GST Vidhi | GST Case Law

M/s K.V. Joshy & C.K. Paul vs. Assistant Commissioner, CGST & Others (High Court of Kerala, Ernakulam Case No.: WP(C) 24617 of 2024)

Introduction

The Kerala High Court delivered an important decision on 27 October 2025 concerning denial of Input Tax Credit (ITC) to a purchasing dealer when the supplier fails to file returns or pay tax. The Court clarified the legal position that, under the scheme of the CGST Act as it existed during 2019–2020, the authorities cannot initiate proceedings against the purchaser without first initiating proceedings against the suppliers in accordance with Section 42. The judgment further reinforces national jurisprudence led by the Calcutta High Court’s decision in Suncraft Energy, later upheld by the Supreme Court.

Case Details

• Case Title: M/s K.V. Joshy & C.K. Paul vs. Assistant Commissioner, CGST & Others
• Court: High Court of Kerala, Ernakulam
• Case No.: WP(C) 24617 of 2024
• Judge: Hon’ble Justice Ziyad Rahman A.A.
• Date of Judgment: 27 October 2025
• Petitioner: M/s K.V. Joshy & C.K. Paul, Thrissur
• Respondents:

1.    Assistant Commissioner, CGST, Chalakudy Division

2.    M/s N.C. Associates, Mysore (Supplier)

3.    M/s Sundha Marketing, Mysore (Supplier)

4.    Assistant Commissioner, Principal Commissioner Office, Mysuru

Facts of the Case

The petitioner, a registered GST assessee, purchased goods during FY 2019-2020 from respondents 2 and 3. These purchases were supported by:

• Valid tax invoices (Exhibits P5–P72)
• Corresponding e-way bills showing transportation
• Payment of consideration along with GST to the suppliers

Based on these documents, the petitioner availed Input Tax Credit and filed returns regularly.

However, it later emerged that the suppliers failed to upload their outward supply details in GSTR-1 and did not remit the GST collected from the petitioner. Based on this mismatch, the department issued a show cause notice under Section 73 (Ext. P3) proposing:

• Reversal of ITC
• Interest
• Penalty

The petitioner challenged the SCN directly before the High Court.

Petitioner’s Submissions

The petitioner advanced two major arguments:

1. Violation of Section 42 – No Notice Issued to Supplier

The petitioner contended that Section 42, as it then existed, required the department to:

• First communicate discrepancies to both supplier and recipient
• Allow the supplier an opportunity to correct the mismatch
• Add the tax liability to the recipient only if the supplier fails to rectify

Since no notice or proceedings were initiated against suppliers before issuing the SCN to the petitioner, the SCN was illegal.

2. SCN is Time-Barred Under Section 73

The petitioner argued that:

• The relevant year is 2019-2020,
• The SCN dated 20.05.2025 is beyond the 3-year limitation prescribed under Section 73.

3. Judicial Precedents Support the Petitioner

The petitioner relied on multiple decisions, including:

• Suncraft Energy Pvt. Ltd. (Calcutta HC) – confirmed by the Supreme Court
• R.T. Infotech (Allahabad HC)
• Lokenath Construction (Calcutta HC)
• Shanti Kiran India (Supreme Court)

All these judgments strongly establish that:

ITC cannot be denied to a bona fide purchaser merely because the supplier defaulted, unless the department first proceeds against the supplier and proves collusion.

Respondents’ Submissions

The department argued:

1. Petitioner Failed to Ensure Tax Payment by the Suppliers

Invoking Section 16(2)(c), the department claimed that the petitioner had an obligation to ensure that the suppliers paid GST to the Government.

2. SCN Is Within Extended Limitation

The department relied on:

• Notification 56/2023-Central Tax (dated 28.12.2023), which extended the time limit for passing orders under Section 73 up to 31.08.2024.

Thus, according to the department, the SCN issued three months before this date was valid.

Court’s Findings

1. Section 42 Requires Mandatory Notice to Both Supplier and Recipient

The Court examined Section 42 in detail and explained the statutory scheme:

• Section 42(3): Discrepancy in ITC must be communicated to both supplier and recipient.
• Section 42(5): Only if supplier fails to rectify the discrepancy, the tax can be added to the recipient’s output tax liability.

The Court found that:

• No notice was ever issued to suppliers (respondents 2 and 3).
• No proceedings under Section 42 were initiated.
• Without this mandatory process, Ext. P3 SCN could not be issued to the petitioner.

2. Suncraft Energy Judgment Squarely Applies

The Court relied heavily on the Calcutta High Court’s ruling in Suncraft Energy Pvt. Ltd., approved by the Supreme Court.
The principles laid down include:

• There is no automatic reversal of ITC for mismatch.
• Department must first proceed against the supplier who failed to remit tax.
• ITC reversal from the buyer is permissible only if:
• Supplier is missing
• Supplier has shut down
• Supplier has no assets
• Supplier and buyer colluded

None of these situations existed in this case.

3. The Department’s Argument Under Section 16(2)(c) Not Acceptable

The Court rejected the department’s view that the buyer must ensure tax payment by the supplier.
The CGST Act does not impose such a burden in the absence of:

• Collusion
• Fraud
• Knowledge of supplier’s default

4. Limitation Issue Not Decided

The Court held that since the SCN itself is illegal for violating Section 42, the issue of limitation under Section 73 need not be examined.

Judgment

The High Court made the following ruling:

1.    Ext. P3 Show Cause Notice is quashed, as it was issued illegally without following Section 42.

2.    The authorities are not precluded from initiating proper proceedings against the defaulting suppliers (respondents 2 and 3).

3.    The proceedings initiated directly against the purchaser (petitioner) are unsustainable in law.

Conclusion

The Kerala High Court’s judgment is a powerful reaffirmation that Input Tax Credit is a vested right and cannot be denied to a purchasing dealer merely due to the supplier’s default—unless statutory procedures are followed.

The ruling clarifies:

• Section 42’s procedural safeguards are mandatory, not optional.
• Authorities must first proceed against the supplier before turning to the recipient.
• Bona fide purchasers cannot be punished for a supplier's wrongdoing.

This decision strengthens taxpayer protection and aligns Kerala High Court’s position with the prevailing national jurisprudence set by Calcutta, Allahabad, and the Supreme Court.

 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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