Supreme Court on ITC: Buyer’s Credit Safe Even if Seller Defaults (Landmark Judgment)

As a tax professional, one question my clients ask with the most worry is this: “Sir, I paid 100% of the bill, including GST, to my supplier. But this supplier never filed his return. Now the department is asking me to reverse my Input Tax Credit (ITC). Is this fair?” For years, this has been a major headache for every honest business owner in India. You do your side of the bargain, but you are punished for someone else’s mistake or fraud. This risk of ITC denial due to supplier default has been a huge source of litigation and has felt deeply unjust.

The department’s stand has always been rigid: if we don’t get the tax from the seller, we will recover it from the buyer’s ITC. This penalizes genuine businesses and is, frankly, bad for business. Now, in a landmark and very welcome decision, the Supreme Court of India has provided significant clarity. By upholding the rights of a bona fide (genuine) buyer in a case from the VAT regime, it has set a powerful precedent for GST.

The Landmark Ruling: M/s Shanti Kiran India (P) Ltd.

The case is Commissioner Trade and Tax Delhi vs. M/s Shanti Kiran India (P) Ltd. (CA Nos. 2042-2047/2015 & 9902/2017) (Order dated October 9, 2025). The Supreme Court heard the tax department’s appeal and, in a major relief to taxpayers, dismissed it.

The Supreme Court’s verdict is unequivocal: A purchasing dealer who has acted in good faith (a ‘bona fide purchaser’) cannot, and should not, be penalized for the non-compliance or default of the selling dealer.

Your ITC Claim is Secure: The ‘Bona Fide Purchaser’ Test.

Based on the principles upheld by the courts, your Input Tax Credit (ITC) claim is considered strong and defensible, provided you can prove you are a ‘bona fide purchaser’. This means you have met these critical conditions:

• ✅ Genuine Supplier: You’ve done your due diligence and confirmed the seller’s GSTIN was active and registered on the date you made the purchase.
• ✅ Good Faith Transaction: You acted in good faith. You have a valid tax invoice, and you’ve actually received the goods or services.
• ✅ Proper Documentation: You have proof of payment (like a bank statement) for the full invoice amount, and you’ve maintained proof of delivery (like an e-way bill or Lorry Receipt).
• ✅ Clean Reconciliation: The transaction is properly reflected in your GSTR-2B, and you have all records to support the claim you’ve made in your GSTR-3B.
• ✅ No Collusion: The transaction is genuine and at arm’s length. The tax department has no evidence to prove that you were a part of any fraud or scheme with the seller to evade tax.

In simple, practical terms: if you have your valid tax invoice, your proof of receiving the goods, and your seller was registered on the date of purchase, your ITC cannot be denied just because that seller later failed to pay the tax. This is a massive victory for taxpayers and a win for a fair interpretation of tax law.

The Problem with Section 16(2)(c).

This fight is not new. It started under the VAT Act (Section 9(2)(g) in the Delhi VAT), which the department used to deny ITC to buyers when sellers defaulted. The department’s logic was simple: no tax in our pocket, no credit in yours.

This policy placed an impossible burden on the buyer. It effectively made you a tax collector and policeman for your own suppliers—a job you have no power to do.

“Placing the burden of a seller’s default on a genuine buyer is like punishing a victim for being robbed. The law should chase the culprit, not the victim.”

This same problem was copied directly into the GST regime under Section 16(2)(c) of the CGST Act, 2017. This rule states that a taxpayer is eligible for ITC *only if* the tax charged by their supplier has actually been “paid to the Government.”

This very section is the reason you get notices for ITC reversal. Officers have denied credit simply because a supplier’s GSTR-1 did not match their GSTR-3B, or the supplier’s registration was later cancelled.

The Court’s Rationale: Protecting the Honest Buyer.

The Supreme Court upheld the High Court’s reasoning, which is grounded in common sense, justice, and constitutional law. Here is the logic:

1. It Violates Article 14 (Equality): The court agreed that treating an honest, genuine buyer on par with a fraudulent buyer (who is in on the scam) is arbitrary and unfair. This violates Article 14 of the Constitution. A bona fide buyer is a different class altogether and cannot be punished for the seller’s fraud.
2. The Law Cannot Ask the Impossible: There is a legal principle: lex non cogit ad impossibilia (the law does not compel a man to do that which he cannot possibly perform). A buyer can check a GSTIN, an invoice, and confirm delivery. He cannot, however, log into the supplier’s bank account and force him to file his GSTR-3B.
3. The Department Must Do Its Job: The government, with all its power (like freezing bank accounts, cancelling registration), is the one who has to recover the tax from the defaulter. The court affirmed that the remedy for the department is to proceed against the defaulting seller, not to take the “easy way out” by penalizing the compliant buyer.

This Shanti Kiran judgment is a big boost to the taxpayer. It reinforces a simple, fair principle: you cannot be held responsible for another person’s crime, especially when you have no proof of involvement.

What This Means for Your GST (The “Persuasive Precedent”).

Now, you might ask, “But Sir, this case was for VAT, not GST.” That is true. But in law, the ‘ratio decidendi’ (the core legal principle) is what matters. This principle is a powerful “persuasive precedent” that can be, and should be, used in all GST cases.

This ruling provides a strong legal foundation for any business to fight an ITC denial under Section 16(2)(c). It gives strength to similar pro-taxpayer judgments from various High Courts (like Arise India, D.Y. Beathel Enterprises, and Suncraft Energy).

