Disallowance of ITC to purchaser due to non-payment of tax by seller.

Case Title: Aastha Enterprises vs State of Bihar

Court: High Court of Patna

Petition No.: Civil Writ Jurisdiction Case No.10395 of 2023

Category of Dispute: Input Tax Credit (ITC)

Date of Judgment: 18 August 2023

Relevant Section(s): Section 16(1) & (2)(a)–(d), Section 107, Bihar Goods and Services Tax Act, 2017

Takeaway: No Credit Without Government’s Receipt – ITC Denied if Supplier Defaults on Tax Payment

Facts of the Case [¶1–4]

1. Aastha Enterprises, a registered dealer, purchased goods from a registered selling dealer and made payments including GST via bank transfer. Tax invoices evidencing payment and movement of goods were submitted [¶3].
2. The selling dealer, however, failed to deposit the collected GST with the State government [¶3].
3. The tax authority denied ITC to Aastha Enterprises under Section 16 of the BGST Act and issued an assessment order dated 24/25.05.2022 [¶2].
4. The petitioner did not file an appeal within the prescribed time and instead approached the High Court via a writ petition challenging the denial of ITC [¶2].

Question(s) in Consideration [¶1–2]

• Can ITC be denied to a purchasing dealer who has paid tax to the selling dealer, solely on the ground that the selling dealer did not remit the tax to the government?
• Does Section 16(2)(c) of the BGST Act require actual payment of tax to the government by the supplier as a pre-condition to avail ITC?

Observation of the Court [¶5–15]

1. The Court reviewed Madras High Court decisions in Sri Vinayaga Agencies and D.Y. Beathel Enterprises, where ITC was allowed to the purchaser in similar circumstances under VAT and GST, respectively [¶5–6].
2. However, those cases were held to be distinguishable because they did not adequately consider Section 16(2)(c) of the GST law, which mandates that ITC can be availed only if the tax is “actually paid to the Government” [¶6–8].
3. Referring to the Supreme Court decision in State of Karnataka v. Ecom Gill Coffee Trading (P.) Ltd., the Court emphasized that mere production of invoices and bank payment is not sufficient; the tax must be credited to the government’s account [¶9].
4. The Court affirmed that ITC is a statutory benefit and subject to conditions including tax payment by the supplier; mere existence of recovery provisions against defaulting seller does not waive this condition [¶10–13].
5. Since the supplier in this case failed to deposit the tax, and hence the tax was not reflected in the purchaser’s credit ledger, ITC was not allowable [¶15].

Judgment of the Court [¶16]

• The writ petition was dismissed. The Court held that the purchasing dealer (Aastha Enterprises) is not entitled to ITC unless the supplier deposits the tax with the government. Remedy, if any, lies in recovering the amount from the supplier.

Between Fine Lines

• ITC is not a right but a conditional statutory benefit.
• One key condition is actual tax payment by the supplier to the government.
• If the supplier defaults, the purchaser must seek redress from the supplier, not the government.
• The state’s machinery for recovery from the supplier does not override ITC eligibility conditions.
• Tax invoice and payment proof alone do not entitle ITC under GST law.

Summary of Referred Cases

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