Allahabad High Court Protects Genuine Input Tax Credit: ITC Cannot Be Denied Merely Due to Subsequent Cancellation of Supplier’s GST Registration
In a significant relief to honest taxpayers, the Allahabad High Court has once again reaffirmed a crucial principle of GST law: Input Tax Credit (ITC) lawfully availed by a bona fide purchaser cannot be denied merely because the supplier’s GST registration is cancelled at a later stage.
This landmark ruling came in Saniya Traders v. Assistant Commissioner (Writ No. 1743 of 2024) and is set to have far-reaching implications for GST assessments, audits, and litigation across India.
This decision directly addresses one of the most common and controversial issues under GST-denial of ITC due to supplier default, even when the recipient has complied with all statutory obligations.
Background: The Recurring ITC Dispute Under GST
Across the country, thousands of GST taxpayers are facing notices proposing reversal of ITC on the sole ground that the supplier’s registration was cancelled subsequently or the supplier was later found non-compliant. In many cases, the purchasing dealer had:
• Verified the supplier’s GST registration at the time of purchase
• Received goods/services
• Paid consideration along with GST
• Reflected transactions in books
• Availed ITC based on valid tax invoices
Despite this, ITC was proposed to be denied simply because the supplier’s registration was cancelled later—sometimes years after the transaction.
The Allahabad High Court has now categorically rejected this approach.
Key Ruling of Allahabad High Court in Saniya Traders
The Court held that subsequent cancellation of a supplier’s GST registration, by itself, cannot be a valid ground for denial of ITC when the recipient is a bona fide purchaser and has complied with the law.
The Court placed reliance on the earlier precedent of Shakti Kiran India Limited, thereby strengthening judicial consistency on this issue.
Facts That Weighed in Favour of the Taxpayer
The High Court specifically noted the following critical facts while allowing ITC:
1. Supplier was duly registered under GST at the time of the transaction
At the time of supply, the supplier held a valid GST registration. The purchaser cannot be expected to foresee future cancellation.
2. Supplier had filed statutory GST returns (GSTR-1 and GSTR-3B)
The transactions were duly reported by the supplier in GSTR-1 and tax liability was declared in GSTR-3B.
3. Payment was made through legitimate banking channels
The purchasing dealer substantiated the transaction through proper banking records, proving genuineness and absence of any cash or circular movement.
These facts conclusively established that the transaction was real, genuine, and carried out in the normal course of business.
Crucial Observation on Section 74 of CGST Act
One of the most important aspects of the judgment is the Court’s clear interpretation of Section 74 of the CGST Act, 2017.
The Court categorically held that proceedings under Section 74 can be initiated only when ITC is wrongly availed or utilised by reason of:
• Fraud
• Wilful misstatement
• Suppression of material facts
Mere subsequent cancellation of the supplier’s GST registration does not meet these conditions.
In absence of any allegation or evidence of fraud or collusion on the part of the recipient, invocation of Section 74 is legally unsustainable.
Bona Fide Purchaser Cannot Be Punished for Supplier’s Lapses
The ruling strongly reinforces the long-standing legal principle that a bona fide recipient cannot be penalised for the default of another person, especially when the law does not impose an impossible burden of monitoring the supplier’s future compliance.
The Court implicitly recognised that GST is a destination-based tax and that recovery, if any, should be initiated against the defaulting supplier-not the innocent recipient.
Importance of Documentation: A Strong Message to Taxpayers
While granting relief, the Court also sent a clear signal: documentation is the backbone of ITC protection.
Taxpayers must maintain:
• Valid tax invoices
• Proof of receipt of goods/services
• Bank payment proofs
• Supplier GST registration status at the time of transaction
• Return matching wherever available
Strong documentation acts as the taxpayer’s shield against arbitrary ITC denial.
Wider Impact of the Judgment
This judgment is extremely important because:
• It curbs mechanical ITC reversals based on supplier cancellation
• It discourages misuse of Section 74 proceedings
• It brings relief to genuine businesses facing harassment
• It aligns GST enforcement with principles of fairness and reasonableness
More importantly, it strengthens judicial consensus across High Courts that GST cannot be enforced by shifting the burden of tax collection onto innocent buyers.
Conclusion: A Landmark Protection for Honest GST Taxpayers
The Allahabad High Court’s ruling in Saniya Traders v. Assistant Commissioner is a powerful reaffirmation of taxpayer rights under GST. It makes it abundantly clear that ITC cannot be denied merely because a supplier’s registration is cancelled later, provided the recipient has acted in good faith and complied with statutory requirements.
For businesses, tax professionals, and GST consultants, this judgment serves as both a shield against unjust ITC denial and a reminder to maintain robust documentation.
In an era of data-driven GST enforcement, this ruling restores balance by ensuring that law-abiding taxpayers are not punished for the sins of others.
This is not just a judgment-it is a strong message that bona fide compliance deserves protection under the law.
The copy of the order is as under:
