In a significant ruling affecting GST compliance across India, the Tripura High Court has stepped in to protect bona fide buyers from being penalised for a supplier’s tax default. The court held that a genuine purchaser cannot be denied Input Tax Credit (ITC) merely because the seller failed to deposit GST with the government, even after collecting it.
The judgment was delivered by a Division Bench led by Chief Justice M.S. Ramachandra Rao, along with Justice S. Datta Purkayastha, in a writ petition filed by M/s Sahil Enterprises.
Background of the Case
Sahil Enterprises, a proprietary firm dealing in rubber products, had purchased goods from a registered supplier between July 2017 and January 2019. During these transactions, the firm paid GST amounting to ₹1.11 crore to the supplier and later claimed ITC in its electronic credit ledger.
Trouble began when tax authorities discovered that the supplier, despite issuing proper invoices and filing outward supply returns, had not deposited the GST collected from buyers with the government. Instead, it filed “Nil” tax payment returns.
Based on this default, the Assistant Commissioner of CGST issued a show-cause notice to Sahil Enterprises and later confirmed a demand of ₹1.11 crore along with interest and penalty, citing Section 16(2)(c) of the CGST Act. The department argued that since tax was not actually paid to the government by the supplier, the buyer was not entitled to ITC.
Petitioner’s Stand
Challenging the demand, Sahil Enterprises approached the High Court. The firm argued that it had fulfilled all legal requirements - it dealt with a registered supplier, paid GST, received goods, and filed returns correctly.
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The petitioner stressed that there is no mechanism under GST law for a buyer to verify whether the supplier has actually deposited tax with the government. Penalising a buyer for a supplier’s failure, it argued, amounts to double taxation and violates constitutional guarantees of equality and fairness.
Court’s Observations
The bench closely examined the GST framework and acknowledged a practical reality: buyers have no control over a supplier’s tax compliance after payment.
“The purchasing dealer cannot be asked to do the impossible,” the bench observed, noting that there is no legal or technological way for a buyer to ensure that a seller deposits the collected tax.
The court found merit in the argument that denying ITC in such cases unfairly punishes honest buyers for someone else’s wrongdoing. It noted that ITC exists precisely to prevent double taxation and that forcing a buyer to pay tax again defeats this core principle.
The judges also referred to earlier rulings of the Delhi High Court, which were later upheld by the Supreme Court, where similar provisions were read down to protect bona fide purchasers.
Reading Down the Law
While the court stopped short of striking down Section 16(2)(c), it clarified how the provision must be applied.
The bench held that the rule should be “read down” so that ITC is denied only in cases involving collusion, fraud, or sham transactions. In genuine, arm’s-length transactions, the buyer cannot be deprived of ITC simply because the seller defaulted.
Importantly, the court noted that the tax department itself had proceeded against the supplier for recovery and had not alleged fraud or collusion on the part of Sahil Enterprises.
Final Decision
Allowing the writ petition in part, the Tripura High Court set aside the tax demand order issued against Sahil Enterprises. The court directed the GST authorities to restore the denied Input Tax Credit of ₹1.11 crore to the petitioner.
The bench made it clear that action must be taken against the defaulting supplier, not against an innocent buyer who complied with the law in good faith.
Case Title:- M/s Sahil Enterprises v. Union of India & Others
Case Number: WP(C) No. 688 of 2022
