Input Tax Credit Cannot Be Denied to Bona Fide Buyer Due to Supplier’s Bogus Billing & Retrospective GST Registration Cancellation – Legal Position, Case Laws & Remedies

 Input Tax Credit Cannot Be Denied to Bona Fide Buyer Due to Supplier’s Bogus Billing & Retrospective GST Registration Cancellation – Legal Position, Case Laws & Remedies

Introduction

A recurring and high-stakes dispute under GST is denial of Input Tax Credit (ITC) to a genuine recipient merely because the supplier’s GST registration is cancelled retrospectively on allegations of bogus billing / fake invoicing.

In many cases:

The recipient purchased goods or availed services in the normal course of business

Full payment including GST was made through banking channels

ITC is reflected in GSTR-2A / GSTR-2B

Later, the supplier’s registration is cancelled ab initio alleging fake billing

The department issues a Show Cause Notice (SCN) proposing ITC reversal, interest and penalty

This article explains:

What the CGST Act, 2017 and Rules actually provide

Whether ITC can be denied to a bona fide purchaser

Supreme Court and High Court jurisprudence (in favour and against)

Action steps to be taken on receipt of notice

Practical litigation strategy

20 FAQs with answers

Typical Factual Matrix

Recipient purchases goods / avails services

Valid tax invoice issued

Consideration + GST paid within time

ITC duly reflected in GSTR-2A / GSTR-2B

Subsequently:

Supplier found involved in bogus billing

Supplier’s GST registration cancelled retrospectively

Department alleges:

Supplier non-existent

Invoices invalid

Wrong availment of ITC

Relevant Provisions of CGST Act & Rules

Section 16(1) – Eligibility for Input Tax Credit

ITC is a statutory right available when goods or services are used in the course or furtherance of business.

Section 16(2) – Conditions for Availing ITC

A registered person is entitled to ITC if:

Possession of a valid tax invoice

Receipt of goods or services

Tax charged has been paid to the Government

Return furnished under Section 39

📌 Critical Point:

The Act does not cast an obligation on the recipient to ensure continuous compliance of the supplier after the transaction is completed.

Section 16(2)(c) – Most Litigated Clause

Authorities often misuse this clause to deny ITC.

Judicial interpretation:

This condition cannot be applied literally to punish a bona fide recipient for supplier default, unless collusion or fake transaction is proved.

Rule 36 of CGST Rules

Requires:

Valid invoice

Accounting records

There is no requirement to verify supplier’s tax payment challans.

Section 29 – Cancellation of Registration

Cancellation:

Operates against the supplier

Does not automatically invalidate past genuine transactions

📌 Retrospective cancellation cannot rewrite history.

Department’s Stand (Against the Taxpayer)

The department generally contends:

Supplier engaged in bogus billing

Registration cancelled from inception

Invoices void ab initio

ITC wrongly availed by recipient

Judicial View – IN FAVOUR OF RECIPIENT (STRONG LINE OF CASES)

Key Legal Principles Evolved

✔ Bona fide purchaser cannot be penalised for supplier’s fraud

✔ ITC is a vested right once conditions of Section 16 are met

✔ Retrospective cancellation cannot nullify completed transactions

✔ Burden is on the department to prove collusion or fake transactions

Supreme Court Jurisprudence

The Supreme Court of India has consistently held that tax statutes must be interpreted reasonably and penal consequences cannot be imposed mechanically without establishing mens rea or culpable conduct.

📌 Principle applied:

A purchaser who has acted diligently and complied with statutory requirements cannot be expected to police the tax affairs of the supplier.

