Gujarat High Court validates Input tax credit reversal citing Supplier’s non-genuineness, tax default and inadequate documentation

Introduction

The Hon’ble Gujarat High Court (‘HC’) recently pronounced a judgment on the eligibility to claim Input Tax Credit (‘ITC’) in cases where the supplier has failed to deposit tax with the Government, and the recipient is unable to provide adequate supporting documentation for ITC availed on the same. The ruling was delivered in the matter of R V Enterprises & Anr vs State of Gujarat & Ors (‘Assessee’) dated 18 July 2025.

In its decision, the Gujarat HC upheld the reversal of ITC on the grounds that the Assessee had not produced essential documents such as invoices, e-way bills, and transport receipts, and further, that the supplier had not discharged the relevant tax liability. Accordingly, the HC held that, in the absence of reliable documentation to establish the genuineness of the transaction and corresponding tax payment by the supplier, the Assessee’s ITC claim was not sustainable.

Facts of the case

• The Assessee is a partnership firm registered under the GST Act, 2017.
• During the FY 2017–18, the Assessee availed ITC on the purchase of plastic goods from various suppliers registered under GST.
• The Assessee contended that the suppliers had issued valid tax invoices and e-way bills and that the goods were duly delivered.
• The Assessee had duly complied with its responsibility to file GST returns and the corresponding ITC was availed basis the credit appearing in Form GSTR-2A and supplier invoices.
• The Assessee had also filed its Annual return in Form GSTR-9 for FY 2017–2018, declaring ITC of INR 3.49 Lakhs each for SGST and CGST availed on the basis of said invoices.
• On 28 September 2023, the department issued a show cause notice in Form GST DRC-01 under Section 73 of the GST Act. However, the department had issued the show cause notice without prior issuance of Form GST DRC-01A.
• The show cause notice alleged that the Assessee had availed the ITC on supplies from vendors whose GST registration had been cancelled due to non-payment of outward tax liabilities.
• Aggrieved by the show cause notice, the Assessee preferred the instant writ petition before the Gujarat HC.
• Subsequently, on 31 December 2023, the department passed an order-in-original in Form GST DRC-07, raising a demand of INR 15.48 Lakhs along with interest of INR 3.90 Lakhs each under the SGST and CGST Acts, and a penalty of INR 0.35 Lakh each under the respective provisions of both Acts.

Judgements and Circulars referred

• Agrometal Vendibles Pvt. Ltd. v. State of Gujarat,(2022) 63 G.S.T.L. 212 (Guj.)
• Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax, 2023 (77) G.S.T.L. 55 (Cal.),
• Lokenath Construction Pvt. Ltd. v. State of West Bengal, 2024 (86) G.S.T.L. 130 (Cal.), and
• New Nalbandh Traders v. State of Gujarat, 2022 (66) G.S.T.L. 334 (Guj).
• On Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi, 2018 (10) G.S.T.L. 182 (Del.)
• Commissioner of Trade & Taxes, Delhi v. Arise India Ltd., (2022) 60 G.S.T.L. 215 (SC)

Assessee’s Contention

• The Assessee contended that the show cause notice and order-in-original were issued without jurisdiction, as no prior notice in Form GST DRC-01A was served, denying an opportunity to respond or establish bona fide purchase of goods and valid ITC claim.
• It was submitted that the order was passed during the pendency of the writ petition, without affording a personal hearing, violating Section 75(4) of the GST Act.
• The Assessee argued that Section 16(2)(c) should not apply, as tax on the purchases had already been paid to the supplier. Recovering the same from the Assessee would result in double taxation.
• It was further contended that recovery, if any, should be made from the defaulting supplier, and not the purchaser who fulfilled their tax obligation.
• There were no findings in the notice or order alleging that the transactions were non-genuine; disallowance was solely due to the supplier’s default.
• The Assessee maintained that Section 16(2)(c) must be interpreted to protect bona fide purchasers and that the final order, relying on undisclosed grounds and documents, violated natural justice and should be set aside.

Department’s Contention

• The Department contended that the Assessee’s supplier, M/s. Parshvi Tradelink, was non-genuine, having reported negligible purchases while declaring disproportionately high outward supplies, indicating possible fake transactions.
• During a spot verification, no business activity was found at the supplier’s registered premises, leading to cancellation of its GST registration ab initio due to non-compliance.
• Invoking Section 155 of the GST Act, the Department argued that the burden to prove ITC eligibility rests with the Assessee — a burden not discharged in this case.
• Since the supplier had not discharged its output tax liability, the Department maintained that reversal of ITC under Section 16(2)(c) was justified.
• It was further submitted that issuance of Form GST DRC-01A is not mandatory, and its absence does not render the show cause notice or subsequent proceedings invalid.

Issues raised before the ITAT:

1. Whether the disallowance of ITC under Section 16(2)(c) of the GST Act was justified when the Assessee had purchased goods and paid tax to the supplier, but the supplier failed to deposit the tax with the State.
2. Whether the absence of a DRC-01A notice rendered the show cause notice and order-in-original invalid.
3. Whether penalty imposed under Section 73 of the GST Act was sustainable without issuance of DRC-01A.

Decision on issue raised

1. Justification of ITC disallowance under Section 16(2)(c):
2. The Court observed that the Assesseefailed to submit documentary evidence such as invoices, e-way bills, or transport documents to substantiate the genuineness of the purchases.
3. It was noted that the supplier, M/s. Parshvi Tradelink, had either made negligible or no purchases during the relevant period while declaring disproportionately high outward supplies, and had not remitted the output tax to the State exchequer.
4. Accordingly, the Court upheld the ITC disallowance under Section 16(2)(c) on the ground that the tax on such supplies had not been paid to the Government, making reversal of ITC by the Assessee mandatory.

• Validity of show cause notice and order in absence of DRC-01A:
• The Court held that the issuance of Form DRC-01A is not a statutory requirement, particularly after the clarificatory amendment to Section 142(1A) of the GST Act.
• Therefore, the absence of DRC-01A did not affect the validity or jurisdiction of the show cause notice or the order-in-original.

• Sustainability of penalty without DRC-01A:
• While confirming the disallowance of ITC, the Court held that the imposition of penalty under Section 73 was not sustainable due to the lack of intimation through Form DRC-01A.
• Consequently, the penalty component of the order was quashed, and the remainder of the order-in-original was upheld.

Conclusion

In this case, the High Court upheld the department’s decision to disallow the Input Tax Credit (ITC) claimed by the Assessee, holding that under Section 16(2)(c) of the GST Act, credit cannot be availed unless the supplier has actually paid the tax to the Government. The Court found that the Assessee’s supplier was non-genuine, had not discharged output tax liability, and that the Assessee failed to furnish supporting documents to prove genuine purchases.

However, the Court quashed the penalty imposed in the absence of a DRC-01A notice, stating that procedural fairness was not followed in this regard.

This judgment underscores the critical responsibility of taxpayers to conduct due diligence on their suppliers’ GST compliance, ensuring that the suppliers have duly paid the output tax to the Government. It also emphasizes the importance of maintaining comprehensive and credible documentation to substantiate the authenticity of transactions and safeguard their entitlement to ITC under the GST framework.