ITC not allowed to buyer if supplier did not pay GST to the Government

The Hon'ble Patna High Court in M/s. Aastha Enterprises v. State of Bihar [CWJ 10395 of 2023 dated August 18, 2023] held that ITC is in the nature of a benefit/concession and not a right extended to the assessee under the statutory scheme.The ITC to purchasing dealer will depend not only upon the collection by the seller but also the due payment by the seller to the Government and the burden of proof lies with the assessee to substantiate that the tax collected has been paid to the government by the supplier.

Facts

M/s. Aastha Enterprises ("the Petitioner") purchased goods from the supplier and paid the taxable value along with the tax amount to the supplier. However, the supplier did not deposit the tax amount to the government.

The Petitioner claimed the ITC of the of the said tax amount and was of the view that since, the tax has been paid to the supplier thus, he is eligible to avail ITC.

The Revenue Department issued the assessment order dated May 25, 2022 ("the Assessment Order") denying the ITC to the Petitioner on the ground that the Petitioner has not followed the condition stipulated under section 16(2) of the Central Goods and Services Tax Act, 2017 ("the CGST Act") thus, not eligible for such credit.

The Petitioner filed a writ before the Hon'ble Patna High Court against the Assessment Order contending that the credit in the hands of purchasing dealer cannot be denied where he has paid the tax and has availed the ITC based on tax invoices issued by the supplier and further on the basis of judgement of Madras High Court in the case of Sri Vinayaga Agencies v. The Assistant Commissioner [WP Nos. 2036 to 2038 of 2013] dated January 29, 2013and M/s D.Y Beathel Enterprises v. The State Tax Officer [(Data Cell) dated February 24, 2021] argued that proceeding initiated against the Petitioner, who have already paid the tax would result in double taxation in the hands of Petitioner. 

The Revenue Department contended that Section 16 of the CGST Act stipulates certain conditions and non-fulfilment of those would result in denial of such credit.

Issue

Whether a purchasing dealer can be denied the benefit of ITC in cases where the supplier has collected tax but not paid it to the government?

Held

The Hon'ble Patna High Court in CWJ 10395 of 2023 held as under:

• Observed that, the claim of ITC raised by the Petitioner cannot be sustained when the supplier has not paid the tax amount to the Government, despite collection of tax from the Petitioner.
• Relied upon the Judgement in M/s D.Y. Beathel Enterprises v. The State Tax Officer[W.P.(MD) Nos. 2127 of 2021 dated February 24, 2021] wherein the Hon'ble Madras High Court held that when the seller has collected tax from the purchasing dealer, the omission on the part of the seller to remit the tax in question should be viewed very seriously and strict action ought to have been initiated against the seller.
• Noted that, the burden of proof lies with the purchasing dealer to substantiate that the tax collected has been paid to the government by the supplier. This requirement underscores the statutory compliance aspect and safeguards the integrity of ITC claims. The court maintained that this condition cannot be viewed in isolation, it is an essential prerequisite for enjoying the benefit of ITC.
• Relied upon the Judgement in The State of Karnataka v. M/s Ecom Gill Coffee Trading Private Limited [Civil Appeal No. 230 of 2023 dated March 13, 2023] wherein the Hon'ble Supreme Court held that to sustain a claim of ITC on purchases, the purchasing dealer would have to prove the genuineness of transactions by furnishing the details. Mere production of tax invoices would not be sufficient to claim ITC.
• Opined that, the statutory levy and the benefit of ITC conferred on the purchasing dealer depends not only upon the collection by the seller but also the due payment by the seller to the Government.
• Held that, when the supplier fails to comply with the statutory requirement, the Petitioner cannot claim ITC and the remedy available to the Petitioner is only to proceed for recovery against the seller.

Our Comments

The judgement issued by the Patna High Court will result in a more stringent process for claiming ITC. The legitimate recipients will face a dual dilemma. While they have already fulfilled their tax obligations to the supplier, they will be unable to utilize the ITC being not auto populated in GSTR-2B, ultimately causing a financial strain on their business operations.