Gauhati High Court Quashes GST ITC Reversal: Bona Fide Assessee Protected from Seller's Return Filing Default

The availability of Input Tax Credit (ITC) has been one of the most litigated domains under the indirect tax regime in India. A recurring dispute arises when the revenue authorities deny ITC to a purchasing assessee due to the default committed by the selling dealer in depositing the collected tax or filing the requisite statutory returns. Addressing this critical issue, the Gauhati High Court, in the landmark ruling of Advance Engineering Farms And Equipments Vs State of Assam And 3 Ors, has provided immense relief to honest business entities.

The Court categorically ruled that a bona fide purchasing assessee cannot be penalized with an ITC reversal and subsequent tax demand merely because the supplier failed to fulfill their return-filing obligations. By relying on established judicial precedents, the High Court reinforced the principle that the revenue department must first exhaust its remedies against the defaulting seller before initiating coercive actions against the innocent buyer.

The Genesis of the Dispute: Factual Matrix

The legal battle commenced when the assessee, a proprietorship firm operating under a valid registration granted under the Central Goods and Services Tax Act 2017, engaged in a commercial transaction during the Financial Year 2017-18.

The Purchase Transaction

The assessee procured generators from the supplier, identified in the proceedings as Respondent No. 4. The total consideration for this procurement was valued at Rs. 9,44,000. As part of this transaction, the assessee diligently discharged its tax liabilities by paying the applicable GST components to the supplier. Specifically, the assessee paid Rs. 72,000 towards CGST and an equivalent amount of Rs. 72,000 towards SGST. The transaction was authenticated by a valid tax invoice-cum-delivery challan dated 14.02.2018, establishing the physical movement of goods and the financial realization of the tax amounts.

Initiation of Departmental Action

Despite the flawless execution of the transaction from the assessee's end, the revenue authorities triggered an investigation into the ITC claimed. On 30.09.2023, a Show Cause Notice (SCN) was issued to the assessee, alleging the availment of excess Input Tax Credit. The department proposed to levy tax, interest, and substantial penalties based on this alleged mismatch.

The assessee proactively responded to the SCN, providing a comprehensive explanation of the ITC claimed. In the reply, the assessee specifically detailed the payment of GST made to Respondent No. 4, attempting to establish the bona fide nature of the procurement.

The Initial Adjudication and Rectification

Disregarding the evidentiary submissions made by the assessee, the adjudicating authority passed an initial order on 30.09.2023. This order imposed a hefty financial burden on the assessee, confirming a tax demand of Rs. 2,08,802, coupled with an interest liability of Rs. 2,16,632, and an additional penalty amounting to Rs. 20,880.

Aggrieved by this disproportionate and legally flawed demand, the assessee filed a formal application for rectification on 29.01.2024. In this application, the assessee reiterated that no excess ITC had been claimed and that all statutory dues had been lawfully settled during the purchase phase.