The Hon’ble Gujarat High Court in R V Enterprises & Anr v. State of Gujarat & Ors [R/Special Civil Application No. 20134 of 2023, order dated June 19, 2025] held that ITC is liable to be reversed under Section 16(2)(c) of the CGST Act where the supplier has not discharged output tax liability, and the purchaser fails to furnish evidence of genuine movement of goods and supporting documentation.
Facts:
R V Enterprises (“the Petitioner”) availed input tax credit during FY 2017–18 and FY 2018–19 on inward supplies from M/s. Parshvi Tradelink, a registered supplier under the GST Act. The Revenue authorities issued a show cause notice under Section 73(1) of the CGST Act proposing reversal of ITC on the ground that the supplier had not discharged output tax liability. The supplier was found to have reported disproportionately high outward supplies compared to negligible or nil purchases for the corresponding years. The Petitioner contended that there was no allegation in the SCN about the genuineness of the transactions and, therefore, it was not required to submit documents like invoices or e-way bills.
The Petitioner also argued that the issuance of SCN under Section 73 implied that the Department accepted the transactions as genuine. The Respondent contended that under Section 16(2)(c), ITC cannot be availed unless the tax is actually paid to the Government, and the burden to prove eligibility for ITC lies with the Petitioner under Section 155 of the CGST Act.
Issue:
Whether ITC can be denied under Section 16(2)(c) of the CGST Act, where the supplier fails to pay output tax and the purchaser fails to prove receipt of goods?
Held:
The Hon’ble Gujarat High Court in R/Special Civil Application No. 20134 of 2023 held as under:
- Observed that, M/s. Parshvi Tradelink reported outward supplies of ₹37.72 lakhs in FY 2017–18 against purchases of ₹8.15 lakhs, and supplies of ₹1.13 crore in FY 2018–19 against nil purchases, clearly indicating absence of genuine transactions.
- Noted that, the Petitioner failed to produce invoices, e-way bills, transport documents or any material to establish actual receipt of goods.
- Held that, once it is found that the supplier has not discharged output tax liability, the recipient is not eligible to retain ITC under Section 16(2)(c), particularly when the genuineness of the transaction is unsubstantiated.
- Held that, the fact that the SCN was issued under Section 73 (and not Section 74) does not imply that the supplies are accepted as genuine by the Department.
- Held that, penalty imposed under the order-in-original was unsustainable due to failure to issue pre-SCN intimation in Form GST DRC-01A as required under Rule 142(1A), and therefore, the penalty portion was quashed. However, it confirmed the remainder of the order-in-original directing reversal of ITC.
Our Comments:
The judgment differentiates itself from the decisions of the Calcutta High Court in Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax, Ballgunge Charge [2023(77) G.S.T.L. 55 (Cal.)] and Lokenath Construction Pvt. Ltd. v. Tax/Revenue Government of West Bengal [2024 (86) G.S.T.L. 130 (Cal.).,] where ITC was denied solely on mismatch between GSTR-2A and GSTR-3B, and the Courts held that in the absence of enquiry into the supplier, denial of ITC was arbitrary. In the present case, however, the Revenue had conducted such enquiry and established that the supplier had not made corresponding purchases or paid output tax, thereby justifying denial of ITC.
Relevant Provision:
Section 16(2)(c) – the CGST Act, 2017
“16 – Eligibility and condition for taking input tax credit-
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-
(c) subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and…”
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