High Court Decisions – In Favour

Several High Courts including:

Delhi High Court

Gujarat High Court

Madras High Court

have held that:

ITC cannot be denied solely because supplier registration is cancelled later

Department must proceed against the defaulting supplier

GSTR-2A / 2B reflection supports bona fide claim

📌 (Add internal link here to your post on “ITC denied due to supplier default – Case laws”)

Judicial View – AGAINST RECIPIENT (LIMITED & FACT-BASED)

Courts have upheld ITC denial only where:

Goods never moved

Transactions were paper transactions

No payment or circular transactions

Recipient and supplier acted in connivance

📌 Mere cancellation ≠ fake transaction

Role of GSTR-2A / GSTR-2B in ITC Disputes

Reflection in 2A/2B is strong corroborative evidence

Department cannot ignore its own portal data

Though not conclusive, it shifts the burden on the department

📌 (Internal link: “Whether GSTR-2A mismatch alone can deny ITC”)

What Action Should the Taxpayer Take? (Step-by-Step)

Step 1: Do Not Reverse ITC Automatically

ITC reversal is not automatic upon cancellation of supplier registration.

Step 2: Compile Documentary Evidence

Tax invoices

Bank payment proof

E-way bills (if applicable)

Stock / consumption records

GSTR-2A / 2B screenshots

Step 3: File Detailed Reply to SCN

Grounds to raise:

Bona fide purchaser

No allegation of collusion

Violation of Section 16

Retrospective cancellation invalid against recipient

Breach of natural justice

📌 (Internal link: “GST SCN reply drafting – Step by step”)

Step 4: Seek Cross-Examination

If reliance is placed on third-party statements.

Step 5: Appeal / Writ Remedy

Appeal under Section 107

Writ petition if jurisdictional error exists

📌 (Internal link: “GST appeal against ITC reversal – Process & case laws”)

Burden of Proof

✔ Recipient must prove:

Receipt of goods/services

Payment

Genuineness of invoices

❌ Recipient need not prove:

Supplier’s tax payment

Supplier’s future compliance

Key Legal Takeaway

ITC cannot be denied to a bona fide recipient merely because the supplier’s GST registration is cancelled retrospectively on allegations of bogus billing, unless collusion or fake transaction is established.

Judicial Precedents on ITC Where Supplier Registration Is Cancelled / Supplier Found Bogus

🔴 CASE LAWS IN FAVOUR OF THE RECIPIENT (Bona Fide Buyer)

1. Assistant Commissioner of State Tax v. Suncraft Energy Pvt. Ltd.

(Calcutta High Court)

Held:

Input Tax Credit cannot be denied to the recipient merely because the supplier failed to discharge tax liability or was later found non-compliant.

Ratio:

A purchasing dealer cannot be expected to verify whether the supplier has deposited tax with the Government. Such interpretation would make ITC provisions unworkable.

Relevance:

Strong authority against mechanical ITC reversal under Section 16(2)(c).

2. D.Y. Beathel Enterprises v. State Tax Officer

(Madras High Court)

Held:

Before denying ITC to the recipient, the department must first proceed against the defaulting supplier.

Ratio:

Without exhausting recovery from the supplier, ITC cannot be reversed from the bona fide purchaser.

Relevance:

Most-cited judgment in bogus billing / supplier default ITC cases.

3. Arise India Limited v. Commissioner of Trade & Taxes

(Delhi High Court)

Held:

ITC cannot be denied to the purchasing dealer unless collusion or connivance is established.

Ratio:

Purchaser cannot be made responsible for seller’s failure.

Relevance:

Though VAT-era, repeatedly relied upon in GST ITC disputes.

4. LGW Industries Ltd. v. Union of India

(Calcutta High Court)

Held:

Section 16(2)(c) cannot be interpreted literally to penalize the recipient for supplier’s default.

Ratio:

Recipient’s compliance must be examined independently.

Relevance:

Direct interpretation of Section 16 in favour of recipient.

5. Sri Vinayaga Agencies v. Assistant Commissioner

(Madras High Court)

Held:

Retrospective cancellation of supplier registration does not automatically invalidate past transactions.

Ratio:

Completed transactions cannot be wiped out by later administrative action.

Relevance:

Very important where registration is cancelled from date of registration.

6. State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd.

(Supreme Court of India)

Held:

The burden of proof lies on the department to establish that transactions are fake.

