Supreme Court: Bona Fide Purchasers Cannot Be Denied ITC Due to Seller’s Tax Default under Delhi VAT

The Commissioner, Trade and Taxes, Delhi v. Shanti Kiran India (P) Ltd.

Supreme Court of India

Civil Appeal Nos. 2042–2047 of 2015
With Civil Appeal No. 9902 of 2017

Category: Input Tax Credit | Bona Fide Purchaser | Defaulting Seller | VAT Law

Date of Judgment: October 09, 2025

Relevant Provisions:
Section 9(1) and Section 9(2)(g) of the Delhi Value Added Tax Act, 2004
Article 14 of the Constitution of India

Facts of the Case

Assessee / Respondent:
M/s Shanti Kiran India (P) Ltd., a registered purchasing dealer under the Delhi VAT regime.

Transaction Structure:
The respondent purchased goods from registered selling dealers and paid VAT as charged in valid tax invoices issued by such sellers (Paras 2–3).

Revenue’s Objection:
Although the selling dealers were registered at the time of transaction, they subsequently defaulted in depositing the tax collected and their registrations were later cancelled. On this basis, the Department denied Input Tax Credit (ITC) to the purchasing dealer (Para 3).

High Court Proceedings:
The Delhi High Court held that the respondent was a bona fide purchasing dealer who had paid tax in good faith to registered sellers and was therefore entitled to ITC, subject to verification of invoices (Para 3).

Question(s) in Consideration

Whether Input Tax Credit can be denied to a bona fide purchasing dealer merely because the registered selling dealer failed to deposit the tax collected with the Government (Paras 2–3)?

Whether Section 9(2)(g) of the DVAT Act permits denial of ITC to a purchaser in the absence of collusion or mismatch in transaction details (Paras 4–5)?

Observation of the Court

Bona Fide Purchaser Protected:
The Supreme Court noted that there was no dispute that the selling dealers were registered on the date of transaction and that the genuineness of invoices or transactions was never doubted (Paras 3, 7).

Reliance on On Quest Merchandising:
The Court expressly relied on the Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd., where Section 9(2)(g) of the DVAT Act was read down to protect bona fide purchasers and avoid violation of Article 14 (Paras 4–5).

Liability Lies on Defaulting Seller:
Where the selling dealer fails to deposit tax collected, the remedy of the Department lies against the defaulting seller, not against the bona fide purchasing dealer who has complied with statutory requirements (Para 5).

No Interference Warranted:
Since the Department neither disputed the registration status of sellers at the time of transaction nor questioned the invoices, there was no justification to deny ITC (Para 7).

Judgment of the Court

The Supreme Court held that:

Input Tax Credit cannot be denied to a bona fide purchasing dealer who has paid tax to a registered selling dealer in good faith.

Failure of the selling dealer to deposit tax with the Government does not disentitle the purchaser from claiming ITC.

Section 9(2)(g) of the DVAT Act cannot be applied mechanically to penalize purchasers for defaults committed by sellers.

The appeals filed by the Department were dismissed as lacking merit.

Between Fine Lines (Summary in Simple Terms)

If you buy goods from a registered dealer and pay tax properly, your ITC is safe.

The tax department must recover unpaid tax from the defaulting seller, not the buyer.

A buyer cannot be punished for a seller’s failure to deposit tax.

Genuine invoices and bona fide conduct protect ITC entitlement.

Summary of Referred Cases

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