CASE STUDY

BRIEF FACTS OF THE CASE:

An investigation was conducted against a firm located in Haryana. On the basis of the physical verification, the said firm was found to be non-existent at its principle place of business and indulged in issuance of invoices without actual movement of goods. Further, it was found that no business activity was ever carried out from the said premises. The said firm passed on ITC to M/s Jagdamba Timber Industries (hereinafter referred to as Appellant). Consequently, appellant was served with show cause notice alleging that it was indulged in availment and utilization of wrongful input tax credit (ITC) without receipt of goods on the basis of invoices issued by the non-existent firms in contravention of provisions of the GST law. The noticee submitted a detailed reply against the impugned show cause notice. However, the contentions were not accepted by the adjudicating authority while passing his order, thereby, confirming the demand alleged by the impugned show cause notice. Being aggrieved by the impugned order-in-original, appellant preferred an appeal before the learned Commissioner (Appeals).

Submissions by Appellant:

CA Pradeep Jain, authorised representative of the appellant appeared for the personal hearing to present the submissions and relevant explanations on behalf of the appellant: -
Demand confirming ignoring the merits of the case is not tenable:
The impugned order has been passed simply on the ground that supplier was found to be non-existent. Further, that the appellant took necessary measures to ensure that the ITC is legitimately availed which can be substantiated by the following documents produced:

Tax invoices have been duly received in accordance with the Section 31 of the CGST Act 2017;
E-way bills pertaining to the invoices proves the valid movement of goods;
Payment was duly made to the suppliers through valid bank account &
Copy of ledger of the supplier.

Reliance was placed upon the judgement given by the Supreme High Court in the case of State of Karnataka v. M/s Ecom Gill Coffee Trading Pvt Ltd. in which it was held that if the purchasing dealer discharges the burden cast under Section 70 and proves the genuineness of the transaction/purchase and sale by producing the relevant materials such as names and address of the selling dealer, details of vehicle etc, ITC should be allowed to the purchasing dealer.
Party Existent at the time of Transactions
Further, contended that the supplier was a genuine supplier and was carrying out normal business activities during the period in issue. Supplier was regular in filing returns and discharging the tax liability. Along with that, appellant produced the screenshot of the GST portal showing the dates of the returns for the relevant period filed by the supplier.
Appellant contested that the supplier was operational during the period in issue and was duly filing all the returns prescribed under the act. Furthermore, merely alleging that the supplier was found non-existent is not sufficient, department is required to prove the same.
Registration of the alleged Supplier cancelled on its own Application
Moreover, it was argued that generally in the case of bogus firms, registration of such firm is cancelled due to proceedings initiated by the revenue department. However, in the instant case, registration of the supplier was cancelled on application filed by the supplier itself. Hence, it was argued that, registration is cancelled after duly verifying the fact that none of the returns or tax dues are pending at the end of the supplier. As the registration was cancelled on application by the supplier, this indicates that the no tax dues or returns were pending on part of the supplier till the date of cancellation.
Further, contested that all the above-mentioned facts were duly submitted in the reply made by the appellant against the impugned show cause notice. However, the impugned order has remained silent on these facts and failed to substantiate the allegations raised with any cogent and corroborative evidence.
Non-speaking order is not sustainable:
Learned adjudicating authority failed to justify as to why the submissions made and the documentary evidence submitted at the time of filing reply before the adjudicating authority have not been accepted. Further, that it is not understandable that how can a firm be called to be a bogus firm whose registration was itself cancelled by the supplier himself. Hence, the instant show cause notice is absurd and vague in nature. Reliance was placed upon the decision given by the Madras High Court in the case of :
Engineering Aids v. State tax officer (Circle) in which it was held that demand order passed without considering the reply of SCN is not sustainable.
Along with that, it was submitted that impugned order has been passed on the grounds that the appellant failed to prove that ITC is admissible. Appellant duly enclosed the copies of all supporting documents to prove that the ITC is admissible to them. Adjudicating authority failed to discuss as to why these documents have not been accepted. Further, that the adjudicating authority has failed to prove the contrary and has not justified its own allegations. Reliance placed upon the decision in the case of :
Commissioner v. Motabhai Iron and Steel Industries [2015 (316) E.L.T. 374 (Guj.)]
Kisco Castings India Ltd. v. Commissioner of C.Ex. & S.T., Chandigarh [2015 (329) E.L.T. 556(Tri.-Del.)]
Victoria Tools Engineers (P) Ltd. v. Commissioner of C.Ex., Delhi-IV [2015 (329) E.L.T. 864 (Tri.-Del.)]
Akshay LPG Valves v. Commissioner of Cus. & C.Ex. Hyderabad-IV [2016 (337) E.L.T. 129 (Tri.-Hyd.)]
Extended Period of Limitation cannot be invoked
With regards to the invocation of the extended period, it was contended that fraud, wilful misstatement or collusion should be present. Reliance was placed upon the decision in the case of Rainbow Industries v. CCE [1994 (74) ELT 3 (SC)] and Chemphar Drug & Limits reported in [2002-TIOL-266-SC-CX]
Along with the above judgements, reliance was placed upon the decision in the case of Nestle India Ltd. Commissioner of Central Excise, Chandigarh [2009 (235) E.L.T. 577 (S.C.)]
Collector of Central Excise v. H.M.M. Limited [1995 (76) E.L.T. 497 (S.C.)]
Cosmic Dye Chemical v. Collector of Central Excise, Bombay [1995 (75) E.L.T. 721 (S.C.)]
Further, that the impugned order has failed to discuss and distinguish the above referred submissions made by the appellant in their reply to the show cause notice. Reliance was placed upon the judgement in the case of:
State of Himachal Pradesh v. Sardara Singh [2008-TIOL-160-SC-NDPS]
Commissioner of Central Excise, Bangalore v. Srikumar Agencies [2008 (232) E.L.T. 577 (S.C.)]
Order Based on incomplete investigation:
Appellant submits that the no action was taken against the said supplier. It was contended that unless the investigation is completed at the end of the supplier, the action cannot be initiated against the recipient. In the case of passing on fake ITC, the department was supposed to issue summons or should have recorded statements from the suppliers or transporters. However, no such investigation was completed. Reliance was placed on:

SUNIL ALCOP INDUSTRY Versus COMMISSIONER OF C. EX. & S.T., JAIPUR [2020 (33) G.S.T.L. 428 (Tri. - Del.)]
ASHOK AGARWAL VERSUS COMMISSIONER OF CGST & CENTRAL EXCISE, DELHI-I [2018 (362) E.L.T. 885 (TRI. - DEL.)

Appellant contested that the legitimate ITC cannot be denied unless the allegations are proved by the Revenue Department. In this regard, reliance was placed upon the decision in the case of :

G.S. ALLOY CASTINGS LTD. V. COMMISSIONER OF C.EX., GUNTUR [2016(331) E.L.T. 310 (Tri.-Bang.)
RAJAN ENGINEERING WORKS V. COMMISSIONER OF C.EX. DELHI-IV, FARIDABAD [2012(279)E.L.T. (Tri.-Del.)]
SHAKTI STEEL ROLLING MILLS V. COMMISSIONER OF C.EX. CHANDIGARH [2014 (304) E.L.T. 108 (Tri.-Del.)]
A.K.MULTIMETALS V. COMMR. OF C.EX. & S.T., CHANDIGARH-I [2015 (323) E.L.T. 591 (Tri.-Del.)]

No action can be taken against the Bonafide Purchaser without taking any action against the Supplier

The appellant also submitted that in the case of issuance of fake invoice by the supplier, action cannot be taken against the Bonafide recipient and hence, ITC cannot be recovered from recipient without taking any action against the supplier. Reliance was placed upon the decision of the Hon’ble Calcutta High Court in the case of Suncraft Energy Private Limited and Another v. Assistant Commissioner, State Tax, Ballygunge charge and others. [Appeal No. 1218 of 2023]

Principle of Ratio Decidendi should be applied

In alignment with above, it was contended that the impugned order has given reference to the decisions cited, however, has not extended the benefit of these judgements by alleging that each case is based on its own facts and circumstances and decision given in a specific context of a case, cannot apply uniformly in all cases. Unless facts of the case relied upon case are shown to be the same as in this case. Reliance was placed upon the judgement in the case of :

Dhrangadhra Muncipality, Dhrangadhra and other v. DHrangadhra Chemical Works Ltd. [1988 (35) E.L.T. 88 (Gujarat)]
Vanathi Exports Pvt Ltd. v. Commr. Of Cus. (Exports), Chennai [2020 (374) E.L.T. 490 (Mad.)]

