ITC Allowed for Genuine Transactions Despite Supplier Default

Under the GST regime, Input Tax Credit (ITC) plays a vital role in eliminating cascading tax effects. However, businesses often face issues where their suppliers default in filing returns or making payments, resulting in denial of ITC to genuine buyers. This has raised significant legal and constitutional debates.
Recently, various courts have held that ITC cannot be denied to a bona fide purchaser merely because the supplier failed to deposit tax. This article explores the legal stand and procedures around claiming ITC in such genuine cases.

🔹 Section 16 of CGST Act, 2017
This section lays down conditions for availing ITC:
✔️ Possession of tax invoice
✔️Receipt of goods or services
✔️Tax charged is paid to the Government
✔️Filing of return by the recipient (GSTR-3B)

🔹 Rule 36(4) of CGST Rules
Restricts ITC to invoices/debit notes uploaded by suppliers in GSTR-1, and reflected in GSTR-2B of the recipient.

✅ Eligibility to Claim ITC in Case of Supplier Default
You may still be eligible for ITC if the following conditions are satisfied:
1. You have a valid tax invoice/debit note.
2. You have received goods/services.
3. The transaction is genuine and recorded in books of accounts.
4. You have paid the tax amount to the supplier.
5. You have filed GSTR-3B return.
6. The default is not due to collusion or fraud between buyer and supplier.

📌 Important: Courts have emphasized that buyers who have acted in good faith should not suffer due to supplier non-compliance.

📑 Documents Required
To support your ITC claim in such cases:
✅ Valid GST Invoice
✅Proof of payment to the supplier (bank statement, UTR, etc.)
✅Delivery challans, e-way bills, or transport receipts
✅Correspondence with supplier (emails/reminders for filing GSTR-1)
✅Purchase agreements, if applicable
✅GSTR-2B / GSTR-3B reconciliation report

Process to Claim ITC (in default supplier)

1. Reconcile GSTR-2B and Purchase Register – Identify unmatched entries.
2. Contact Supplier – Request them to file GSTR-1 or rectify their returns.
3. If the supplier fails to comply:
🔷File reconciliation statement with proof of payment and genuine transaction.
🔷Respond to any GST notice under Section 61 (scrutiny), Section 73 (demand), or audit proceedings.
4. Submit a written representation along with documents to the jurisdictional officer.
5. If ITC is denied unjustly, consider filing an appeal under Section 107.

Case Laws
1. D.Y. Beathel Enterprises vs. State Tax Officer (Madras High Court)
Held that recipient cannot be penalized for the default of supplier if all ITC conditions are met and there’s no fraud or collusion.

2. Arise India Ltd. vs. Commissioner of Trade & Taxes (Delhi HC)
VAT case but principle upheld: Genuine buyer should not be penalized for default by supplier.

Conclusion
While GST law mandates supplier compliance for seamless ITC flow, courts have repeatedly protected genuine buyers from unjust denial of credit.