Madras High Court Clarifies ITC Denial When Supplier is Declared Non-Existent

The Madras High Court, in Clear Secured Service Private Limited Vs Assistant Commissioner (ST) (W.P. No. 23402 of 2026), has once again underlined an important principle under the GST regime: Input Tax Credit (ITC) cannot be refused solely because the supplier is later treated as non-existent, without a proper examination of the purchasing assessee’s documents and without following the correct statutory procedure.

This decision is particularly significant for assessees who have dealt with subsequently de-registered or “non-existent” vendors, and face demands for ITC reversal merely on that basis. It also highlights the importance of the correct invocation of Section 73 or Section 74 of the CGST/TNGST Acts and the corresponding procedural consequences.

Background of the Dispute

Parties and Registration

  • Petitioner: Clear Secured Service Private Limited, a registered assessee under the Central Goods and Services Tax Act, 2017 (CGST Act) and the Tamil Nadu Goods and Services Tax Act, 2017 (TNGST Act), located in Chennai.
  • Supplier: M/s. Jay Steels.
  • Respondent: Assistant Commissioner (ST), Porur Assessment Circle.

The assessee had availed ITC relating to supplies received from M/s. Jay Steels for the relevant tax period, based on tax invoices and other supporting documentation.

Initial Proceedings

Pursuant to departmental intimation, the assessee submitted a reply dated 27.01.2025, enclosing:

  • Bank statements evidencing payment to the supplier (including the tax component)
  • Copies of tax invoices issued by M/s. Jay Steels
  • E-way bills
  • Ledger extracts
  • Screenshots of Form GSTR-2A and Form GSTR-2B showing reflection of the transactions

Subsequently, a Show Cause Notice (SCN) dated 26.02.2025 was issued to the assessee, proposing reversal of ITC on supplies received from M/s. Jay Steels. The SCN:

  • Required production of original tax invoices, e-way bill copies, purchase register, lorry receipts and proof of payment
  • Specifically recorded that it was issued under Section 73 of the CGST/TNGST Acts

Assessment Order

Despite the SCN invoking Section 73, the assessment order dated 02.09.2025 (followed by the summary in Form GST DRC-07 dated 08.09.2025) was passed under Section 74 of the CGST/TNGST Acts.

The demand was confirmed only on one ground: that the registration of M/s. Jay Steels had been cancelled with effect from 27.03.2024, and that the supplier was therefore treated as “non-existent”.

No proper analysis or discussion of the documents already filed by the assessee was undertaken in the assessment order.

Aggrieved, the assessee invoked the writ jurisdiction under Article 226 of the Constitution of India and challenged the order as being arbitrary, contrary to law and passed in violation of principles of natural justice.

Whether ITC can be denied and a tax demand confirmed solely because the supplier was later categorised as non-existent, without a proper evaluation of the documentary evidence produced by the assessee to prove the genuineness of the supplies?

A connected procedural question also arose:

Whether proceedings initiated through a SCN under Section 73 can lawfully culminate in an order under Section 74 without appropriate allegations and foundation in the SCN?

Findings of the Madras High Court in Clear Secured Service Private Limited Vs Assistant Commissioner (ST)

1. Burden of Proof on the ITC Claimant

The Court reiterated that, under Section 155 of the CGST Act, the burden of establishing eligibility to ITC rests on the assessee claiming such credit:

“Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”

Accordingly:

  • The department is justified in calling upon the assessee to demonstrate that the underlying supplies are genuine.
  • There is no infirmity merely in asking for supporting evidence such as invoices, transport documents and payment proofs.

However, once the assessee does produce relevant documents, the adjudicating authority is duty-bound to evaluate them on merits.

2. Nature of Documents Produced by the Assessee

In this case, the assessee had already put on record:

  • Bank statement evidencing payments to M/s. Jay Steels
  • Tax invoices issued by the supplier
  • E-way bills corresponding to such supplies
  • Ledger extracts
  • Form GSTR-2A and Form GSTR-2B demonstrating reflection of the supplies

The Court emphasised that these records are material and relevant to the question of whether the supplies were genuine.

3. Failure of the Authority to Consider Evidence

The High Court held that the assessing authority:

  • Ought to have scrutinised the documents furnished,
  • And, if any deficiency was noticed, ought to have extended an opportunity to the assessee to produce further material or clarifications.

Instead, the assessment order: