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December 9, 2021
All Articles by: Mr.M. GOVINDARAJAN       View Profile
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Input tax credit

Section 16(1) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides for utilization of input tax credit by the registered persons.  The said section provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.


Section 16(2) of the Act provides that restrictions in availing and utilizing the input tax credit for certain reasons.  One among them is- a registered person shall not be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless  the tax charged in respect of supply has been actually paid to the Government either in cash or through utilization of input tax credit admissible in respect of the supply and he has furnished the return required to be filed under section 39. 

The said section further provides that if a buyer 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 the tax payable thereon within a period of 180 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 added to his output tax liability along with interest thereon, in such manner as may be prescribed.

According to the above provision if any seller wants to avail input tax credit for the purchaser for the goods or services or both from the seller the following are to be complied with by both the buyers and sellers-

  • The buyer is to pay the invoice for the goods or services received from the seller.
  • The seller is to pay the tax invoiced for the buyer to the credit of the Central Government.

Without the payment by the seller the buyer cannot able to avail input tax credit.  If he avails the input tax credit in such cases he has to reverse the credit availed by him or the Department may take action against the buyer and reversed the input tax credit availed by him.

Case law

The Madras High Court made a landmark judgment in this regard.  In M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. [2021 (3) TMI 1020 - MADRAS HIGH COURT] the Madras High Court held that if the Department initiated action against the registered person who availed input tax credit for the goods which he paid to the sellers but the seller did not remit the tax to the credit of the Government, the Department ought to bring the sellers as witnesses in the inquiry made against the buyer and simultaneously the Department has to initiate recovery proceedings against the seller.

In this case the petitioners are traders in raw rubber sheets.  They had purchased goods from one Charles and his wife Shanthi.  The petitioners made payment for the sale consideration through banking channels.  The payments include the tax component.  Charges and his wife and the petitioners registered with the very same assessment circle.

The petitioners availed input tax credit based on the returns filed by the sellers.  During inspection the petitioners came to know that Charles and his wife did not pay any tax to the Government.  The Department issued show cause notices to the petitioners.  The petitioners submitted reply to the show cause notice.  In the reply the petitioners contended that all the amounts payable by the petitioners were paid to Charles and his Wife Shanthi.  Therefore they contended that both Charles and his wife should be confronted during enquiry.  The Authorities passed the order without involving Charles and his wife Shanthi and reverted the input tax credit availed by the petitioners.  Being aggrieved against the said order the petitioners filed writ petitions before Madras High Court.

The Department submitted the following before High Court-

  • The petitioners had availed input tax credit on the premise that tax had already been paid to the Government by their sellers.
  • The Department was justified in initiating action against the petitioners since the tax has not been paid by the sellers and the petitioners could not furnish and proof for the same.
  • The Department cannot be faulted for having reversed whatever Input tax credit was already availed by the petitioners.

The petitioners relied on a press released by the Central Board of Goods and Service Tax Council on 04.05.2018.  In the said press release it has been laid down that there shall not be any automatic reversal of input tax credit from the buyer on nonpayment of tax by the seller.  The Department ought to take action to recover the tax amount from the seller.  The Department ought to take the action of reversal of credit when there is missing dealer, closure of business by the supplier or the supplier not having adequate assets etc.

The Madras High Court analyzed the provisions of section 16 of Tamil Nadu Goods and Services Tax Act, 2017

The High Court observed that the assessee must have received the goods and the tax charged in respect of its supply must have been actually paid to the Government either in cash or through utilization of input tax credit, admissible in respect of the said supply.  If the tax has not been paid then the liability shall lie on either the seller or the buyer.  In this case the Department has not taken any action for the recovery against the sellers viz. Chrles and his wife Shanthi.   The petitioners brought to the notice of the High Court on the finalization of assessment by the Department by excluding their transactions alone.  The High Court was unable to appreciate the approach of the Departmental authorities. 

The High Court held that when it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him.  Charles and his Wife ought to have been examined.  This is necessary since the respondent has taken a stand that the petitioners have not even received the goods and had availed in the input tax credit on the strength of generated invoices.

The High Court did not understand as to why the Department did not ensure the presence of sellers in the enquiry.  The High Court, therefore, held that the impugned order suffers from certain fundamental flaws and liable to be quashed on the following grounds-

  • Non examination of Charles and his Wife Shanthi in the enquiry;
  • Non initiation of recovery action against Charles in the first place.

The High Court quashed the impugned order and remitted back to the Department.  The petitioners gave replies to the show cause notices which hold good.  The enquiry alone will have to be held afresh.  Charles and his Wife shall be examined as witnesses in the said enquiry.  The High Court also directed the Department to initiate recovery action against Charles and Shanthi parallel to the inquiry.

The High Court allowed the petitions.


By: Mr.M. GOVINDARAJAN - December 9, 2021


Discussions to this article


Nice write up Sir, thanks.

By: Ganeshan Kalyani
Dated: 10/12/2021


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