Karnataka High Court Grants Interim Stay on ITC Reversal Demanded Due to Supplier’s Non-Compliance

Introduction to the ITC Mismatch Conundrum

The seamless flow of Input Tax Credit (ITC) is often heralded as the backbone of the Goods and Services Tax (GST) architecture. However, one of the most contentious issues plaguing the assessee community today is the denial of ITC due to defaults committed by the supplier. The revenue authorities frequently initiate recovery proceedings against the bona fide recipient of goods or services when the selling dealer fails to deposit the collected tax into the government treasury or fails to file the requisite returns.

In a significant development that offers a breather to honest businesses, the Karnataka High Court, in the case of Sunlog Services Pvt. Ltd. Vs Assistant Commissioner of Central Tax, has intervened to protect an assessee from coercive tax demands arising solely from a supplier's default. The Court granted an interim stay against an adjudication order that sought to penalize the recipient for discrepancies between the supplier-reported data and the recipient's claims. This judicial intervention underscores the growing legal consensus that a purchasing dealer, who has diligently paid the invoice value along with the applicable tax, should not be made a scapegoat for the administrative or financial failures of the selling dealer.

Factual Background of the Dispute

The Adjudication Order Under Section 73

The genesis of the present litigation lies in an adjudication order dated 30.12.2025, passed by the revenue authorities under Section 73 of the Central Goods and Services Tax Act, 2017. The department initiated these proceedings based on a glaring mismatch between the ITC claimed by the assessee in their GSTR-3B returns and the data auto-populated in their GSTR-2A.

Upon scrutiny, it was discovered that the mismatch occurred because the supplier, to whom the assessee had already made full remittances including the tax component, had failed to file their respective GST returns. Consequently, the tax paid by the assessee never reflected in the government's coffers, prompting the Adjudicating Officer to issue a demand notice to the recipient.

The NCLT Complication and the Department's Stance

Adding a layer of complexity to the factual matrix was the financial status of the defaulting supplier. The supplier was undergoing corporate insolvency resolution proceedings, and matters were pending before the National Company Law Tribunal (NCLT).

The Adjudicating Officer took a rather stringent and controversial stance. The officer acknowledged the supplier's default but concluded that the GST department had limited or no effective recourse to recover the dues from a corporate entity entangled in NCLT proceedings. Consequently, the Adjudicating Officer directed the assessee to discharge the tax liability out of their own pocket. The officer further suggested that after paying the disputed tax to the government, the assessee could attempt to recover the said amount from the defaulting supplier by filing a claim before the NCLT. This approach essentially shifted the entire burden of revenue collection and the risk of supplier insolvency onto the shoulders of the bona fide recipient.