• Dated 31^th October, 2025

The Apex Court has held that ITC not deniable if seller’s registration cancelled post-transaction

Brief Facts of the Case

The respondent, was a registered purchasing dealer under the Delhi Value Added Tax Act, 2004(DVAT Act,2004). The company had purchased goods from registered selling dealers and paid the applicable VAT as per tax invoices issued by such sellers. Subsequently, it was discovered that the selling dealers had failed to deposit the tax collected with the Government, and their registrations were later cancelled. The issue before the Delhi High Court, and later the Supreme Court, was whether the respondent could still claim the benefit of Input Tax Credit (ITC) under Section 9(1) of the DVAT Act when the selling dealer's registration was cancelled after the impugned transactions.

Department's Contention

The appellant contended that in terms of Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, ITC could be availed by a purchasing dealer only when the tax collected by the seller had been duly deposited with the Government. It was argued that since the selling dealers had failed to do so, the purchasing dealer (respondent) could not claim ITC. The appellant further argued that the subsequent cancellation of the seller's registration implied that the transactions were not genuine, and therefore, the purchaser should be denied the credit. The Department relied on the amendment to Section 9(2)(g) effective from 1-4-2010 to support its position that ITC entitlement was conditional upon actual deposit of tax by the seller.

Assessee's Contention

The respondent submitted that at the time of the transactions, the selling dealers were validly registered with the Department and that all purchases were made bona fide against tax invoices duly reflecting the TIN numbers. The respondent had paid tax in good faith and had no control over the seller's subsequent failure to deposit the tax. It was argued that denial of ITC in such circumstances would penalize the purchasing dealer for no fault of its own. Relying upon the judgment of the Delhi High Court in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, it was submitted that bona fide purchasers could not be denied ITC merely because the selling dealer defaulted in payment of tax to the Government.

Held by the Supreme Court

The Hon'ble Supreme Court, affirming the Delhi High Court's view, held that the benefit of ITC under Section 9(1) of the Delhi Value Added Tax Act, 2004, cannot be denied to a bona fide purchasing dealer where the seller's registration was valid on the date of the transaction. The Court observed that neither the authenticity of the transactions nor the invoices had been questioned, and the selling dealer was duly registered at the relevant time. The subsequent cancellation of registration does not retrospectively affect the validity of the transaction. It was further noted that the High Court had correctly held that the amendment to Section 9(2)(g), effective from 1-4-2010, was not clarificatory in nature and therefore not applicable to transactions prior to that date. Accordingly, the Supreme Court found no reason to interfere with the High Court's order and dismissed the appeal, directing that ITC benefit be granted after due verification.

BTA's Remarks

This judgment reaffirms the principle that a bona fide purchasing dealer cannot be penalized for the seller's default in depositing VAT to the Government when the seller was duly registered at the time of transaction. The Supreme Court's reasoning aligns with earlier rulings such as On Quest Merchandising India Pvt. Ltd. and Arise India Ltd., emphasizing that the tax authorities must proceed against the defaulting seller rather than deny credit to a compliant purchaser. The decision strengthens taxpayer confidence in the integrity of VAT and GST credit mechanisms and upholds fairness in the enforcement of input credit provisions

Case reference: Civil Appeal No(s). 2042-2047 of 2015 with C.A. No. 9902 of 2017,

Decided on: 9-10-2025

Author: Soumaditya Chakroborty

Edited by: Shaily Gupta