Discussion and Findings:

Tax Liabilty was duly discharged by the supplier:

It was observed that the appellant has produced all documents relied upon by them i.e. copy of invoices, E-way bills, builties, ledger, bank transactions etc. Further, upon verification of the GSTR filing status on the GST portal it was observed that the corresponding supplier had duly furnished its GSTR-3B return which indicates that the supplier had duly reported the relevant transaction and discharged the applicable tax liability. Hence, the condition for payment of tax to the government is also duly satisfied by the supplier.

Registration was cancelled on the request of the supplier and the department failed to produce substantive evidence supporting their allegation:

Appellate authority observed that as evident from the GST portal, registration of the said supplier was found cancelled on their own application w.e.f. 30.05.2019, thus, it was observed that if any supplier had closed their business on 30.05.2019 and thereafter lapse of significant time passing of information in year 2023 regarding physical verification does not substantiate any allegation that they are involved in passing of any fraudulent ITC without supply of actual goods. Appellate authority held that why would any supplier would stay on their business premises after closure of business. Further that the show cause notice does not disclose any investigation conducted in respect of that supplier, nor does it record any outcome of finding establishing their alleged involvement in fraudulent availment of passing of ITC.

Transactions entered were prior to the cancellation of the supplier’s registration:
Further, that the transactions undertaken by the appellant with the aforesaid suppliers were prior to the dates of their cancellation and does not record any findings or material establishing that the said suppliers were involved in the alleged passing of fraudulent ITC.
It was held that the show cause notice is conspicuously silent regarding any investigative outcome, statement, inspection or corroborative evidence demonstrating that these entities were fictitious, non-existent or engaged in fraudulent activities.

ITC cannot be denied on the basis of cancellation of supplier’s registration on its own request:
Reliance was placed upon the judgement in the case of Shyamalmay Paul V. Assistant Commissioner SGST, Siliguri Charge. Wherein they set aside the appellate authority’s order denying the input tax credit holding that even retrospective cancellation of a supplier’s registration on their own request also cannot justify denial of ITC. Further, the court had order of the authority on the ground that no findings were recorded on the documents produced regarding movement of goods and also whether the requirement of availed ITC as prescribed under the statute is complied with or not.

ITC cannot be denied where requisite conditions and documents were complied with by the recipient:
Further reliance was placed upon the judgement in the case ofM/ Singhal Iron v. Additional Commissioner and another 2025.
It was held that as the appellant possess all the necessary documents and complies with the necessary conditions for availing input tax credit, hence, the input tax credit cannot be denied.

Transactions entered were found to be genuine in nature:
Appellate authority observed that on the basis of the above observations, transaction is found genuine and the statutory conditions prescribed for availing ITC stand satisfied. Hence, it was held that as the demand itself is found unsustainable on merits. When demand of ITC is not held legitimate, therefore, the recovery of interest and penalty imposed in relation to the said demand are also not maintainable. Therefore, the ITC in question is found to be admissible to the appellant.

Accordingly, the impugned order is liable to be set aside and the demand of tax, interest and penalty is set aside.

AUTHOR’s COMMENT:

It is often observed that the Department initiates proceedings against bona fide purchasers merely on the ground that the registration of the supplier has been cancelled, without undertaking any independent investigation or bringing on record cogent evidence to substantiate the allegations. The present case is significant in this regard, particularly because the supplier himself had applied for cancellation of registration. Two important principles emerge from the decision. First, the show cause notice is the foundational document of adjudication and must clearly disclose the specific allegations, the basis on which they are made and the material relied upon to invoke the provisions against the taxpayer. Secondly, the extended period of limitation cannot be invoked mechanically in the absence of the requisite ingredients. Further, mere mechanical reproduction of the expressions ‘fraud’, ‘wilful-misstatement’ or ‘suppression of facts’, without disclosing the material that led the proper officer to draw such inference, would not suffice. The same was even held in the Circular No. 258/04/2026-GST dated 26.10.2026.
The present decision reinforces that where the taxpayer furnishes relevant documentary evidence in support of the transaction, the burden lies upon the Department to substantiate its allegations through proper investigation and supporting evidence. In the absence of such material, proceedings based merely on presumptions or unsupported allegations cannot be sustained, and the benefit must go to the taxpayer.

CA Pradeep Jain_

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PJ case study/2026-27/17

CASE STUDY

BRIEF FACTS OF THE CASE:

Submissions by Appellant:

Discussion and Findings:

AUTHOR’s COMMENT:

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