Landmark Ruling in Devendra Singh v. Hema Industries in a GST Fraud Case

AUTHOR: CA Atul Gupta

CASE: Devendra Singh vs. Hema Industries (GSTAT, Agra Bench)  |  CITATION: 2026 Taxo.online 3622

1. BACKGROUND

The Goods and Services Tax (GST) regime, while designed to streamline indirect taxation, has frequently been marred by disputes over Input Tax Credit (ITC). A recurring issue arises when suppliers are retrospectively found to be non-existent or their registrations are cancelled, leading to demands for ITC reversal from purchasing dealers. The GST Appellate Tribunal (GSTAT), Agra Bench, in Devendra Singh v. Hema Industries (2026 Taxo.online 3622), has delivered a landmark ruling clarifying the legal position on ITC eligibility where the purchasing dealer possesses valid documents but the supplier is later declared non-existent.

This judgment reinforces the principle that ITC cannot be denied mechanically without establishing the buyer’s collusion or fraudulent intent, aligning with earlier precedents under the GST framework.

2. FACTS OF THE CASE

Hema Industries (“the dealer”), a manufacturer of metal and padlock goods, purchased GP sheets from M/s Adil Enterprises, Lucknow, in June 2021. The dealer claimed ITC on these purchases, supported by valid tax invoices, e-way bills, transport records (bilty), and proof of payment through banking channels. Subsequently, the Assistant Commissioner, CGST Division, Aligarh, issued a letter dated 23.05.2022, declaring M/s Adil Enterprises a non-existent firm engaged in issuing fictitious invoices without actual supply of goods.

Based on this letter, the State Tax Department issued a show-cause notice (SCN) to Hema Industries, alleging that the dealer had availed ITC wrongly without actual inward supply. Despite the dealer’s submission of documentary evidence — including invoices, e-way bills, and bank payment proofs — the proper officer rejected the explanation and imposed a demand of ₹1,53,282 (tax), ₹37,554 (interest), and ₹1,53,282 (penalty), totalling ₹3,44,118.

Aggrieved by the order, the dealer filed a first appeal, which was allowed by the First Appellate Authority on 25.03.2023. The State of Uttar Pradesh, represented by Devendra Singh (Assistant Commissioner, State Tax), filed a second appeal before the GSTAT, Agra Bench, challenging the appellate order.

3. ISSUES

1. Whether ITC can be denied under Section 16(2) of the CGST/UPGST Act to a purchasing dealer who possesses valid tax invoices, e-way bills, transport records, and proof of payment through banking channels, merely because the supplier was subsequently found to be non-existent.
2. Whether a penalty order under Section 74 is justified against a purchasing dealer without proving collusion or active participation in the fraud.
3. CONTENTIONS OF THE PARTIES

PETITIONER (REVENUE) Supplier Found Non-Existent •  The dealer availed ITC on invoices issued by M/s Adil Enterprises, a firm later found to be non-existent and engaged in issuing fictitious invoices without actual supply of goods. •  The Assistant Commissioner, CGST Division, Aligarh, had established that the supplier was indulging in fraudulent activities, including generating GSTR-1 returns without actual supply of goods. Receipt of Goods Unsustainable •  The dealer’s claim of actual receipt of goods was unsustainable, as the supplier was non-existent and no physical movement of goods could be established. Burden of Proof Not Discharged •  The First Appellate Authority erred in setting aside the demand, as the dealer failed to discharge the burden of proving the genuineness of the transaction under Section 155.

RESPONDENT (HEMA INDUSTRIES) Actual Receipt and Consumption •  It received actual supply of GP sheets, which were used in manufacturing metal and padlock goods; the raw material was physically consumed in production. Verifiable Documents •  It possessed tax invoices, e-way bills, transport records (bilty), and proof of payment through banking channels demonstrating the genuineness of the transaction. Valid Registration at the Time of Purchase •  In June 2021, M/s Adil Enterprises was a registered entity with a valid GSTIN displayed on the GST common portal; retrospective cancellation could not automatically disentitle the dealer from claiming ITC. No Collusion or Fraudulent Intent •  The Revenue failed to establish collusion or fraudulent intent; the dealer acted as a prudent businessman and had no knowledge of the supplier’s fraud, so a Section 74 penalty was unjustified.

5. RELEVANT STATUTORY PROVISIONS

Section 16(2)(b) of the CGST Act

STATUTORY TEXT “The tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.”

Section 16(2)(c) of the CGST Act

STATUTORY TEXT “The said registered person has furnished the return under section 39.”

Section 74(1) of the CGST Act

STATUTORY TEXT “Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.”

Section 155 of the CGST Act

STATUTORY TEXT “Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”

6. HELD

The GSTAT, Agra Bench, upheld the order of the First Appellate Authority and dismissed the Revenue’s appeal. The Tribunal’s findings, based on a detailed analysis of the statutory provisions and documentary evidence, are summarized below:

1. Statutory Framework

The Tribunal examined Sections 16(1) and 16(2), which prescribe the conditions for claiming ITC, including possession of a tax invoice, actual receipt of goods, payment of tax to the exchequer, and filing of returns under Section 39; Section 74, which applies where tax is not paid, short-paid, or ITC is wrongly availed by reason of fraud, wilful misstatement, or suppression of facts; and Section 155, under which the burden of proving the eligibility of ITC lies on the person claiming it.

