In the present matter, a Writ Petition was instituted before the Hon’ble Gauhati High Court, raising the issue of whether Input Tax Credit (ITC) can be denied to purchasing dealers when the selling dealer fails to remit the collected tax to the authorities.
The Hon’ble High Court observed that the facts of the instant case were analogous to those in the case of On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors.[1] as decided by the Delhi High Court. The provisions under scrutiny in the current petition were found to be substantially similar to those challenged in the aforementioned Delhi High Court case, wherein it was unequivocally held that a purchasing dealer cannot be penalized for the default of the selling dealer, particularly when the selling dealer has failed to deposit the tax collected.
The Hon’ble Gauhati High Court relied heavily on the precedent set by the Delhi High Court, which held that Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, could be read down, and that demands raised against purchasing dealers involved in bona fide transactions could not be sustained unless there was evidence of collusion. It was determined that actions against purchasing dealers should be contingent on proof of such collusion.
W&B Comments: The subject of ITC in instances of non-remittance by the selling dealer remains contentious. The provisions of Section 9(2)(g) of the Delhi VAT Act bear a significant resemblance to those of Section 16(2)(c) of the GST Act. In light of multiple judgments affirming the constitutional validity of provisions that restrict ITC claims, this judgment offers substantial relief to bona fide purchasers. Notably, this is one of the first judgments to acknowledge and apply the principles established in the On Quest Merchandising case, which provided significant protection to bona fide purchasers under the Delhi VAT regime. This precedent is likely to be beneficial in addressing similar issues under the GST framework in the future.
[1] 2017 SCC OnLine Del 11286