ITC disallowed on purchases from non-genuine supplier as Court upheld Section 16(2)(c), but penalty quashed for want of DRC-01A notice

Case Summary

Case Title: M/s R V Enterprises v. State of Gujarat
Court: High Court of Gujarat, Ahmedabad
Petition Number: R/Special Civil Application No. 20134 of 2023
Date of Judgment: 19 June 2025
Category of Dispute: Input Tax Credit (ITC) – denial under Section 16(2)(c) of CGST Act, 2017
Relevant Sections: Section 16(2)(c), Section 73, Section 75(4), Section 155 of CGST Act, 2017; Section 142(1A); Rule references regarding DRC-01A/DRC-01

Facts (Paras 1–4, 5.1–5.5)

The petitioner, a partnership firm engaged in trading plastic items, availed ITC of ₹6,98,648 for FY 2017–18 based on invoices from registered suppliers, including M/s Parshvi Tradelink. The ITC reflected in GSTR-2A and was declared in GSTR-9. Later, a show cause notice under Section 73 was issued in Form DRC-01 without prior DRC-01A, alleging that the supplier’s registration had been cancelled ab initio due to non-payment of tax. The order-in-original demanded ₹15,48,204 with interest and penalty. Petitioners argued that they were bona fide purchasers, tax was already paid, and Section 16(2)(c) should be read down.

Questions before Court

1. Whether ITC can be denied to a bona fide purchaser when the supplier defaulted in paying tax?

2. Whether absence of DRC-01A vitiates the SCN and order?

3. Whether penalty could be imposed in such circumstances?

Observations (Paras 6–10)

• The Court noted findings that M/s Parshvi Tradelink had negligible purchases but reported inflated supplies (₹8.15 lakh purchases vs. ₹37.72 lakh sales in FY 2017–18, and nil purchases vs. ₹1.13 crore supplies in FY 2018–19). Spot verification revealed no business activity, confirming it was a non-genuine supplier.

• Under Section 16(2)(c), ITC cannot be availed unless tax is actually paid to the Government. Since the supplier failed to remit tax, the petitioner’s ITC had to be reversed.

• The Court distinguished Suncraft Energy Pvt. Ltd. (Calcutta HC) as in that case Revenue had failed to inquire into suppliers, while here, detailed inquiry established non-genuineness.

• The plea to read down Section 16(2)(c) was rejected as unjustified in this factual matrix.

• However, the Court found merit that absence of DRC-01A deprived the petitioner of an opportunity to avoid penalty; hence penalty was quashed.

Judgment (Paras 10–11, 26–27)

The High Court upheld the disallowance of ITC and reversal of credit under Section 16(2)(c) but set aside the penalty for want of DRC-01A intimation. Thus, demand of ITC reversal and interest sustained, penalty quashed.

Case References and Their Ratio

Between Fine Lines

For businesses, this ruling reinforces the strict reading of Section 16(2)(c): ITC is conditional on supplier paying tax to Government. Purchasers must conduct due diligence on supplier credibility. However, the Court offers relief by quashing penalties if procedural safeguards like DRC-01A are ignored. The trade takeaway: while ITC reversal risks remain, penalties can be contested on procedural lapses.

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