[GST] Seller Registered At Time Of Transaction; Cannot Draw Adverse Inference Against Purchasing Dealer Over Subsequent Cancellation: Allahabad HC

The Allahabad High Court has held that if the seller is a registered dealer at the time of transaction, no adverse inference can be drawn against the purchasing dealer based on the subsequent cancellation of seller's registration.

Justice Piyush Agrawal held

“Once the seller was registered at the time of the transaction in question, no adverse inference can be drawn against the petitioner. Further, the record shows that the registration of the selling dealer was cancelled retrospectively i.e. w.e.f. 29.01.2020 and not from its inception which goes to show that the transaction between petitioner and seller was registered and having valid registration in his favour.”

Case Background

Petitioner is a registered dealer dealing in the business of purchasing and selling scraps. It his case that a notice under Section 74 of the UPGST Act was issued to him for tax period December, 2018-19, F.Y. 2018-19. Petitioner pleaded that order was passed in violation of Section 75(4) of the Act without considering the reply submitted by him.

Section 75 provides the procedure to be followed by assessing officers for proceedings under Sections 73 and 74. Section 75(4) provides that when requested in writing, the assesee must be given an opportunity of personal hearing where assesee is chargeable to tax/ penalty or where any adverse action is contemplated against him.

Counsel for petitioner pleaded that the transaction from the selling dealer in question was more than a year before the registration of the seller was cancelled by the department. It was argued that petitioner cannot be held responsible if at a subsequent date the seller was not found at the place of business and the registration was cancelled. It was also argued that the petitioner had filed its return disclosing the transaction.

Per contra, counsel for department argued that the petitioner had not shown actual physical movement of goods.

High Court Verdict

Perusing Sections 16 and 74 of the GST Act and Rule 36 of the GST Rules, the Court observed that once the conditions are fulfilled and documents are provided, the assesee must granted benefit of input tax credit. It further observed that

“Section 74 of the GST Act, 2017 provides the power to the State-authorities to proceed against the registered dealer if I.T.C. has wrongly availed or utilized by reason of fraud or wilful misstatement of fact or by means of fraud, and upon the adjudication, can recover the same.”

The Court observed that even though the authorities could have cancelled the registration of the selling dealer from the date of proceedings, they cancelled it with effect from 29.01.2020. It was observed that the Department did not plead that at the time fo the transaction, the selling dealer was not registered.

The Court noted that the returns were filed by the supplier and were available on the portal and were not considered by the authority while imposing penalty on the petitioner. It was observed that the registration of the seller was not cancelled from the date of the transaction.

Regarding the judgment of the Allahabad High Court in M/s Rajshi Processors Raebareli Thru. Its Partner Ashok Kumar Lakhotia Vs. State of U.P. Thru. Prin. Secy. Deptt. Of State Tax, Lko and 2 Others, Justice Agrawal held that in that case the registration of the seller was cancelled from inception, whereas in case at hand, the registration was cancelled from a later date, after the transaction between the parties.

The Court differentiated the judgment of the High Court in M/s Shiv Trading Vs. State of U.P. and 2 others, which followed the decision of the Apex Court in State of Karanataka Vs. Ecom Gill Coffee Trading Private Limited, on grounds that in Shiv Trading, no finding regarding GSTR-3B was made whereas in the present case, the same had been filed by the petitioner.

Reliance was placed on its earlier judgment in M/S Rama Brick Field Vs. Additional Commissioner Grade-2 and 2 others, where the Court had held once the GSTR-2A had been auto-generated on the portal, the transaction was valid and the parties were registered at the time of the transaction.

“However at the subsequent time if the seller i.e. Rohit Coal Trader was found non- existence, the proceeding can be initiated but the authorities has failed to consider the fact that GSTR returns as prescribed under the Act was filed by the seller to which not a single word has been whispered while passing the impugned order. On the contrary an observation has been made that the petitioner has failed to bring on record any cogent material to show that Rohit Coal Traders has deposited the tax and therefore proceedings were held to be justified”

The Court in M/S Rama Brick Field had set aside the proceedings holding that the returns were available on the portal, which the authorities had failed to verify. Similar observations were made by the Court in the present case.

Accordingly, the impugned orders were quashed, and the case was remanded to the authority to pass fresh orders.

Case Title: M/S Solvi Enterprises v. Additional Commissioner Grade 2 And Another [WRIT TAX No. - 1287 of 2024]

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