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Shree Karni Electrovision Loses ITC Challenge as Upholds Section 16(2)(c) Tax Condition
Court Upholds Mandatory Tax Payment for ITC Under GST Regime
In a significant ruling on under the Goods and Services Tax (GST) regime, a Division Bench of the has held that actual payment of tax by the supplier to the Government is an absolute condition for availing ITC under . The court dismissed a by , which had challenged the constitutional validity of the provision and an order directing recovery of ITC from the buyer.
The Case: When a Supplier’s Insolvency Triggered a Credit Recovery
The petitioner, a registered firm dealing in electronic goods, had procured supplies worth ₹59.42 lakh from , a retail arm of the , between and . On these purchases, tax of ₹13 lakh (CGST and RGST each of ₹6.5 lakh) was payable. availed ITC on the assumption that the supplier had deposited the corresponding tax with the Government.
The supplier subsequently became insolvent, and proceedings under the were initiated. The Revenue did not lodge a claim for the unpaid tax in those proceedings. Later, the tax authorities issued an order dated under , directing recovery of the ITC from the petitioner, contending that the tax had not actually been paid by the supplier.
Petitioner’s Argument: Impossibility and the IBC Protection
The petitioner advanced two primary arguments:
- Section 16(2)(c) as : The condition requiring the purchaser to ensure that the supplier has actually paid the tax to the Government is practically impossible to fulfill, especially given the absence of a real-time mechanism to verify such payment. This rendered the provision arbitrary and violative of the principle (the law does not compel a person to do what is impossible). They argued that the section should be read down.
- Effect of IBC: Relying on the ’s judgment in , the petitioner contended that once an insolvency resolution plan is approved, all claims not forming part of the plan stand extinguished. Since the Revenue failed to lodge its claim against the supplier in the IBC proceedings, it could not recover the tax from the purchaser.
Revenue’s Stand: A Clear
The Revenue argued that Section 16(2)(c) is a clear, unambiguous, and mandatory condition. The provision explicitly states that no registered person shall be entitled to ITC unless the tax charged on the supply has been actually paid to the Government. They placed strong reliance on the ’s recent decision in , which had upheld the provision’s constitutionality and elaborated on its interplay with Section 41 and .
Court’s Analysis: Conditions Must Be Read Conjointly
The Division Bench of Dr. Justice Pushpendra Singh Bhati and Justice Praveer Bhatnagar analyzed the matter in detail. The court observed that the conditions under must be satisfied together and not independently. The court specifically noted:
“This Court finds that Section 16(2)(c) of the Act of 2017 is a mandatory condition, subject to /, requiring that the tax charged in respect of the supply be actually paid to the Government and, unless the same is paid, the availing of Input Tax Credit is prohibited.”
The court further held that the burden of proving eligibility for ITC lies on the person claiming the credit, as mandated by . The ’s reasoning in Maruti Enterprise was found to be persuasive, particularly the observation that the GST regime provides safeguards through Section 41 and Rule 37A, which allow a purchaser to reverse and later re-avail ITC if the supplier eventually pays the tax. The maxim was held not to be attracted because the scheme provides a mechanism for the purchaser to protect itself through and contractual safeguards.
The IBC Judgment: Not a Shield Against Statutory Compliance
The court distinguished the Ghanashyam Mishra judgment, noting that it dealt with the extinguishment of claims under an approved resolution plan, but did not override the specific governing ITC under Section 16(2)(c). The court observed:
“The judgment in Ghanashyam Mishra & Sons (P.) Ltd. (supra) , relied upon by learned counsel for the petitioner, deals with the consequences flowing from an approved resolution plan under the IBC and does not dispense with the governing the petitioner's entitlement to Input Tax Credit under Section 16(2)(c) of the Act of 2017.”
Final Ruling and Implications
The dismissed the and upheld the recovery order dated . The court’s decision reinforces the strict interpretation of Section 16(2)(c) of the , making it clear that a purchaser who avails ITC without verifying that the supplier has actually paid the tax to the Government does so at its own risk. The principle of cannot be used to circumvent a clear statutory mandate, especially when the law provides alternative mechanisms for the purchaser to protect its interests, such as seeking indemnity from the supplier or reversing and re-availing credit under Rule 37A.
The ruling has significant implications for businesses claiming ITC under the GST regime, emphasizing the need for rigorous on supplier compliance and the importance of monitoring supplier tax payment status, particularly through GSTR-2B and GSTR-3B matching. The judgment also underscores that the IBC process does not automatically extinguish tax liabilities when the purchasing dealer has availed credit without the supplier having paid the corresponding tax.