Ratio:

Suspicion or third-party default is not sufficient to deny ITC.

Relevance:

Supreme Court authority on burden of proof.

🟢 CASE LAWS AGAINST THE RECIPIENT (Limited & Fact-Specific)

These cases apply only where fraud or non-receipt of goods is proved.

1. Aastha Enterprises v. State of Gujarat

(Gujarat High Court)

Held:

ITC was denied where no evidence of actual movement of goods was produced.

Ratio:

ITC is not allowable for paper transactions.

Relevance:

Distinguishes genuine transactions from accommodation entries.

2. Mahadev Trading Company v. Union of India

(Gujarat High Court)

Held:

Where invoices were found fake and supplier non-existent, ITC was rightly denied.

Ratio:

Recipient failed to establish receipt of goods.

Relevance:

Used by department where no physical evidence exists.

3. R.K. Traders v. State Tax Officer

(Madras High Court)

Held:

ITC denied where recipient could not prove receipt of goods or services.

Ratio:

Burden shifts back to recipient when prima facie fraud is shown.

Relevance:

Applies only where documentation is weak.

⚖️ Legal Distinction Drawn by Courts

Situation

ITC Allowed?

Supplier default only

✅ Yes

Retrospective cancellation only

✅ Yes

GSTR-2A / 2B reflecting ITC

✅ Supports claim

No receipt of goods

❌ No

Fake / circular transactions

❌ No

Collusion proved

❌ No

🧠 How to Use These Case Laws in Reply / Appeal

In your SCN reply or appeal, include a paragraph like this:

“The impugned proposal to deny Input Tax Credit solely on the basis of retrospective cancellation of supplier registration is contrary to settled judicial law. Courts have consistently held that a bona fide purchaser cannot be penalized for supplier default unless collusion or fake transaction is established. Reliance is placed on judgments of various High Courts and the Supreme Court.”

✅ Litigation Takeaway

ITC cannot be denied to a bona fide recipient merely because the supplier’s registration is cancelled retrospectively or the supplier is later found non-compliant, unless the department proves collusion or non-receipt of goods.

Frequently Asked Questions (FAQs)

1. Can ITC be denied if supplier registration is cancelled retrospectively?

No, not automatically.

2. Is retrospective cancellation binding on recipient?

No, it operates against the supplier only.

3. Does Section 16(2)(c) require recipient to ensure supplier paid tax?

No, courts interpret it reasonably.

4. Is GSTR-2A / 2B sufficient proof?

It is strong supporting evidence.

5. Can ITC be denied without SCN?

No, SCN and hearing are mandatory.

6. What if supplier admits bogus billing?

Department must still prove recipient’s involvement.

7. Is banking payment important?

Yes, it strongly supports bona fides.

8. Can penalty be imposed on recipient?

Only if mens rea or collusion is proved.

9. Can writ be filed directly?

Yes, in case of jurisdictional defects.

10. Is e-way bill mandatory?

Not in all cases, but helpful.

11. Can ITC be denied on suspicion alone?

No.

12. Who bears burden of proof?

Department bears burden after recipient shows prima facie compliance.

13. Can interest be demanded?

Only if ITC was wrongly availed and utilised.

14. Does cancellation nullify invoices?

No.

15. Can supplier revocation help?

Yes, indirectly.

16. Is ITC a vested right?

Yes, once Section 16 conditions are met.

17. Can department reopen past years?

Only within limitation and due process.

18. Does this apply to services also?

Yes.

19. What is best defence?

Strong documentation + case-law based reply.

20. What is the safest approach?

Reply, contest, and appeal if required.

Conclusion

GST law does not permit punishment of innocent recipients for supplier fraud.

Retrospective cancellation of registration cannot erase genuine transactions, and ITC cannot be denied without establishing collusion or fake billing.

This principle is now well-settled through Supreme Court and High Court jurisprudence.

✍️ Author Note

For educational and GST litigation guidance purposes.