Allahabad High Court Rules GST Authorities Cannot Deny ITC Without Proving Fraud Or Collusion - 2025-09-09

Allahabad High Court Rules GST Authorities Cannot Deny ITC Without Proving Fraud Or Collusion

The High Court of Judicature at Allahabad has provided much-needed relief to taxpayers, ruling that revenue authorities cannot arbitrarily deny Input Tax Credit (ITC) under Section 74 of the Uttar Pradesh Goods and Services Tax (UPGST) Act without concrete evidence of fraud, wilful misstatement, or suppression of facts. Justice Piyush Agrawal emphasized that the mere cancellation of a supplier's registration post-transaction does not automatically invalidate a purchaser’s claim to ITC, provided the transaction is genuine.

A Dispute Over Tax Compliance

The petitioner, M/s Safecon Lifescience Private Limited, a manufacturer and trader of pharmaceutical products, challenged orders passed by the Additional Commissioner (Grade 2) and the Deputy Commissioner, Commercial Tax, Agra. The dispute arose when authorities denied the petitioner's ITC for April 2021, alleging that their supplier, M/s Unimax Pharma Chem, had engaged in irregular practices and had its registration cancelled. The Revenue authorities argued that since the supplier had allegedly claimed forged credit from other non-tax-paying firms, the petitioner was ineligible for the credit, despite having proof of payment through banking channels and valid invoices.

The Petitioner’s Defense

The petitioner contended that at the time of the transaction, the supplier was duly registered and the goods were moved with valid e-way bills and transport documents. Furthermore, all tax invoices were reflected in the GSTR-1 and GSTR-3B filings. Counsel argued that because the petitioner had fulfilled all statutory obligations—including verifying the supplier's status at the time of purchase and making payments via official banking channels—the denial of ITC was legally unsustainable.

Legal Analysis and The 'Fraud' Threshold

The High Court observed that Section 74 of the UPGST Act is an extraordinary provision that requires the presence of mens rea, or a clear intent to evade tax. Referring to a circular dated December 13, 2023, the Court reiterated that investigations must provide material evidence of fraud before invoking such severe measures.

"The information sent by the Central Intelligence Unit must be verified by the authority before using the same against the registered dealer," the court noted, pointing out that the authorities had acted with "closed eyes" by failing to provide the petitioner with a copy of the reports used to reject their claim.

Key Observations

The judgment clarifies the standard of proof required by tax authorities:

• "Once actual movement of goods as well as payment of tax by the respondent authorities have been proved by the petitioner to which no rebuttal has been brought on record at any stage, proceedings under section 74 of the Act cannot be justified."
• "The information sent by the Central Intelligence Unit must be verified by the authority before using the same against the registered dealer."
• " Section 74 (1) cannot be invoked merely on account of non-payment of GST without specific element of fraud or wilful mis-statement or suppression of facts to evade tax."
• "The Apex Court has clearly stated that incorrect statement, unless made with the knowledge that it was not correct, would not be a ground of wilful misstatement or suppression."

Final Ruling and Implications

The Allahabad High Court allowed the writ petition, quashing the impugned orders issued against the petitioner. This ruling serves as a strong precedent for businesses operating under the GST regime, asserting that the "Ease of Doing Business" initiative cannot be undermined by administrative overreach. Tax authorities are now explicitly warned that in the absence of evidence proving deliberate evasion or collusion, they cannot penalize law-abiding registered dealers for the actions of their suppliers.