Supreme Court Upholds Input Tax Credit for Bona Fide Buyers in Landmark DVAT Ruling
Supreme Court Upholds Input Tax Credit for Bona Fide Buyers in Landmark DVAT Ruling
New Delhi, October 9, 2025 – In a significant victory for taxpayers, the Supreme Court of India has ruled that genuine purchasers cannot be denied Input Tax Credit (ITC) under the Delhi Value Added Tax (DVAT) Act, 2004, merely because the selling dealer failed to deposit the collected tax with the government. The judgment in The Commissioner of Trade and Tax, Delhi v. M/s Shanti Kiran India Pvt. Ltd. (Civil Appeal Nos. 2042–2047 of 2015) dismissed the tax department’s appeals and affirmed the Delhi High Court’s pro-taxpayer stance, bringing clarity to a long-standing controversy in VAT and GST regimes.
Background of the Dispute
The respondents, including M/s Shanti Kiran India Pvt. Ltd., were registered dealers under the DVAT Act who purchased goods from other dealers holding valid registration at the time of sale. These sellers issued tax invoices compliant with Section 50 of the Act, and the buyers duly paid the invoiced amount, including VAT, in good faith.
The buyers utilized the purchased goods for taxable outward supplies and claimed ITC under Section 9(1) of the DVAT Act — a fundamental feature of the value-added tax system designed to eliminate cascading effects of taxation.
However, the sellers later defaulted on depositing the collected VAT with the government. Their registrations were subsequently cancelled. Citing Section 9(2)(g) of the DVAT Act, which disallows ITC if the tax has not been paid to the government by the selling dealer (unless adjusted under the Act), the tax authorities denied the buyers’ ITC claims and raised demands.
Aggrieved, the buyers approached the Delhi High Court, which, in a series of rulings including the lead case of Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017 SCC OnLine Del 13037), allowed ITC for bona fide purchasers. The tax department challenged these orders before the Supreme Court.
The Supreme Court’s Verdict
A Division Bench comprising Justices B.V. Nagarathna and Augustine George Masih delivered a unanimous verdict on October 9, 2025, dismissing the civil appeals filed by the Commissioner of Trade and Tax, Delhi.
The Court held:
“A bona fide purchasing dealer who has acted upon valid tax invoices issued by a registered selling dealer at the time of transaction cannot be denied Input Tax Credit merely because the seller subsequently defaults in depositing the tax.”
Key Legal Interpretations
Reading Down Section 9(2)(g) The Court adopted a purposive and constitutional interpretation of Section 9(2)(g). While the provision aims to prevent revenue leakage due to seller defaults, it cannot be applied mechanically to penalize innocent buyers.
- The phrase “dealer or class of dealers” in Section 9(2)(g) was construed to apply only to defaulting sellers, not genuine purchasers.
- Applying the proviso to bona fide buyers would render it arbitrary and violative of Article 14 (equality before the law) of the Constitution.
Vested Right to ITC ITC is not a bounty but a vested right for compliant dealers. Once conditions under Section 9(1) are satisfied — valid invoice, payment of tax to seller, and use in taxable supplies — the credit cannot be denied without proof of collusion or fraud.
Burden on Revenue Authorities The Department’s remedy lies in recovering unpaid tax from the defaulting seller under provisions like Section 40A (in cases of collusion) or general recovery mechanisms. Reversing ITC on buyers shifts an undue burden and disrupts legitimate business.
Verification of Transactions In the present cases, the Court noted:
- Sellers were validly registered at the time of sale.
- Tax invoices were genuine and compliant.
- No mismatch in purchase/sale declarations.
- No evidence of collusion or circular trading.
Thus, denial of ITC was unjustified.
Broader Implications
1. Relief to Thousands of Dealers
Over 1,000 similar cases pending before the Delhi High Court and VAT tribunals across India stand resolved in favor of taxpayers. The ruling prevents cascading litigation over “missing dealer” scenarios.
2. Alignment with GST Principles
Though delivered under the DVAT Act, the judgment has strong persuasive value under the GST regime (Section 16 of CGST Act), where similar disputes arise over seller defaults. Courts have increasingly protected buyers who exercise due diligence (e.g., verifying GSTIN status, obtaining invoices, and making payments via banking channels).
3. Encourages Due Diligence, Not Punishment
The Court clarified that buyers must verify:
- Seller’s registration status at the time of transaction.
- Validity of tax invoices.
- Payment of consideration including tax.
However, they are not expected to monitor whether the seller deposits the tax with the government — a responsibility of the tax administration.
Key Takeaways for Businesses
| Do’s | Don’ts |
|---|---|
| Verify seller’s GSTIN/VAT registration before purchase | Rely solely on verbal assurances |
| Insist on proper tax invoices under Section 50 (DVAT) / Rule 46 (GST) | Accept cash payments without invoices |
| Make payments via banking channels | Engage in transactions with known defaulters |
| Retain proof of delivery and utilization | Ignore red flags like unusually low prices |
Conclusion
The Shanti Kiran judgment reinforces the sanctity of the VAT/GST credit chain and upholds the principle that tax compliance is a shared responsibility, but punishment must be proportionate and evidence-based. By shielding bona fide purchasers from the fallout of seller defaults, the Supreme Court has struck a balanced chord between revenue protection and ease of doing business.
For tax practitioners and businesses, this ruling serves as a precedent of fairness — a reminder that the taxman’s sword should fall on the defaulter, not the diligent.
Citation: The Commissioner of Trade and Tax, Delhi v. M/s Shanti Kiran India Pvt. Ltd., Civil Appeal Nos. 2042–2047 of 2015, decided on 09.10.2025 (Supreme Court of India).