ITC Denial Requires Evidence, Not General Allegations
A law may be constitutionally valid, but a demand raised under it must still be supported by facts and proper procedure. Section 16(2)(c) of the CGST Act, 2017 requires that the tax charged on a supply have actually been paid to the Government. However, a general allegation that suppliers failed to pay tax or that their registrations were cancelled is insufficient to deny ITC. The Department must identify the suppliers, disputed invoices and credit amounts, disclose the supporting evidence, and consider the purchaser's explanation. Where Section 74 is invoked, the Department must also identify facts showing fraud, wilful misstatement or suppression by the purchaser with intent to evade tax. A disputed credit claim, by itself, does not prove fraud.
This distinction was central to Treco Wire India Private Limited v. Additional Commissioner, Central Tax, Delhi North & Others, 2026-VIL-1136-DEL, decided on 29.09.2026. The Delhi High Court, comprising Justices Anil Kshetarpal and Bharat Parashar, decided W.P.(C) No. 583/2026. The petitioner, a copper-wire manufacturer, faced a GST audit for 01.07.2017 to 31.03.2021. The Department questioned ITC on purchases from suppliers whose registrations had allegedly been cancelled retrospectively from dates preceding the invoices. The petitioner maintained that the purchases were genuine and that the suppliers' registrations were active when the transactions occurred. The disputed purchases and supporting records therefore required examination; cancellation alone could not replace that exercise.
An audit memo dated 23.07.2023 and audit report dated 27.07.2023 were followed by a show-cause notice dated 22.09.2023. The adjudication order dated 15.01.2024 confirmed recovery of ITC of Rs.3,34,21,261, with interest and an equivalent penalty, and a separate interest demand of Rs.50,30,256 concerning alleged payments to suppliers beyond 180 days. The petitioner challenged both the constitutional validity of Section 16(2)(c) and the demand itself. These challenges required separate decisions. Upholding the provision did not automatically uphold the demand. The Department still had to establish the disputed liability through evidence and reasons, including the grounds necessary for invoking Section 74.
Paying GST to the Supplier Does Not Prove Payment to the Government
Section 16(2)(c) of the CGST Act, 2017 requires the tax charged on a supply to have actually been paid to the Government, either in cash or through admissible ITC, subject to the applicable statutory provisions. Payment by the purchaser to the supplier is different from payment by the supplier to the Government. For example, a purchaser may pay Rs.1,18,000, comprising the price of goods of Rs.1,00,000 and GST of Rs.18,000. The bank record proves payment to the supplier; it does not, by itself, prove that the supplier paid the tax to the Government. Although the purchaser ordinarily has no control over the supplier's tax payments, payment of the invoice alone does not establish compliance with Section 16(2)(c).
The constitutional validity of this condition was examined in Maruti Enterprises v. Union of India, 2026 SCC OnLine Guj 4013; 2026-VIL-432-GUJ. The Supreme Court subsequently considered the ruling in Bhandari Scrap Traders v. Union of India & Others, 2026 SCC OnLine SC 1570; 2026-VIL-69-SC, SLP(C) No. 23931/2026 and connected matters, decided on 24.07.2026. It explained that the Delhi VAT law and the GST law contained different provisions. Protection available to purchasers under the former could not automatically be applied under GST. It also referred to the mechanism allowing reversed credit to be reclaimed after the supplier pays the tax. The Supreme Court expressly agreed with the Gujarat High Court through a reasoned order, rather than dismissing the petitions without explaining its conclusion.
Accordingly, Treco Wire rejected the challenge to Section 16(2)(c) and the request to generally exclude bona fide purchasers from its operation. However, upholding the provision did not automatically uphold the particular demand. The Department still had to identify the disputed transactions, examine the purchaser's evidence and give reasons supporting recovery. Equally, an invoice, bank payment or claim of good faith did not automatically establish every condition for ITC. The purchaser must substantiate its entitlement, while the Department must justify any denial through evidence and proper adjudication
An ITC Demand Must Identify the Suppliers and Purchases in Dispute
Where an ITC demand is based on retrospective cancellation of suppliers' registrations, the Department must identify the affected purchases. It must give the supplier's name and GSTIN, invoice dates, the date the cancellation took effect, the disputed credit amount, and supporting evidence. These details explain which purchases are disputed, why the credit is being denied, and how the demand was calculated. They are essential to the demand, not merely additional information.