The key takeaway for you is this: The burden of proof has now shifted significantly to the department. They can no longer just deny your ITC automatically. They must establish that you, the buyer, were *in collusion* with the seller. If they cannot prove your involvement in the fraud, and you can prove you did your homework, your ITC claim is strong.

For more details on the fundamentals of the GST system, you can learn more about What GST is on our site.

A Professional’s Checklist for ITC Due Diligence.

This judgment is a powerful shield, but it is not a free pass. It protects the “bona fide” and “diligent.” It will not protect a business that is careless. As your tax advisor, here is my expert-recommended guide to protect your ITC.

Step 1: Robust Supplier Onboarding (Don’t be careless!).

• Verify GSTIN: Before you place an order, verify the supplier’s GSTIN on the official GST portal. Check that it is “Active” and look at their compliance rating and filing history.
• Do Your “KYC”: For new or large suppliers, do basic due diligence. Do they have a real office? A real godown? Are they just a name on a letterhead?
• Protect Yourself with a Contract: Include an indemnity clause in your purchase orders. This clause should clearly state that the supplier is responsible for paying the GST and that any loss of ITC (including interest and penalty) due to their non-compliance will be recovered from them.

Step 2: Impeccable Documentation (Your First Line of Defence).

• Valid Tax Invoice: Make sure every invoice is a “Valid Tax Invoice” as per GST law (Section 31). It must have all details: GSTINs, HSN, tax breakup, etc. No “kaccha” bills.
• Proof of Receipt: Maintain meticulous records that prove you received the goods. This includes e-way bills, lorry receipts (LRs), delivery challans, and weighbridge slips.
• Proof of Payment: Keep your bank statements ready. Show that you paid the *full* invoice amount (including tax) from your bank account to their bank account.

Step 3: Diligent and Regular Reconciliation (Don’t wait!).

• Check GSTR-2B Monthly: This is the most critical step. Every month, you must perform a GSTR-2B reconciliation. This is your official, non-editable ITC statement.
• Act on Mismatches: If an invoice is missing from your GSTR-2B, do not claim the ITC and wait. Contact your supplier *immediately*. Send them an email (keep the proof!) asking why it’s missing and demand they file their GSTR-1.
• Annual Check: This monthly diligence is essential. It will save you a nightmare when you file your GSTR-9 and GSTR-9C (annual returns).

Step 4: How to Reply to a Tax Notice.

• Do Not Panic: If you receive a notice (like GSTR-3A or DRC-01B), don’t get scared. You now have a strong legal argument.
• Gather Your Proof: Systematically collect all the documents from Step 2 for the disputed invoices.
  • The valid tax invoice.
  • The e-way bill / LR / delivery challan.
  • Your bank statement showing payment.
  • A screenshot of the supplier’s “Active” GSTIN status.
  • Your email follow-ups with the supplier (this shows you were diligent).
• Draft a Formal Reply: Structure your reply clearly. State that you are a bona fide purchaser. Attach all your proofs as annexures. Assert that you have fulfilled all conditions under your control. And most importantly, cite the Supreme Court’s decision in the Shanti Kiran case as the legal basis for your defence.

This Supreme Court judgment is a breath of fresh air. It brings fairness and justice to honest taxpayers. It shifts the balance, reminding the tax authorities that their primary duty is to chase the actual defaulters, not to harass compliant businesses.

Frequently Asked Questions (FAQs).

Q: What is the Supreme Court’s latest judgment on ITC?

A: The Supreme Court, in the M/s Shanti Kiran India (P) Ltd. case, upheld the legal principle that a genuine (bona fide) buyer’s Input Tax Credit (ITC) cannot be denied just because the selling dealer failed to pay the tax to the government. This relief is conditional on the buyer proving their own diligence and non-involvement in any fraud.

Q: Is my ITC safe if my supplier did not pay GST?

A: Your ITC is defensible. This judgment provides a strong legal basis to argue that your ITC is safe, provided you can demonstrate you are a “bona.” You must have all valid documents (invoice, proof of receipt, proof of payment) and show you were not in collusion with the defaulting seller.

Q: What is a ‘bona fide purchaser’ in GST?

A: A ‘bona fide purchaser’ is a legal concept for a genuine buyer who has acted in good faith. In the context of GST, this is demonstrated by:

1. Possessing a valid tax invoice.

2. Proving the actual receipt of goods or services.

3. Proving payment was made to the supplier for the invoice.

4. Verifying the supplier’s GSTIN was active at the time of purchase.

5. Having no part in any collusion or fraud.

Q: What is Section 16(2)(c) of the CGST Act?

A: Section 16(2)(c) is a controversial rule in the GST law. It states a buyer is eligible for ITC only if the tax they paid to their supplier has actually been “paid to the Government” by that supplier. This new Supreme Court judgment provides a strong constitutional challenge to the arbitrary application of this section against genuine buyers.

Q: Can ITC be denied for a supplier’s mistake in filing?

A: This is a key distinction. The law does not typically penalize genuine clerical errors (e.g., a typo in an invoice number). Various High Courts (and the principle from this SC judgment) support that a buyer’s ITC cannot be denied for such errors, especially if the transaction’s genuineness is proven by all other documents. This is distinct from cases of non-payment or fraud by the supplier.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.