Allahabad High Court Rules ITC Reversal Invalid When Supplier Was Registered and Paid GST
Court Protects Purchasers from Penalties Due to Supplier’s Later Registration Cancellation
Landmark Ruling Strengthens Taxpayer Rights and Clarifies GST Compliance Obligations
By Our Legal Reporter
New Delhi: December 09, 2025:
In a landmark judgment, the Allahabad High Court has set aside tax and penalty orders against a registered dealer, ruling that Input Tax Credit (ITC) cannot be denied when the supplier was duly registered and had paid GST at the time of transaction. The case involved Singhal Iron Traders vs. Additional Commissioner, where the petitioner purchased scrap batteries from a registered supplier, paid consideration along with GST, and reported the transaction in returns.
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The authorities later attempted to reverse ITC, alleging fictitious transactions after the supplier’s registration was cancelled. The Court held that such reversal was unsustainable, emphasizing that taxpayers cannot be penalized for circumstances beyond their control.
Background of the Case
- The Petitioner: Singhal Iron Traders, engaged in trading scrap materials.
- The Transaction: Purchase of scrap batteries from Mohan Enterprises, Muzaffarpur (Bihar) on June 28, 2021.
- Supplier’s Compliance: Supplier issued a valid tax invoice and e-way bill, reported the outward supply in GSTR-1, and paid GST through GSTR-3B.
- Petitioner’s Compliance: Paid consideration along with GST via banking channels and claimed ITC in returns.
- Tax Authority’s Action: Authorities reversed ITC, alleging fictitious transactions after supplier’s registration was cancelled.
- Court’s Intervention: The Allahabad High Court quashed the reversal, ruling in favour of the petitioner.
Court’s Observations
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The High Court made several key points:
- Valid Registration: At the time of transaction, the supplier was duly registered under GST law.
- Tax Paid: GST was collected and deposited with the department.
- No Fictitious Transaction: Authorities acted on assumptions without evidence, despite clear statutory data and payment trail.
- Purchaser’s Rights: A bona fide purchaser cannot be penalized for subsequent cancellation of supplier’s registration.
- ITC Protection: Input Tax Credit is a statutory right when conditions are met, and denial without cause undermines GST’s framework.
Wider Legal Context
- Section 16 of CGST Act: Grants ITC to taxpayers if tax has been paid and supplier is registered.
- Judicial Precedents: Courts have consistently ruled that ITC cannot be denied when transactions are genuine and tax is paid.
- Policy Implications: The ruling strengthens trust in GST compliance and reduces harassment of taxpayers.
- Consumer Protection: Ensures businesses are not penalized for supplier defaults beyond their control.
Implications of the Ruling
- For Taxpayers: Provides relief and clarity, ensuring ITC claims are protected when transactions are genuine.
- For Tax Authorities: Reinforces the need for evidence-based action, discouraging arbitrary reversals.
- For Judiciary: Strengthens jurisprudence on ITC rights and taxpayer protection.
- For Businesses: Boosts confidence in GST compliance, reducing litigation risks.
Industry and Expert Reactions
Also Read: Allahabad High Court Rules ITC Reversal Invalid When Supplier Was Registered and Paid GST
- Tax Professionals: Welcomed the ruling as a safeguard against arbitrary ITC reversals.
- Legal Experts: Pointed out that the judgment reinforces statutory rights under GST law.
- Businesses: Saw the decision as a boost to confidence in India’s tax regime.
- Public Opinion: Many argued that the ruling reduces unnecessary litigation and promotes ease of doing business.
Conclusion
The Allahabad High Court’s ruling that ITC reversal is not sustainable when the supplier was registered and had paid tax at the time of transaction is a landmark in GST jurisprudence. By protecting bona fide purchasers from penalties due to supplier defaults, the Court has reinforced taxpayer rights and clarified compliance obligations.
This judgment will serve as a precedent across India, ensuring that tax authorities act fairly and transparently while safeguarding the integrity of the GST framework.
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