In Treco Wire, the adjudication order repeated the audit objection without providing these supplier-wise details. It broadly alleged that the suppliers' registrations had been cancelled before the invoices. However, it did not identify the suppliers and invoices, specify the relevant cancellation dates or explain the credit amount attributable to each supplier. The allegation therefore lacked the facts necessary to support it. It also prevented the purchaser from effectively answering the demand.
For example, a manufacturer may purchase material from several suppliers during a year. A statement that "credit from cancelled suppliers is inadmissible" does not identify which purchases require explanation. Supplier-wise details allow the purchaser to check the allegation against its purchase register, transport documents and stock records, and verify the calculation. The taxpayer should not have to guess which transactions form the basis of the demand
Retrospective Cancellation Alone Does Not Decide ITC Eligibility
Retrospective cancellation of a supplier's registration may justify an inquiry into earlier purchases. However, the Department must explain how that cancellation affects the purchases for which credit is disputed. It must examine the relevant dates, supporting documents and the purchaser's explanation. Cancellation alone cannot replace an examination of the actual transactions.
For example, a registration cancelled later with effect from an earlier date may raise doubts about whether the supplier existed or actually supplied the goods. These questions must be answered through evidence. The purchaser may produce delivery records, transport documents, stock entries, and records showing the goods' use in manufacturing. The Department may have evidence contradicting those records. The officer must consider both sides and explain why the disputed credit is admissible or inadmissible.
This does not make retrospective cancellation irrelevant or guarantee credit to every purchaser. The Tribunal must examine genuine supporting evidence, and a fictitious purchase cannot become genuine merely because the supplier's registration appeared active. ITC eligibility must be decided on the facts and applicable statutory conditions, not merely on the cancellation entry.
Section 74 Requires More Than an Allegation of Ineligible Credit
For the periods governed by Section 74, the provision addresses specified tax or ITC defaults arising by reason of fraud, wilful misstatement or suppression of facts to evade tax. These requirements distinguish it from ordinary determination under Section 73. The question whether credit is inadmissible is therefore separate from the question whether the purchaser engaged in conduct attracting Section 74. An officer cannot answer the second question merely by asserting an affirmative answer to the first.
The adjudication in Treco Wire contained no specific finding explaining how the petitioner committed fraud, made a wilful misstatement or suppressed material facts with intent to evade tax. The allegation concerning cancelled suppliers did not establish these ingredients against the purchaser. Reproducing statutory expressions cannot replace identifying the conduct, evidence, and reasoning supporting them . This mattered particularly because the order imposed a penalty equal to the disputed ITC, in addition to recovery and interest.
Two situations illustrate the distinction. A purchaser may have received goods under documented transactions, while a dispute subsequently arises about the supplier's compliance. Alternatively, evidence may show that the purchaser knowingly obtained invoices without receiving goods. Both require examination, but their implications differ materially. A supplier-related discrepancy does not automatically establish the purcha
The Order Must Explain Why the Taxpayer's Defence Was Rejected
An opportunity to submit a reply serves little purpose unless the taxpayer's main arguments and supporting records are examined. In Treco Wire, the petitioner stated that the purchases were genuine, the suppliers held active registrations when the transactions occurred, and the required records had been supplied. However, the adjudication order did not show that it had examined and answered these arguments. Keeping a reply on file is not enough; the order must explain why it rejected the material submissions.
