ITC Cannot Be Denied Merely Because the Supplier's GST Registration Was Cancelled Retrospectively: Supreme Court
GST Litigation & Compliance | Supreme Court Update
ITC Cannot Be Denied Just Because Your Supplier's GST Registration Was Cancelled Later: Supreme Court
If you have ever received a GST notice asking you to reverse Input Tax Credit (ITC) because your supplier's registration was cancelled months after you bought from them, a recent Supreme Court order is worth knowing about. The Court has refused to interfere with a High Court ruling that protects genuine, documented purchases — even when the supplier later turns out to be non-compliant.
What the Supreme Court decided
In Additional Commissioner Grade 2 & Anr. v. M/s Safecon Lifescience Private Limited (SLP (C) No. 23993 of 2026, order dated 17 July 2026), the Supreme Court dismissed a Special Leave Petition filed by the GST department at the admission stage itself. The Court stated it found no good ground to entertain the petition, which means the Allahabad High Court's judgment in the taxpayer's favour now stands final between the parties.
The underlying High Court decision had quashed proceedings under Section 74 of the Uttar Pradesh GST Act that sought to deny ITC to a buyer purely because its supplier's GST registration was cancelled at a later date, and because of alleged irregularities in the supplier's own upstream purchases — with no finding of fraud against the buyer itself.
Background: the Safecon Lifescience case
The taxpayer, a pharmaceutical trading and manufacturing company, had purchased medicines from a Bhiwandi-based supplier for the tax period of April 2021. At the time of the transaction, the supplier held a valid GST registration and a drug licence. The purchase was backed by a proper tax invoice, an e-way bill, and a transporter's bilty, and the entire payment was routed through banking channels. The supplier had also filed its GSTR-1 and GSTR-3B for that period and paid tax on the turnover.
Based on intelligence input from a central excise and tax intelligence unit, the jurisdictional GST officer issued a show cause notice under Section 74, arguing that ITC could not be allowed because, under Section 16(2)(c), a recipient can claim credit only once the supplier has actually deposited the tax with the government. The demand was confirmed, and the first appeal was also rejected — this time on the ground that the supplier itself had allegedly claimed credit from further-upstream vendors who had not paid their taxes.
What the Allahabad High Court found
On writ, the Allahabad High Court set aside both orders. Its reasoning is directly useful for any business facing a similar notice:
- Documentary evidence was never disproved. The buyer's tax invoices, e-way bill, transport documents, banking payment proof and matching GSTR-3B entries of both parties were on record and were never disbelieved or rebutted by the department.
- The intelligence input was not verified. The order had been passed largely on unverified information from a central intelligence unit, without disclosing that material to the taxpayer or independently verifying it before use.
- No fraud finding against the buyer. At no stage did the authorities record a finding that the buyer itself was complicit in any irregularity or wrongdoing by the supplier.
- Section 74 requires intent, not mere default. Citing CBIC's Instruction No. 05/2023-GST dated 13 December 2023, the Court held that Section 74 can only be invoked where fraud, wilful misstatement or suppression of facts to evade tax is shown — not for a plain default in tax payment somewhere up the supply chain.
The legal position on Section 74 and Section 16(2)(c)
Two provisions sit at the heart of this dispute:
Section 16(2)(c) of the CGST/SGST Act conditions a recipient's ITC on the supplier having actually paid the tax to the government. Departments across India have used this clause to recover credit from buyers whenever a supplier defaults or disappears — even where the buyer had no way of knowing or controlling that default.
Section 74 of the CGST/SGST Act allows the department to raise demands (with extended limitation and higher penalty) only where fraud, wilful misstatement, or suppression of facts to evade tax is involved. CBIC's own instruction dated 13 December 2023 makes clear that this is not a residual power for ordinary default — the fraud-related ingredient must be specifically pleaded and evidenced in the show cause notice itself. For periods from FY 2024-25 onward, the newly inserted Section 74A carries a common limitation period, but the intent-based test remains relevant to penalty exposure.
Read together, the courts have consistently held that where a buyer discharges its own burden of proof — genuine invoice, transport proof, banking payment, and matching returns — the risk of a supplier's later default should ordinarily fall on the department's recovery action against that supplier, not on an automatic reversal from the compliant buyer.
