23.08.2023: When supplier fails to deposit the collected tax, ITC claim to be denied to purchaser: Patna HC

Recently, the Patna High Court in the case of Aastha Enterprises vs. State of Bihar in Civil Writ Jurisdiction Case No. 10395 Of 2023 dated 18.10.2023, held that the purchaser's entitlement to Input Tax Credit (ITC) depends on the collective fulfillment of conditions, which includes the collection of tax and its subsequent payment to the Government by the selling dealer. All the conditions outlined in Section 16 of the CGST Act, 2017 must be satisfied together rather than separately or in isolation. If the tax collected by the supplier from the purchaser is not remitted to the Government, the purchaser cannot claim ITC under the statute. The burden of proving whether the selling dealer has indeed remitted the collected tax amount to the government lies with the purchasing dealer.

Facts: The petitioner acquired certain goods and paid the value of goods along with the tax amount to the supplier, for this the petitioner produced the invoices issued by the selling dealer. However, the selling dealer failed to remit the tax amount to the government despite collecting it from the petitioner.

Petitioner's Submission: The petitioner referred to judgments from the Madras High Court, in the case of Sri Vinayaga Agencies v. The Assistant Commissioner (CT) & Anr. in WP Nos. 2036 to 2038 of 2013 and M/s D.Y. Beathel Enterprises v. The State Tax Officer (Data Cell).

The petitioner contended that the right to ITC cannot be denied to the purchasing dealer when the appropriate tax has been paid to the selling dealer. Additionally, the objective of the Input Tax Credit regime is to prevent the cascading effect of taxation.

However, it would lead to a cascading effect if the department attempts to recover the tax from the purchasing dealer for a tax liability that has already been settled through payment to the selling dealer. The department should instead proceed to recover the collected amount of tax from the selling dealer.

Department's submission: The respondent relied on the judgment in the case of ALD. Automotive Pvt. Ltd. v. The Commercial Tax Officer & Ors. (Civil Appeal Nos. 10412-10413 of 2018), where it was held that ITC is a benefit or concession, not an inherent right under the statutory scheme. The eligibility for ITC on any supply of goods requires the fulfillment of all conditions provided in Section 16 of the CGST Act, 2017 together, rather than separately or in isolation.

Thus, mere demonstrating payment of the value of goods and taxes to the selling dealer, receiving the goods, and paying through bank accounts are insufficient grounds for ITC allowance.

Court's Decision:

The Hon’ble High Court after considering the submissions and cited judgments, held as following:

i) The conditions in Section 16 of the CGST Act, 2017 must be collectively satisfied. Mere production of a tax invoice, proof of goods movement and receipt, and payment through bank accounts are not sufficient to claim ITC.

ii) The burden of proof lies with the purchasing dealer to demonstrate whether the selling dealer remitted the collected tax amount to the government.

iii) The denial of ITC does not result in cascading effect, as it occurs only when the selling dealer who collected tax fails to remit it to the Government.

iv) The tax levy and ITC benefit for the purchasing dealer depend on both collection and payment of collected tax by the seller to the Government. If the supplier doesn't fulfill statutory requirements, the purchasing dealer cannot claim ITC and the remedy available to the purchasing dealer is only to proceed for recovery against the seller.

v) The fact that GST laws enable the recovery of collected tax from the selling dealer would not absolve the taxpayer from fulfilling the entire liability to the Government. Therefore, unless the tax paid by the purchaser to the supplier is remitted to the Government by the supplier, the purchaser cannot claim ITC under the statute. The purchasing dealer can potentially seek a refund if the Government recovers amounts from the selling dealer at a later time.

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