Yes, consideration for supply can be made through book adjustment, and the recipient can pay for inward supplies by way of setting off book debts, provided certain conditions are fulfilled.
Let me explain both the legal basis and practical treatment, especially in light of Input Tax Credit (ITC) denial concerns:

 1. Definition of ‘Consideration’ under GST
Under Section 2(31) of the CGST Act, 2017, “consideration” includes:
“Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply…”
This means that payment doesn’t have to be in cash or bank transfer. It can be through other forms, including book adjustments, barter, or mutual set-offs.

2. ITC Eligibility under Section 16 of CGST Act
Section 16(2)(d) requires:
“the tax charged in respect of such supply has been actually paid to the Government…” and
“the recipient has paid the consideration for the supply along with tax payable thereon within a period of 180 days…”
It does not mandate that the consideration must be paid in cash or bank transfer — only that it must be paid.

Therefore, adjustment of mutual debts, i.e., book adjustments, is a valid mode of discharge of consideration if:
It’s accounted properly in the books of both parties.
There is proof of mutual acknowledgment (like ledger entries or agreements).
The tax is paid by the supplier to the government.
Department’s Denial of ITC
If the department is denying ITC only on the ground that consideration was paid via book adjustment, such a denial is not legally sustainable. You can argue the following:
Key Points for Defense:
No requirement under GST law that payment must be via banking channel.
Book adjustment is a legally recognized mode of payment under contract law and accounting standards.

Circulars/clarifications, e.g., in service tax era, and even under indirect tax jurisprudence, have accepted book adjustments.

As long as Section 16(2) conditions are fulfilled (supplier paid tax, recipient accounted properly, etc.), ITC is not to be denied.

Supporting Case Laws (Indicative):
Arvind Ltd. v. UOI (2020) – Gujarat HC: “Book adjustment can amount to payment of consideration”.

Pre-GST jurisprudence (Service Tax & VAT): Book adjustments were upheld as valid payment modes in many cases, provided proper documentation existed.

Conclusion
Yes, recipient can pay for inward supplies by way of book adjustment, and ITC cannot be denied merely on that basis, if:

Supplier has paid tax,

Consideration is accounted through proper mutual ledgers or agreements, and

Payment (in any form) is made within 180 days.