How this fits with other rulings
This is not an isolated view. Similar reasoning protecting bona fide purchasers has been taken by the Delhi High Court in the On Quest Merchandising case (under the erstwhile Delhi VAT law, with the Revenue's appeal later dismissed by the Supreme Court), the Calcutta High Court in Suncraft Energy and in Gargo Traders, the Madras High Court in D.Y. Beathel Enterprises, and, within the Allahabad High Court itself, in the Khurja Scrap Trading, Solvi Enterprises, and R.T. Infotech decisions. Across these cases, the common thread is the same: genuine, well-documented transactions carried out while the supplier was validly registered should not be undone by that supplier's later, unrelated non-compliance.
A note of caution: the burden is still on the buyer
This is not a blanket protection. The Supreme Court's own ruling in State of Karnataka v. Ecom Gill Coffee Trading (decided under the Karnataka VAT law, but frequently cited in GST matters) held that the burden of proving genuineness — including actual physical movement of goods — rests squarely on the purchasing dealer, and that producing a tax invoice and a banking-channel payment entry alone is not automatically sufficient. The Safecon Lifescience buyer succeeded precisely because it discharged this full burden with multiple, mutually reinforcing categories of evidence, and the department could not produce anything to rebut it.
It is also worth noting, as a technical point, that dismissal of a Special Leave Petition without a reasoned order does not by itself create a binding precedent under Article 141 of the Constitution (per Kunhayammed v. State of Kerala). What it does mean is that the Allahabad High Court's detailed reasoning stands undisturbed and now carries strong persuasive weight in similar disputes nationwide, including in Tamil Nadu.
Practical takeaways for Coimbatore businesses
For traders, manufacturers, and exporters across Coimbatore's textile, engineering, and jewellery sectors who deal with a wide vendor base, this ruling is a reminder to build a documentation habit that can withstand scrutiny years after the transaction:
- Verify GST registration status at the time of purchase — not retrospectively — and keep a dated screenshot or printout of the GST portal status as part of your purchase file.
- Preserve e-way bills and transporter documents for every consignment, not just the tax invoice.
- Always pay through traceable banking channels; avoid cash settlements for B2B purchases above the threshold where ITC is claimed.
- Reconcile GSTR-2B/2A against your purchase register every month so any mismatch with a supplier's filings is caught early, not years later in a departmental notice.
- Respond to show cause notices with the full evidence bundle — invoice, e-way bill, transport proof, payment proof, and return extracts — and specifically call out the absence of any fraud finding against your business.
- Don't assume silence protects you — if intelligence-based information is used against you without being shared, that is itself a ground to challenge the notice, as this case shows.
If you have received a Section 74 notice, or an ITC demand linked to a vendor's registration being cancelled after your purchase, this precedent — read with the CBIC instruction and the wider body of High Court and Supreme Court decisions — gives you real legal ground to contest it, provided your own documentation is in order.
Frequently asked questions
Can my Input Tax Credit be reversed if my supplier's GST registration is cancelled after I bought from them?
Not automatically. If you can show a genuine tax invoice, e-way bill, transport document, banking-channel payment and matching returns for the period of purchase, ITC cannot be denied merely because the supplier's registration was cancelled at a later date, unless the department proves fraud, wilful misstatement or suppression of facts on your part.
What documents protect a buyer from ITC reversal in a GST audit or notice?
Tax invoices, e-way bills, the transporter's lorry receipt or bilty, proof of payment through banking channels, and GSTR-3B/GSTR-1 records of both the buyer and the supplier showing the transaction and tax payment. These four categories of evidence were decisive in the Safecon Lifescience case.
When can the GST department invoke Section 74 against a buyer?
Section 74 can be invoked only where there is a specific finding of fraud, wilful misstatement or suppression of facts to evade tax. CBIC Instruction No. 05/2023-GST dated 13 December 2023 clarifies that non-payment of tax by the supplier alone, without this intent-based element, does not justify a Section 74 notice against the recipient.
Does this ruling apply outside Uttar Pradesh?
The Allahabad High Court decision was rendered under the UPGST Act, and the Supreme Court's dismissal of the department's appeal does not itself become a binding declaration of law under Article 141. However, since CGST/SGST provisions are largely identical across states, the reasoning carries strong persuasive value for GST disputes in Tamil Nadu and elsewhere, including before Coimbatore's GST authorities and the GSTAT.
Facing an ITC demand or Section 74 notice?
Covai Accounting Services helps businesses across Coimbatore respond to GST show cause notices, reconcile ITC mismatches, and represent clients in adjudication and appellate proceedings — including matters that go before the GSTAT. If you've received a notice linked to a supplier's registration cancellation, get in touch before your reply deadline.
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