ITC cannot be reversed from buyer for non-payment of tax by seller

Petitioner: D.Y.Beathel Enterprises

Respondents: The State Tax Officer, Investigation Wing, Tirunelveli

Authority: Madras High Court

Date: 24th February 2021

Case: The petitioners had purchased goods from Charles and his wife Shanthi and payment (including the tax component) was made to them through banking channels. Based on the returns filed by the sellers, the petitioners availed the Input Tax Credit. However, the sellers didn’t pay tax to the Government which initiated proceedings against the Petitioners. The petitioners submitted that without involving the sellers, the impugned order was passed levying entire liability on petitioner. A writ petition is filed challenging the Order.

Core Issue: Whether ITC availed by the buyer can be reversed for failure to pay tax by the seller?

Court’s Observation:

1. Attention of the Court was drawn to the decision of Madras High Court made in Sri Vinayaga Agencies Vs. The Assistant Commissioner, CT Vadapalani. It was held that the authority does not have the jurisdiction to reverse Input Tax Credit already availed by the assessee on the ground that the selling dealer has not paid the tax.

2. Press release issued by Central Board of GST Council on 04.05.2018 was referred to wherein it has been mentioned that there shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by seller. In case of default in payment of tax by the seller, recovery shall be made from the seller. Reversal of credit from buyer shall be an option only to address exceptional situations like missing dealer, closure of business by the supplier or the supplier not having adequate assets etc.

3. On examining Sec 16(1) & (2) of the GST Act, it is clear that the assessee must have received the goods and tax charged must have been actually paid to the Government.

4. If tax had not reached the kitty of the Government, then the liability may have to be eventually borne by either the seller or the buyer. However, where it has come out that the seller has collected the tax, any omission on part of the seller must have been viewed very seriously and strict action ought to have been initiated against the seller.

5. The respondent does not appear to have taken any recovery action against the sellers.

Judgement: The impugned order suffers from certain fundamental flaws and quashed for the following reasons:

1. Non examination of sellers in the enquiry

2. Non initiation of enquiry action against sellers in the first place

The Court also directed to hold fresh enquiry where the sellers shall be examined as witnesses. Parallely, the respondent will also initiate recovery action against the sellers.