No bar of ITC for the buyer when the supply is genuine and supplier was active and registered on invoice date

The Allahabad High Court has ruled that a buyer is entitled to Input Tax Credit (ITC) even if their supplier's GST registration is cancelled retrospectively, provided the transaction was genuine and the supplier was registered at the time of the invoice. The court found that the subsequent cancellation of the supplier's registration cannot be the sole reason to deny ITC if the buyer can prove the transaction's authenticity with proper documentation and evidence of goods movement. In this case, the buyer's ITC was upheld, and the denial orders were quashed.

The Hon'ble Allahabad High Court in the case of M/s Kesarwani Traders v. State of U.P. & Others [Writ Tax No. 1235 of 2025, order dated August 18, 2025] held that subsequent cancellation of the supplier's GST registration cannot by itself be the ground for denial of ITC if the supplier was registered on the date of invoice and the transaction is genuine, an adverse inference against the buyer was unjustified.

Facts:

M/s Kesarwani Traders ("the Petitioner") is a registered dealer engaged in the trading of MS TMT bars. On June 20, 2018, the Petitioner purchased goods via a "Bill To Ship To" transaction: it placed the order on M/s Purvanchal Tradelink India, Sonbhadra (registered supplier), who in turn sourced the goods from SM Shop Raipur, Chhattisgarh, who issued invoice No. 00961 and e-way bill for vehicle CG-10-C-6933, listing Purvanchal as buyer and the Petitioner as consignee.

While the goods were in transit, the Chhattisgarh mobile squad intercepted the truck on 21 June 2018, placing a rubber stamp on the e-way bill, documenting movement. The Petitioner's supplier, Purvanchal Tradelink, issued its invoice to the Petitioner the same day. No fraud was alleged in the movement or documentation.

Later, under Section 74 of the UP GST Act, the Department issued an SCN holding the transaction as "paper" because Purvanchal's GST registration was cancelled on September 28, 2018 (after the sale), and denied ITC. The Petitioner's documentary evidence including tax invoices, stamped e-way bill, bank payments, and GSTR-2A-was not rebutted. The first appeal was dismissed.

The Petitioner contended before the High Court that all documents evidenced genuine supply, interception of goods confirmed movement, and the supplier was registered on the transaction date. The cancellation was subsequent, and thus, ITC could not be denied.

The Respondent argued that proceedings were justified as the supplier's registration was cancelled, making the invoice suspect.

Issue:

Whether subsequent cancellation of supplier's GST registration by itself justifies reversal of ITC where the transaction is genuine, duly documented, the goods moved, and the supplier was registered on the invoice date?

Held:

The Hon'ble Allahabad High Court in Writ Tax No. 1235 of 2025, order dated August 18, 2025 held as under:

· Observed that, the departmental records confirmed that the vehicle and goods were physically intercepted, e-way bill stamped, and that the transaction was a "Bill To Ship To" supply, with all documentation in order.

· Noted that, the supplier's registration was valid on the date of transaction, and its subsequent cancellation cannot taint prior genuine ITC.

· Held that, once the buyer establishes the transaction as genuine, supported by unimpeached evidence and tax-paid banking transactions, no adverse inference or ITC denial can be drawn solely due to later cancellation of supplier's registration.

· Quashed the adjudication, appellate, and recovery (DRC-07) orders, ordering refund of all amounts deposited during litigation. Writ petition allowed.

Our Comments

This decision upholds the principle that genuineness and documentation are decisive for ITC and are not retrospective supplier registration cancellations. It affirms the modern GST regime's focus on documentary and transaction evidence, in line with Section 16(2) CGST Act.

Similarly, in Suncraft Energy Pvt. Ltd. v. ACST [MAT 1218 OF 2023], the Hon'ble Calcutta High Court and in the case of Himalaya Communication Pvt. Ltd. v. State of HP [CWPNo.8809 of 2025], the respective High Courts held that denial of ITC for retrospective supplier cancellation is unsustainable where the buyer establishes genuine transaction and compliance.

In D.Y. Beathel Enterprises v. State Tax Officer ( 127 taxmann.com 80, Madras HC), the Hon'ble Court stressed that authorities must first proceed against the defaulting supplier and there is no automatic reversal of the recipient's ITC without such efforts.

However, in the case of State of Karnataka v. Ecom Gill Coffee Trading Private Limited[(2023) 111 GSTR 6 (Karn).], the Hon'ble Karnataka High Court upheld denial of ITC where the buyer could not prove actual movement of goods and only relied on invoices, underscoring that mere documentary compliance without real supply/movement is insufficient for ITC eligibility.

Relevant Provisions:

Section 16(2) of the CGST Act, 2017

16. Eligibility and conditions for taking input tax credit.-

"2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

(b) he has received the goods or services or both.

Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;

(c) subject to the provisions of Section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be paid by him along with interest payable under Section 50, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him to the supplier of the amount towards the value of supply of goods or services or both along with tax payable thereon."

Official copy of the judgment has been attached