Input Tax Credit Cannot Be Denied for Seller’s Default: Supreme
Court Of India
Introduction:
The Supreme Court of
India has recently delivered a significant judgment in the case of Commissioner,
Trade and Tax, Delhi vs. M/s Shanti Kiran India Pvt. Ltd., decided on 9
October 2025. The case involved an important question of law — whether a
genuine purchasing dealer can be denied Input Tax Credit (ITC) merely
because the selling dealer failed to deposit the tax with the government. The
Court’s decision has brought major relief to honest taxpayers and reinforced
the principle that a buyer who pays tax in good faith cannot be punished for
the wrongdoings of others.
This appeal was filed by
the Department of Trade and Tax, Government of Delhi, challenging the earlier
order of the Delhi High Court which had granted relief to M/s Shanti Kiran
India Pvt. Ltd. The High Court had held that a bona fide purchasing dealer who
buys goods from a registered seller, pays tax as per invoice, and maintains
proper records, cannot be denied the benefit of ITC simply because the seller
did not deposit the collected tax. The Department, however, argued that under Section
9(2)(g) of the Delhi Value Added Tax Act, 2004 (DVAT Act), ITC can only be
allowed if the tax collected by the seller has been actually paid to the
government. The Supreme Court was called upon to decide whether this strict
interpretation could be applied even to honest dealers who had no control over
the seller’s compliance.
Facts of
the Case
M/s Shanti Kiran India
Pvt. Ltd. was a registered dealer under the DVAT Act, engaged in the business
of trading goods within Delhi. During assessment, the Department of Trade and
Tax disallowed the ITC claimed by the company on the ground that its sellers,
though registered at the time of sale, had later failed to deposit the tax
collected on those sales. The Department took the view that since the tax was
not actually received by the government, the buyer could not be granted ITC.
Consequently, demands were raised against the purchasing dealer, even though
the company had paid the full invoice value, including tax, to the sellers.
The company challenged
this decision before the Delhi High Court. It argued that it had made purchases
from registered dealers, had obtained genuine tax invoices, and had made
payments through proper banking channels. The company also contended that it had
no way of verifying whether the selling dealer had deposited the tax or not, as
this information was within the exclusive knowledge of the Department. The High
Court accepted these arguments and ruled in favor of the company. Aggrieved by
this, the Department filed an appeal before the Supreme Court.
Arguments
of the Department
Before the Supreme Court,
the Department of Trade and Tax, represented by the Additional Solicitor
General, argued that Section 9(2)(g) of the DVAT Act clearly provides
that ITC shall be allowed only if the tax charged by the seller has been
actually deposited with the government. It was contended that this provision
places an obligation on the purchasing dealer to ensure that the seller has
deposited the tax. According to the Department, if the seller fails to do so,
the buyer must bear the consequence. The Department further submitted that this
approach is necessary to prevent loss of revenue and to curb the menace of fake
invoicing and tax evasion.
Arguments
of the Respondent
On the other hand, the
counsel for M/s Shanti Kiran India Pvt. Ltd. strongly opposed the Department’s
interpretation. It was argued that the purchasing dealer had fulfilled all
legal requirements — it bought from a registered seller, paid the invoice value
including tax, and possessed valid tax invoices. The buyer had no means of
ensuring whether the seller deposited the tax or not. It was further submitted
that punishing the buyer for the seller’s default is arbitrary, unfair, and
contrary to the principles of natural justice. The company relied on several
earlier judgments of the Delhi High Court, including On Quest Merchandising
India Pvt. Ltd. vs. Government of NCT of Delhi (2017) and Arise India
Ltd. vs. Commissioner of Trade & Taxes (2017), where the High Court had
held that a bona fide purchasing dealer cannot be denied ITC for no fault of
his own.
Court’s
Analysis and Findings
After carefully examining
the facts and the relevant provisions of law, the Supreme Court dismissed the
appeal filed by the Department and upheld the order of the Delhi High Court.
The Bench comprising Justice Manoj Misra and Justice Nongmeikapam
Kotiswar Singh delivered a detailed and reasoned judgment in favor of the
purchasing dealer.
The Court first noted
that there was no dispute regarding the genuineness of the transactions.
The selling dealers were registered with the Department at the time of sale,
and the invoices were genuine. The Department did not allege that the
transactions were fake or that there was any collusion between the buyer and
seller. The only ground for denial of ITC was the seller’s subsequent failure
to deposit the tax.
The Supreme Court
observed that such an interpretation would lead to unjust consequences,
as it would penalize an honest taxpayer for something entirely beyond his
control. The Court emphasized that a purchasing dealer has no legal authority
or mechanism to compel a selling dealer to deposit tax. Once the purchasing
dealer has paid the invoice amount including tax to the seller, he has
discharged his legal obligation. Whether the seller later defaults in paying
tax is a matter between the seller and the Department.
