SC Rules Buyers Can Claim VAT Credit Despite Seller Default

Supreme Court Rules Input Tax Credit on VAT Cannot Be Denied to Buyers for Seller’s Failure to Deposit Tax

Apex Court Protects Genuine Purchasers, Says Onus Lies on Defaulting Seller, Not Buyer

Judgment Upholds Delhi High Court Ruling, Brings Relief to Businesses Across India

By Our Legal Correspondent

New Delhi: October 13, 2025:

In a landmark ruling with far-reaching implications for businesses, the Supreme Court of India has held that Input Tax Credit (ITC) under the Delhi Value Added Tax Act, 2004 (DVAT Act) cannot be denied to registered purchasing dealers merely because the selling dealer failed to deposit the collected VAT with the government.

The judgment, delivered on October 11, 2025, upholds the Delhi High Court’s earlier decision and provides significant relief to thousands of businesses that had been penalized for no fault of their own. The Court made it clear that the responsibility to deposit tax lies with the seller, and a bona fide purchaser who has paid the tax in good faith cannot be punished for the seller’s default.

Background of the Case

The dispute arose when tax authorities denied ITC claims to several registered purchasers on the grounds that the selling dealers had not deposited the VAT collected from them.

The purchasers argued that they had paid the full invoice amount, including VAT, to the sellers.
They also produced valid tax invoices and proof of payment.
Despite this, the authorities denied ITC, claiming that since the sellers had not deposited the tax, the buyers could not claim credit.

The matter reached the Delhi High Court, which ruled in favor of the purchasers. The High Court held that the burden of ensuring tax deposit cannot be shifted from the seller to the buyer. The tax department challenged this ruling in the Supreme Court, leading to the present judgment.

Supreme Court’s Observations

The Supreme Court bench upheld the Delhi High Court’s reasoning and made several important observations:

Onus on Seller, Not Buyer
- The Court held that once a purchaser has paid the tax to a registered seller and obtained a valid invoice, the buyer’s responsibility ends.
- It is the seller’s statutory duty to deposit the tax with the government.
No Denial of ITC to Bona Fide Purchasers
- Denying ITC to genuine purchasers would amount to double taxation and unfairly penalize them for the seller’s misconduct.
- The Court emphasized that purchasers cannot be expected to police sellers or ensure compliance.
Reaffirmation of Precedents
- The Court relied on its earlier ruling in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017), which had similarly protected buyers from being penalized for sellers’ defaults.
- The present judgment strengthens that precedent and extends its application.
Principle of Fairness
- The Court stressed that taxation must be guided by fairness and equity.
- Punishing buyers who acted in good faith would undermine trust in the tax system.

Key Excerpts from the Judgment

The Supreme Court observed:

“The fault lies with the defaulting selling dealer and not against a bona fide purchaser who has paid tax in good faith. The benefit of Input Tax Credit cannot be denied to such a purchaser.”

This categorical statement provides clarity and certainty to businesses that had long faced disputes over ITC claims.

Implications of the Ruling

The judgment has wide-ranging implications for businesses, tax authorities, and the overall tax ecosystem.

Relief for Businesses
- Thousands of businesses across India, especially small and medium enterprises (SMEs), will benefit from this ruling.
- Many had faced heavy tax demands and penalties due to sellers’ defaults.
Strengthening of ITC Framework
- The ruling reinforces the principle that ITC is a vested right once conditions are met.
- It ensures that the credit mechanism functions smoothly without unfair disruptions.
Impact on Tax Administration
- Tax authorities will now have to focus on enforcing compliance from sellers rather than penalizing buyers.
- This may lead to stricter monitoring of seller compliance and better enforcement mechanisms.
Precedent for GST Cases
- Although the case pertains to VAT under the DVAT Act, the principles laid down are likely to influence disputes under the Goods and Services Tax (GST) regime as well.
- Similar issues have arisen under GST, where buyers were denied ITC due to sellers’ non-compliance.

Expert Reactions

Tax lawyers hailed the judgment as a victory for fairness. Advocate Shishir Sinha noted:
“The Court has rightly protected bona fide purchasers. This will restore confidence in the ITC system and prevent unjust enrichment of the state.”
Industry bodies such as FICCI and CII welcomed the ruling, saying it would reduce litigation and compliance burdens for businesses.
Tax consultants pointed out that the judgment may also push the government to revisit GST rules that currently allow denial of ITC in similar circumstances.

Public and Business Response

The ruling has been widely welcomed by the business community.

Small traders and SMEs expressed relief, saying they had often been caught in disputes despite acting honestly.
Large corporations noted that the judgment provides much-needed clarity and reduces uncertainty in tax planning.
Taxpayers on social media praised the Court for standing up for fairness and protecting genuine businesses.

Conclusion

The Supreme Court’s ruling that ITC on VAT cannot be denied to registered purchasers for sellers’ failure to deposit tax is a landmark in Indian tax jurisprudence. By upholding the principle that the onus lies on the seller, not the buyer, the Court has ensured fairness, reduced litigation, and strengthened trust in the tax system.

The judgment not only provides relief to businesses under the VAT regime but also sets a precedent that could shape future disputes under GST. For India’s taxpayers, it is a reaffirmation that the law will protect those who act in good faith.