2. Documentary Evidence and Genuineness of Transaction

The Tribunal observed that the dealer had produced verifiable documents, including:

• Tax invoices issued by M/s Adil Enterprises.
• E-way bills generated for the movement of goods.
• Transport records (bilty) confirming the physical movement of goods.
• Bank payment proofs demonstrating payment through verifiable banking channels.

The Tribunal noted that the raw material (GP sheets) was utilized in the manufacturing of metal and padlock goods, and the Revenue had not disputed the manufacture or sale of the finished products. The physical consumption of the raw material validated the actual receipt of goods under Section 16(2)(b).

3. Retrospective Cancellation of Supplier’s Registration

The retrospective cancellation of the supplier’s registration could not automatically disentitle the dealer from claiming ITC. At the time of the transaction, M/s Adil Enterprises was a registered entity with a valid GSTIN displayed on the GST common portal. The dealer had acted as a prudent businessman by verifying the supplier’s registration status and ensuring compliance with statutory requirements. The Tribunal relied on the principle that a bonafide buyer cannot be penalized for the supplier’s post-transaction fraudulent activities.

4. Burden of Proof and Fraudulent Intent

To invoke Section 74, the Revenue must establish deliberate fraud, misstatement, or collusion between the buyer and supplier. In this case, the SCN failed to produce any direct evidence, statements, or materials to show that the dealer was aware of or participated in the bogus invoice scheme operated by the supplier. The Revenue could not make the purchasing dealer a guarantor for the supplier’s statutory compliance or post-transaction records.

The dealer had successfully discharged the burden of proof under Section 155 by producing valid documents, including invoices, e-way bills, transport records, and bank payment proofs, and by demonstrating the physical consumption of the raw material in the manufacturing process.

5. Conclusion of the Tribunal

The Tribunal concluded that the First Appellate Authority had rightly allowed the first appeal by setting aside the order of ITC reversal passed by the proper officer. Both questions for determination were answered in favour of the dealer, and the Revenue’s appeal was dismissed.

7. PRECEDENT CASE LAW

M/s LGW Industries Ltd. v. Union of India (2022 Taxo.online 1920)

The Calcutta High Court held that if the purchasing dealer has verified the active GST status of the supplier at the time of purchase, paid the consideration along with tax through banking channels, and possesses valid transport documents, ITC cannot be denied or reversed solely due to the retrospective cancellation of the supplier’s registration or non-existence discovered in a subsequent investigation.

Shaurya Alloys Pvt. Ltd. v. State of Punjab (2023 Taxo.online 2105)

The Punjab and Haryana High Court held that reversal of ITC from a purchasing dealer cannot be done mechanically unless the Revenue establishes direct collusion or complicity.

Quest Merchandising India Pvt. Ltd. v. Government of NCT Delhi (2024 Taxo.online 2890)

The Delhi High Court held that a purchasing dealer who has complied with all requirements at the time of purchase cannot be penalized for the seller’s failure or fraudulent activities unless active complicity is established.

8. KEY TAKEAWAYS

Practical Implications: •  ITC Cannot Be Denied Mechanically: ITC cannot be denied to a purchasing dealer merely because the supplier is subsequently found to be non-existent or its registration is cancelled retrospectively. Entitlement depends on the genuineness of the transaction and possession of valid documents at the time of the transaction. •  Burden of Proof Lies on the Dealer: Under Section 155, the burden of proving ITC eligibility lies on the dealer, but it is discharged by producing valid tax invoices, e-way bills, transport records, and proof of payment through banking channels. •  Fraud Must Be Proved for Section 74: The Revenue must establish deliberate fraud, wilful misstatement, or collusion between buyer and supplier. Mere retrospective cancellation or non-existence of the supplier is insufficient to deny ITC or impose penalties. •  Prudent Business Practices Matter: A dealer who verifies the supplier’s GSTIN, ensures statutory compliance, and maintains proper records cannot be penalized for the supplier’s fraud unless active complicity is established. •  Precedents Reinforce Buyer’s Protection: The judgment aligns with earlier precedents: a bonafide buyer cannot be held liable for the supplier’s post-transaction fraudulent activities, and the Revenue must establish direct collusion or fraudulent intent on the buyer’s part.

9. FINAL OBSERVATIONS

The judgment in Devendra Singh v. Hema Industries (2026 Taxo.online 3622) serves as a significant precedent in GST litigation, particularly in cases involving ITC claims where suppliers are retrospectively found to be non-existent. The ruling underscores the importance of documentary evidence and prudent business practices while protecting bonafide dealers from being penalized for the fraudulent activities of their suppliers. The decision also highlights the limitations of the Revenue’s power to deny ITC or impose penalties without establishing fraudulent intent or collusion on the part of the purchasing dealer. For businesses, this judgment reaffirms the need to maintain robust documentation and verify supplier credentials at the time of transactions to safeguard their ITC claims.