Commissioner, Trade & Tax, Delhi vs. Shanti Kiran India (P) Ltd. (Civil Appeal Nos. 2042–2047 of 2015 Supreme Court of India)
1. Brief Facts
- The Respondent-Assessee, Shanti Kiran India (P) Ltd., was a registered dealer under the Delhi Value Added Tax Act, 2004.
- The Assessee purchased taxable goods from registered selling dealers, paid tax as reflected in valid tax invoices, and claimed Input Tax Credit (ITC) under Section 9 of the DVAT Act.
- Subsequently, it was discovered that certain selling dealers had failed to deposit the tax collected into the Government treasury.
- The Department denied ITC to the Assessee under Section 9(2)(g) of the DVAT Act, contending that since tax had not actually been deposited by the sellers, ITC could not be allowed.
- The Delhi High Court held in favor of the Assessee, relying on its earlier judgment in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017).
- The Revenue filed appeals before the Supreme Court.
The principal issue before the Supreme Court was whether ITC can be denied to a bona fide purchasing dealer merely because the selling dealer failed to deposit the collected tax with the Government.
2. Important Key Takeaways
(A) Bona Fide Purchaser Cannot Be Penalized
The Supreme Court upheld the Delhi High Court’s view that ITC cannot be denied to a bona fide purchasing dealer who has paid tax to a registered seller under valid invoices.
(B) Section 9(2)(g) Read Down
The Court endorsed the interpretation that Section 9(2)(g) must be read down to preserve constitutional validity. ITC cannot be denied automatically unless there is evidence of collusion, fraud, or lack of bona fides on the part of the purchaser.
(C) No Material Against Assessee
The Court noted:
- Selling dealers were registered at the time of transactions.
- Invoices were genuine.
- No material was produced to doubt the bona fides of the Assessee.
(D) Revenue’s Remedy Lies Against Defaulting Seller
The Court clarified that recovery proceedings should be initiated against the defaulting selling dealers, not against innocent purchasing dealers.
(E) Appeals Dismissed
The Supreme Court found no reason to interfere with the Delhi High Court’s order and dismissed the Revenue’s appeals.
3. Author’s Comment – Business Impact
This judgment is a landmark affirmation of the “substance over third-party default” principle in indirect taxation.
Practical Implications:
- Protects bona fide purchasers from denial of ITC due to supplier’s failure to deposit tax.
- Places responsibility for enforcement on tax authorities against defaulting sellers.
- Limits arbitrary denial of ITC unless purchaser involvement in fraud is established.
- Strengthens legal certainty in credit-based tax systems, including GST jurisprudence.
Though rendered under the DVAT Act, this ruling has persuasive value in GST matters involving denial of ITC due to supplier non-payment.