VAT- Input Tax Credit cannot be denied to bona fide purchasing dealers

Supreme Court Upholds ITC Rights for Bona Fide Dealers. Apex Court affirms Delhi High Court's decision, ensuring input tax credit for honest purchasers despite seller defaults

In a significant judgment delivered on October 9, 2025, the Supreme Court of India upheld the rights of bona fide purchasing dealers to claim Input Tax Credit (ITC) under the Delhi Value Added Tax Act, 2004, even when the registered selling dealers fail to deposit the tax collected with the government. The ruling, delivered by Justices Manoj Misra and Nongmeikapam Kotiswar Singh, aligns with the Delhi High Court's previous stance, emphasizing the protection of genuine business transactions from unwarranted financial repercussions due to seller non-compliance.

The case, "Commissioner Trade And Tax Delhi v. M/s Shanti Kiran India (P) Ltd.," revolved around the interpretation of Section 9(2)(g) of the DVAT Act, which traditionally barred ITC for purchasing dealers if the selling dealers did not deposit the tax. The Delhi High Court had earlier read down this provision, thereby excluding bona fide purchasing dealers from its ambit to prevent violation of Article 14 of the Constitution of India, which guarantees equality before the law.

The Supreme Court's decision is based on the acknowledgment that purchasing dealers who have acted in good faith, paid taxes as per valid invoices from registered sellers, should not be penalized due to the sellers' failure to comply with tax deposit requirements. The court highlighted that the remedy for tax recovery should be directed towards the defaulting selling dealers rather than denying ITC to honest purchasers.

This judgment echoes a similar stance taken in the case of "Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi," where the Delhi High Court clarified the conditions under which ITC should be granted, reinforcing the importance of bona fide transactions and proper tax documentation.

Legal experts and business entities have lauded the Supreme Court's judgment for its pragmatic approach to tax law enforcement, safeguarding the interests of compliant businesses. The ruling is expected to bring relief to numerous dealers who have faced challenges due to the stringent application of Section 9(2)(g), which often led to unnecessary financial strain and litigation.

The Supreme Court's decision not only upholds the Delhi High Court's interpretation but also sets a precedent for future cases involving ITC claims, ensuring that the statutory framework supports honest trade practices without being undermined by procedural lapses of other parties.

The judgment emphasizes the importance of verifying invoices and ensuring the legitimacy of transactions, urging the tax department to focus on recovering dues from defaulting sellers and addressing collusion, if any, through Section 40A of the DVAT Act. The court's directive for due verification of invoices before granting ITC further stresses the need for transparency and accountability in tax processes.

As the legal community digests this landmark judgment, businesses in Delhi and across India are expected to benefit from clearer guidelines and reinforced legal protections, fostering a fair and equitable tax environment.

Bottom Line:

Value Added Tax Act - Input Tax Credit (ITC) cannot be denied to bona fide purchasing dealers who paid taxes to registered selling dealers in good faith, even if the selling dealers failed to deposit the tax with the Government.

Statutory provision(s): Delhi Value Added Tax Act, 2004 Section 9(2)(g), Constitution of India, 1950 Article 14

Commissioner Trade And Tax Delhi v. M/s Shanti Kiran India (P) Ltd., (SC) : Law Finder Doc Id # 2794930