The Bench also referred
to the constitutional principle of equality before law under Article 14,
stating that denying ITC to a bona fide purchaser merely because of another
person’s default would be arbitrary and discriminatory. Such an approach would
punish compliant dealers while allowing the Department to escape its
responsibility to monitor defaulting sellers.
Reliance on
Earlier Precedents
The Supreme Court relied
on and approved the landmark judgment of the Delhi High Court in On Quest
Merchandising India Pvt. Ltd. vs. Government of NCT of Delhi. In that case,
the High Court had “read down” Section 9(2)(g) of the DVAT Act to ensure that
it does not apply to bona fide purchasing dealers. The High Court had observed
that the expression “dealer or class of dealers” in that section should not
include a purchasing dealer who buys goods from a registered seller in good
faith, pays the tax, and possesses valid invoices. The Supreme Court agreed
with this reasoning and held that this interpretation was necessary to save the
provision from being unconstitutional.
The Court further
referred to similar views expressed in Arise India Ltd. vs. Commissioner of
Trade & Taxes, Delhi, where it was held that the Department’s remedy
lies against the defaulting seller, not against the innocent purchaser. These
consistent judicial opinions show a clear trend in favor of protecting genuine
taxpayers from unfair treatment.
Key
Observations by the Supreme Court
In its judgment, the
Supreme Court made several important observations. It stated that the Department
must act against the defaulting selling dealer who has collected tax but
failed to deposit it with the government. The law provides sufficient powers to
the authorities to recover such dues from the seller. However, punishing the
buyer by denying ITC is both illogical and unjust. The Court held that the remedy
lies against the wrongdoer, not against those who acted lawfully.
The Court also clarified
that granting ITC to bona fide dealers does not mean that the government loses
revenue. The government retains the right to recover tax from the defaulting
seller along with penalty and interest. What is prevented is only the double
taxation and undue hardship caused to the honest buyer.
In conclusion, the Court
found no reason to interfere with the Delhi High Court’s order. It observed
that the Department had failed to establish any collusion or fraud on the part
of M/s Shanti Kiran India Pvt. Ltd. Therefore, denying ITC was unjustified. The
appeal filed by the Department was dismissed.
Impact of
the Judgment
This judgment has
far-reaching implications for taxpayers and tax authorities alike. It
reinforces the fundamental principle that no taxpayer should be punished for
acts beyond his control. It also clarifies that tax credit is a vested
right when all legal conditions are fulfilled. The Department cannot take
away that right on the basis of another person’s default.
The decision strengthens
the concept of fair tax administration and ensures that honest
businesses are not harassed due to administrative lapses or non-compliance by
others. It places responsibility where it truly belongs — on the defaulting
seller, not on the purchasing dealer who has acted in good faith.
Although this case was
decided under the Delhi VAT Act, its reasoning applies equally to the Goods
and Services Tax (GST) system. Under the GST law, similar issues arise
under Section 16(2)(c) of the CGST Act, 2017, which restricts ITC if the
supplier fails to pay tax to the government. This Supreme Court judgment can
serve as strong persuasive precedent for future cases under GST, ensuring that
genuine buyers are not penalized for non-compliance by suppliers.
Final
Verdict: The Supreme Court
dismissed the Department’s appeals and upheld the right of M/s Shanti Kiran
India Pvt. Ltd. to claim Input Tax Credit. The Department was directed to
verify the invoices and allow ITC accordingly. The Court reiterated that any
recovery must be made from the defaulting sellers, not from bona fide
purchasers.
Conclusion
The Supreme Court’s
ruling in Commissioner, Trade and Tax, Delhi vs. M/s Shanti Kiran India Pvt.
Ltd. is a landmark decision that upholds fairness, justice, and
reasonableness in tax administration. It reiterates that the objective of
the tax system is to collect due taxes, not to victimize honest taxpayers.
By affirming the Delhi High Court’s view, the Supreme Court has protected the
rights of genuine purchasers and ensured that the government’s enforcement
actions remain balanced and proportionate.
In simple terms, the
Court made it clear that if a buyer has purchased goods from a registered
seller, paid tax in good faith, and possesses genuine invoices, then ITC cannot
be denied merely because the seller failed to deposit the tax. The
responsibility to recover the unpaid tax lies with the Department and not with
the buyer.
This decision will
serve as a guiding light for both taxpayers and authorities in the GST era. It
sends a strong message that while tax evasion will not be tolerated, the rights
of compliant taxpayers must always be protected. In the end, the Supreme Court
upheld justice by ensuring that the law is applied not only strictly, but also
fair
Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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