M/S Chunnilal Bothra And Sons vs. The Union Of INDIA And 4 Ors

Facts

The petitioners are purchasing dealers who are facing denial of Input Tax Credit (ITC) under the GST regime. The revenue authorities have issued show cause notices and consequential orders to deny ITC based on the alleged failure of the selling dealers to deposit the collected tax. The petitioners argue that they have entered into bona fide transactions and cannot be held responsible for the selling dealers' non-compliance. The present writ petitions challenge these notices and orders. The matter is linked with several other writ petitions concerning similar issues.

Held

The Court held that the controversy raised in the writ petitions is squarely covered by the decision of the Delhi High Court in 'On Quest Merchandising India Private Limited'. The Court agreed with the Delhi High Court's reasoning that the provisions of the GST Act, analogous to Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, place an onerous burden on bona fide purchasing dealers by asking them to do the impossible – to ensure that the selling dealer deposits the collected tax. The Court found that a law that is not capable of honest compliance and visits disobedience with disproportionate consequences on a bona fide purchasing dealer is vulnerable to invalidation under Article 14. Therefore, the Court held that the expression 'dealer or class of dealers' in the relevant provisions should be interpreted to exclude purchasing dealers who have bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices, provided there is no mismatch in transaction details. The Court set aside the impugned show cause notices and consequential orders. However, it granted liberty to the Department to proceed against purchasing dealers where purchase transactions are not bona fide, in accordance with law.

Key Issues

1. Whether the provisions of Section 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017, and analogous provisions of the Central Goods and Services Tax Act, 2017, are liable to be read down to protect bona fide purchasing dealers from the denial of Input Tax Credit (ITC) when the selling dealer fails to deposit the collected tax? Petitioner's arguments: The petitioners contend that the denial of ITC to bona fide purchasing dealers, who have taken all reasonable precautions and entered into genuine transactions, is unconstitutional and violates Article 14 of the Constitution. They rely on the Delhi High Court's decision in 'On Quest Merchandising India Private Limited' which held that such provisions should be read down to protect innocent purchasers. They also highlight that a Special Leave Appeal against this Delhi High Court judgment was dismissed by the Supreme Court. Revenue's arguments: The learned Standing Counsel for the CGST and the counsel for the respondent State were not in a position to dispute that the controversy is covered by the Delhi High Court's decision. They did not present any counter-arguments against the petitioners' reliance on the 'On Quest Merchandising India Private Limited' judgment.