Supreme Court Protects Genuine Dealers: ITC Cannot Be Denied for Seller’s Failure to Deposit Tax

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In a landmark ruling safeguarding the rights of honest taxpayers, the Supreme Court of India has upheld the entitlement of bona fide purchasing dealers to claim Input Tax Credit (ITC) even when the selling dealer fails to deposit the collected tax with the government. The verdict, delivered in Commissioner, Trade & Tax, Delhi vs. M/s Shanti Kiran India (P) Ltd., reaffirms that genuine dealers who have purchased goods against valid tax invoices and made due payment of tax cannot be penalized for the default of their suppliers.

The apex court’s decision brings long-awaited relief to law-abiding traders and reinforces the constitutional principle that a person acting in good faith should not suffer for another’s wrongdoing. It also settles a contentious issue under the Delhi Value Added Tax Act, 2004, which has parallels in the GST regime, ensuring that tax authorities must act against the defaulting seller rather than denying rightful credit to innocent purchasers.

Case in Brief

  • Parties: Commissioner, Trade & Tax, Delhi (Revenue) vs. M/s Shanti Kiran India (P) Ltd. (Purchasing dealer)
  • Court / Bench: Supreme Court of India; Justices Manoj Misra & Nongmeikapam Kotiswar Singh
  • Date of Judgment: 9 October 2025
  • Citation / Appeal No(s.): Civil Appeal Nos. 2042-2047 of 2015 (batch)
  • Statute Under Consideration: Delhi Value Added Tax Act, 2004 (DVAT Act), particularly Section 9(2)(g) (provision regarding denial of ITC if seller did not deposit tax)

Issues Raised

  1. Whether a purchasing dealer (who has valid invoices and has paid tax to the supplier) can be denied Input Tax Credit (ITC) under Section 9(2)(g) merely because the selling dealer failed to remit the tax collected to the government.
  2. Whether Section 9(2)(g) as originally enacted — denying ITC unless the seller deposits tax (or adjusts it lawfully) — is constitutionally valid or requires “reading down” to avoid denial of fundamental rights (e.g., equality) to bona fide purchasers.
  3. Whether the remedy for defaulting sellers should lie solely against them rather than penalizing innocent purchasers.

Background & Prior Precedent

  • The Delhi High Court had earlier considered a similar issue in On Quest Merchandising India Pvt. Ltd. vs. Government of NCT of Delhi (2017). In that case, the High Court “read down” clause (g) of Section 9(2) so as not to penalize bona fide purchasing dealers when sellers defaulted in depositing tax, unless there was evidence of collusion.
  • The High Court’s rationale: denying ITC to innocent purchasers would violate Article 14 (right to equality), because it punishes a party that has complied in good faith.
  • The High Court held that the proper remedy for the Department is to recover from the defaulting seller, not to deny credit to the purchaser.
  • The On Quest decision was challenged via Special Leave Petition (SLP No. 36750/2017), which the Supreme Court disposed without interfering with the High Court’s order.

Supreme Court’s Decision & Reasoning

Holding

  • The Supreme Court dismissed the appeals filed by the Commissioner, Trade & Tax, Delhi, effectively affirming the Delhi High Court’s decision that bona fide purchasing dealers can claim ITC even if the selling dealer failed to deposit the tax, provided certain conditions are met.
  • In doing so, the Court held that in the facts of the case, there was no dispute that:
    1. The seller was registered on the date of the transaction.
    2. The invoices and transactions were genuine and had not been challenged on veracity.
  • Since none of the transactions or invoices were questioned, and there was no evidence of collusion, the Court saw no reason to interfere with the High Court’s grant of ITC after due verification.

Key Reasoning & Principles

  1. Reading down / constitutional safeguard
    • The Court accepted the High Court’s approach of “reading down” Section 9(2)(g) so that bona fide purchasers are not penalised for the default of suppliers.
    • If the clause were interpreted literally (i.e. ITC denied whenever seller fails to deposit tax), many innocent dealers would be deprived of their legitimate rights, which could conflict with the principle of equality under Article 14.
    • Therefore, the phrase “dealer or class of dealers” in clause (g) is to be understood not to include bona fide purchasing dealers transacting with registered sellers, in absence of collusion or fraudulent conduct.
  2. Remedy lies against defaulting seller, not innocent purchaser
    • The Court endorsed the principle that the revenue’s recourse should be against the errant seller, and not to deprive the purchaser who had acted in good faith, because that would amount to “double punishment”.
    • The purchaser, having already paid taxes pursuant to valid invoices, should not be penalized for the supplier’s failure.
  3. No collusion or fraud, and proper verification
    • A key caveat: the entitlement to ITC is subject to due verification of invoices and absence of evidence of collusion or fraud between buyer and seller.
    • If the Department can bring material indicating collusion or manipulation, then it may deny the benefit under other provisions (e.g. Section 40A of DVAT) or suitable penal provisions.
  4. No interference with High Court’s fact-finding
    • Since the High Court had already examined facts (e.g. that the seller was registered, invoices were valid, no suspicion of fraud) and no challenge to those findings was successful at Supreme Court, the Supreme Court declined to disturb the High Court’s order.
  5. Disposition
    • The appeals were dismissed, and the pending applications (if any) were disposed of.

Implications & Significance

  • Protection of bona fide purchasers: The judgment fortifies the legal position that a purchasing dealer who acts in good faith, receiving valid invoices from a registered seller, cannot be denied the benefit of ITC merely because the seller defaulted in remitting the collected tax.
  • Limiting revenue’s power: It constrains the revenue’s power to deny credit broadly and compels it to target the defaulting seller (rather than penalize all downstream purchasers) in cases of non-payment.
  • Consistency with “reading down” doctrines: The decision reinforces that statutes may need to be read down when literal interpretation would lead to inequity or violation of constitutional rights.
  • Greater certainty in VAT / earlier regime: Though this is under the DVAT Act (i.e., pre-GST regime), the reasoning is expected to influence analogous disputes under GST/CGST law (especially in interpreting denial provisions)

  • Caution for tax departments: The revenue must ensure that any denial of ITC is backed by concrete material (such as collusion, fraudulent invoices, etc.) and not a blanket disallowance merely because the supplier failed deposits.

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