In a crucial ruling, the Allahabad High Court clarified that no adverse inference can be drawn against a purchasing dealer under GST if the seller was registered at the time of the transaction. This judgment comes in the backdrop of disputes over Input Tax Credit (ITC) where sellers' registrations were cancelled retrospectively.
The bench, led by Justice Piyush Agrawal, passed the verdict while allowing a batch of writ petitions filed by M/S Solvi Enterprises, a registered dealer engaged in the scrap trading business.
Read also: Trial Already Begun? Then No Need to Reopen or Transfer Investigation, Says Allahabad High Court
Background of the Case
The petitioner, M/S Solvi Enterprises, had entered into a transaction with a registered supplier—M/S Radhey International—on 06.12.2018. However, later, the GST registration of the seller was cancelled retrospectively with effect from 29.01.2020.
Despite the seller being registered during the transaction, tax authorities initiated proceedings under Section 74 of the UPGST Act for the Financial Year 2018-19. A notice (DRC-01) was issued on 29.07.2022, and an order was passed on 12.09.2022 without properly considering the petitioner’s reply. The appeal filed by the petitioner was also dismissed on 20.10.2023, which prompted the writ petitions.
The primary legal issue was:
Can a purchasing dealer be denied ITC if the seller’s GST registration is cancelled after the date of transaction?
"Once the seller was registered at the time of the transaction in question, no adverse inference can be drawn against the petitioner."
— Justice Piyush Agrawal, Allahabad High Court
The Court further noted:
“The registration of the selling dealer was cancelled retrospectively i.e., w.e.f. 29.01.2020 and not from its inception, which shows that the transaction between petitioner and seller was valid.”
- Petitioner submitted GSTR-3B returns, and the GSTR-2A was auto-generated, which confirms the genuineness of the transaction.
- The seller’s registration was active at the time of issuing the invoice.
- Tax invoices were generated from the GST portal, showing proper documentation.
- The authorities failed to verify whether tax was deposited by the seller, even though all necessary GST returns were available on the portal.
“The authorities have failed to consider the fact that GSTR returns as prescribed under the Act were filed by the seller, to which not a single word has been whispered while passing the impugned order.”
- Section 16, GST Act – Conditions for availing ITC.
- Section 74, GST Act – Action against ITC wrongly availed due to fraud or suppression.
- Rule 36, GST Rules – Documentary requirements for ITC.
“The provisions clearly provide that ITC can be claimed if the buyer has valid documents and the seller is registered and compliant at the time of supply.”
- M/S Rama Brick Field Vs. Additional Commissioner Grade-2
- Court ruled that if seller was registered at the time of transaction, ITC cannot be denied later due to retrospective cancellation.
- Rajshi Processors Case
- Distinguished by the Court as the seller’s registration was cancelled from inception, unlike the present case.
- Shiv Trading Vs. State of U.P.
- Relied on Supreme Court ruling in Ecom Gill Coffee Trading Pvt. Ltd. but Court noted no GSTR-3B findings were considered in that case, making it inapplicable here.
The High Court quashed the impugned orders and allowed the writ petitions. It remanded the matter back to the concerned authority with the following directions:
“The authority shall pass a fresh, reasoned and speaking order after hearing all stakeholders within two months from the date of production of certified copy of this order.”
Any tax amount already deposited by the petitioner will remain subject to the outcome of the fresh order.
Accordingly, the impugned orders were quashed, and the case was remanded to the authority to pass fresh orders.
Case Title: M/S Solvi Enterprises v. Additional Commissioner Grade 2 And Another [WRIT TAX No. - 1287 of 2024]