The officer need not reproduce every document or answer every sentence. However, the order must address the points that could affect the decision. If receipt of goods is disputed, transport and delivery records must be examined. If cancellation dates are relied upon, their connection with the disputed invoices must be explained. If fraud is alleged, the supporting facts must be identified. Merely stating that the reply is "unacceptable" does not provide these reasons.
A clear order also helps the Department defend its decision and enables the appellate authority to examine whether it is correct. An unexplained conclusion leaves doubt about whether the relevant evidence was considered at all. The purchaser must support its claim with evidence, and the officer must explain the decision on that evidence. Both responsibilities must be fulfilled
The Demand Must Be Supported by Its Own Evidence and Findings
The Department relied on an earlier order dated 24.09.2025 in W.P.(C) No. 14428/2025, involving the same petitioner. However, that order did not decide whether the demand presently challenged was valid. The Department still had to support the demand through the notice, evidence and findings in the current proceedings. The taxpayer's involvement in earlier litigation did not remove that requirement.
The judgment also noted differences in the dates appearing in the adjudication records. However, the order was not set aside merely because of those differences. The decisive defects were more fundamental: the absence of transaction-specific particulars and findings establishing the requirements of Section 74. The decision should therefore not be understood as granting relief merely for clerical mistakes.
The principle is limited but clear. An incorrect date does not necessarily invalidate every order, nor is earlier litigation always irrelevant. However, an earlier court order cannot replace the evidence and findings needed to support the demand under challenge.
Fresh Examination Does Not Mean ITC Has Been Allowed
The Order-in-Original dated 15.01.2024 and consequential proceedings were set aside, and the matter was sent back for a fresh decision. The authority had to issue proper notice, give the petitioner an effective opportunity to be heard, examine its reply and documents, and explain its findings. If the demand continued to rely on retrospective cancellation, the authority had to identify the suppliers and disputed purchases and examine the supporting evidence.
The authority also had to separately determine whether the facts justified proceedings under Section 74. The T ribunal directed the petitioner to appear on 08.10.2026 and asked the authority to endeavour to pass a fresh order within eight weeks of that appearance. This required genuine reconsideration, not merely rewriting the earlier order to reach the same result.
The Tribunal did not give a final decision on the petitioner's entitlement to ITC. The Tribunal also did not conclusively decide the separate interest dispute concerning payments beyond 180 days through an independent constitutional ruling. The Tribunal set aside the defective order, but it did not finally allow the disputed credit or cancel all possible liabilities. The outcome would depend on the fresh adjudication conducted in accordance with law
ITC Denial Must Rest on Evidence and Reasoned Findings
Two days after Treco Wire, the Punjab and Haryana High Court decided Shaurya Alloys Private Limited v. State of Punjab and Another, 2026-VIL-1131-P&H, on 01.10.2026, along with 423 connected writ petitions. Both judgments uphold Section 16(2)(c), but require separate examination of the facts supporting each ITC demand. Neither supplier default nor the validity of the provision automatically proves fraud by the purchaser. The disputed transactions and the purchaser's evidence must be examined, and Section 74 proceedings must rest on specific facts. The main difference is their scope. Treco Wire examined one adjudication order. Paragraph 103 of Shaurya Alloys provided wider guidelines on investigation, disclosure of relied-upon documents, the purchaser's burden under Section 155, examination of recovery from suppliers, application of the law relevant to each tax period, personal hearings and reasoned orders. These guidelines neither remove the statutory conditions nor automatically allow ITC. Although persuasive rather than binding in Delhi, they may assist fresh adjudication, subject to the applicable law and the specific directions in Treco Wire.
The relief also differed. Treco Wire set aside the adjudication order and consequential proceedings. Shaurya Alloys directed reconsideration without setting aside the existing orders, whose effect would depend on the fresh decisions. It also restrained fresh coercive recovery under the disputed proceedings until those decisions. Neither judgment finally allowed the disputed credit. Together, they confirm that ITC entitlement and allegations of fraud must be decided on evidence and supported by clear reasons, not assumptions.
CAclubindia
