Non-Reversal of Buyer’s ITC for not Depositing Tax by The Seller: Recent Madras High Court Ruling

The main purpose of the government behind Input Tax Credit was to target and scrutinize the purchase and selling of the goods and services by the registered recipients and the supplies in order to detect any fraudulent dealer. There have been cases where the Tax Authorities would have caught hold of the recipient of the goods where tracing of the fraudulent supplier was difficult. However in one of the recent case of D.Y. Beathel Enterprises v. State Tax Officer (Data Cell), Tirunelveli the authorities took hold of the petitioner by issuing show-cause notice, even without trying to contact and examine the suppliers, for being guilty of availing of ITC on the generation of fake tax invoices, where goods are not even brought. The charges have to be paid to the government either in the form of cash or by way of the utilization of the input tax credit.

Section 16 the buyer can avail ITC only when the taxes under GST are paid by the seller, but when the taxes are not being paid by the supplier, can the recipient be held guilty when the recipient has assessed with all the respective duties.


The petitioners are dealers registered with Nagercoil Assessment Circle, trading in Raw Rubber Sheets, where any purchase with respect to their goods was made from the supplier one Charles and his wife Shanthi. A substantial portion of the payment made by the recipient was by way of Bank channels including all tax components. The Tax Authorities instead of catching hold of Charles and his wife Shanthi imposed all the liabilities of availing of the input tax credit on the petitioners for the amount of tax that was not paid by the suppliers to the government. The Goods and Service Department passed the impugned orders on the petitioner levying all the entire liability upon them. The same order is under challenge before the Madras High Court.

Pleadings of the Petitioner

The council on behalf of the petitioner relied on and referred to the decision of Madras High Court in the case of Sri Vinayaga Agencies Vs. The Assistant Commissioner, CT Vadapalani, where it was held by the court that, the ITC availed by the assessee cannot be asked to be reverted back, only on the ground that the seller hasn’t paid the taxes which he was liable to pay and that the authorities don’t hold the jurisdiction to reverse the same.

Further, the council also brought forward the notice of Press release dated 04.05.2018 of the Central Board of the GST Council which mentioned whether the ITC of the buyer/assessee can be reversed or not? The press release notice clarified that there shall be no automatic reversal of the assessee ITC when there is non-payment of taxes by the seller and that such payment default shall be recovered by the seller only. The notice stated that such reversal of input credit can however be taken into consideration in exceptional situations where either the dealer is missing, closure of the supplier’s business, or when he doesn’t have adequate assets, etc.

The council also stated that the petitioners have already paid the taxes on their behalf for which the 2 sellers should have been caught. There was no inquiry or involvement of the suppliers by the tax Authorities; rather the show cause notice was issued against the petitioners, and the orders were passed by the GST Department.

Pleadings of the Respondent

The Government advocate pointed out the fact that the petitioners availed input tax credit on the pretext that the taxes have been paid to the government by the suppliers. Later when it was found that no taxes have been paid by the suppliers and for the same, the petitioners failed to generate any proof, the authorities found it justified to hold the petitioners liable for non-payment of taxes by way of reversing the input tax credit which has already been claimed by them.

The respondent claimed that they were at no fault for reversing the input credit availed by the assessee and that the counter affidavit has been filed stating that the orders passed by the GST department require no such interference of the court.


On providing clarification under Section 16(1) & (2) the court has stated that the tax which has not reached the government kitty, the liability is upon either of the parties and that the recovery steps by the revenue should have been taken against the actual defaulter i.e. the supplier and not the petitioners, even when the petitioners made the revenue aware of the fact that the taxes have been collected and still not deposited by suppliers.

The court continued disagreeing with the approach taken by the authorities of not taking any recovery action on the supplier’s default and that now a strict and stringent action along with an examination of Charles and his wife Shanthi ought to be initiated, as it was even more of a prior concern with respect to the fact stated by the respondent of petitioners being guilty of not purchasing the goods & availing of ITC on generated tax invoices.

Further, there were certain Fundamental flaws that lead to the quashing of the impugned order for reasons-

  • There was no action of recovery initiated against Charles, and that
  • There was no examination of Charles in the inquiry.

The court has remitted back to the file of the respondent, to file a fresh inquiry upon the examination of Charles and his wife Shanthi as witnesses of the case and simultaneously to initiate an action of recovery of taxes. And hence, the Writ Petition was allowed.

Author: Mehak Bansal, a 4th Year student of B.Com LLB. University of Petroleum and Energy Studies (Dehradun), intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at

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