Allahabad HC: ITC Can’t Be Denied for Supplier’s Later Cancellation; Section 74 Set Aside

The Allahabad High Court’s decision in Singhal Iron Traders v. Addl. Commissioner (Nov 3, 2025) marks a decisive shift in the landscape of Input Tax Credit (ITC) disputes under GST. The Court held that a recipient’s ITC cannot be denied merely because the supplier’s GST registration was cancelled after the transaction, unless there is concrete evidence of fraud, wilful misstatement, or collusion by the recipient. The judgment underscores that valid registration at the time of supply, payments through banking channels, and matching GST returns are the “anchor” evidences for ITC eligibility. The burden of proof for invoking Section 74 now rests squarely on the Revenue, which must establish actual fraud or misrepresentation—not just rely on “borrowed information” about a supplier’s later non-existence. For CFOs and accountants, this ruling offers immediate clarity: robust documentation and due diligence at the time of purchase are your best shields against retrospective ITC reversals.

Factual Backdrop

The case involved Singhal Iron Traders, a registered dealer in iron scrap, who purchased goods from M/s Arvind Metal Suppliers in August 2018. At the time of supply, the supplier was duly registered, and all payments were made via banking channels. Both parties filed their respective GST returns (GSTR-1 and GSTR-3B), indicating that tax was paid to the government. The controversy arose when, months later, the supplier’s registration was cancelled. Relying solely on this subsequent cancellation, the Revenue initiated proceedings under Section 74, alleging that the purchases were from a non-existent dealer and thus fraudulent. The taxpayer challenged the assessment and appellate orders, presenting a full documentary trail to establish bona fide compliance.

The Court’s Reasoning: Doctrinal Analysis

A. Burden of Proof Under Section 74

Section 74 of the GST Act is a stringent provision, reserved for cases involving fraud, wilful misstatement, or suppression of facts. The Allahabad High Court clarified that the mere fact of a supplier’s later deregistration does not, by itself, amount to evidence of fraud by the recipient. The Revenue cannot presume collusion or misrepresentation simply because a supplier is found non-existent at a later date. Instead, the authorities must verify the supplier’s status as on the date of supply and demonstrate, with credible evidence, that the recipient was complicit in any wrongdoing.

B. Evidentiary Value of Defenses

The Court gave significant weight to three key pieces of evidence:

1. Valid GST Registration at Time of Purchase: If the supplier was registered when the transaction occurred, this is a strong indicator of the recipient’s bona fide intent. (Learn more about GST Registration Services)
2. Payments via Banking Channels: Transactions routed through banks create an audit trail, supporting the genuineness of the purchase.
3. Matched GSTR-1 and GSTR-3B Filings: The supplier’s outward supply (GSTR-1) and the recipient’s ITC claim (GSTR-3B) must align, and tax must have been paid to the government. This documentary flow—supported by e-way bills and invoices—forms the backbone of a defensible ITC claim. (See detailed insights on E-Way Bill 2.0 and GST Compliance)

C. Limits on “Borrowed Information”

The judgment draws a clear line: Revenue cannot proceed against recipients based solely on information about a supplier’s subsequent deregistration or non-existence. There must be a distinction between a “procedural lapse” (such as later cancellation) and actual fraud or collusion. The Court rejected the notion that post-facto findings about a supplier’s status can, by themselves, justify punitive action under Section 74. (Related case analysis: Allahabad HC: Subsequent Supplier Cancellation Not Ground to Deny ITC; S.74 Set Aside)

D. Precedential Value & Interpretive Clarifications

This ruling sets a strong precedent for both practitioners and GST officers. It narrows the grounds for ITC denial, requiring the Revenue to move beyond mere suspicion or “borrowed information” and to undertake a substantive investigation before initiating Section 74 proceedings. The judgment stands in contrast to earlier, more pro-revenue interpretations that allowed for ITC reversal based on supplier cancellation alone.

Practitioner’s Toolkit: Actionable Guidance

A. Checklist: Documentary Evidence to Defend ITC Claims

To robustly defend ITC claims in scenarios where a supplier’s registration is later cancelled, practitioners should retain and be ready to present:

• GST registration certificate of the supplier as on the date of supply.
• Tax invoice and e-way bill referencing the supplier’s valid GSTIN.
• Proof of payment through banking channels (bank statements, RTGS/NEFT slips).
• Copies of the supplier’s GSTR-1 (showing the outward supply) and the recipient’s GSTR-3B (claiming ITC).
• Proof of delivery or receipt of goods (goods inward register, lorry receipt).
• Any correspondence or documentation evidencing the commercial, arm’s-length nature of the transaction.

B. Sample Response Points to Section 74 SCNs Based on Supplier’s Subsequent Non-Existence

When replying to show cause notices that rely solely on a supplier’s later deregistration, taxpayers should:

• Assert compliance at the transaction date, highlighting the supplier’s valid registration and the complete documentary trail.
• Demand that the Revenue produce evidence of fraud, collusion, or wilful misstatement.
• Cite the Allahabad High Court’s ruling: No presumption of fraud arises from subsequent cancellation alone.
• Emphasise that banking and GST portal records are independently verifiable and support the genuineness of the transaction.

C. Audit & Risk Management: Red Flags & Preventive Steps

To pre-empt ITC disputes, practitioners should:

• Verify the supplier’s GST status before each transaction. Tools and support are available from GST Consultancy Services.
• Retain all tax payment and return documentation for the statutory period.
• Monitor for GSTN “alerts” regarding supplier compliance status.
• Flag suppliers who show sudden inactivity or discrepancies in return filings for further review.

How This Ruling Narrows the Grounds for ITC Denial

The Allahabad High Court’s decision in Singhal Iron Traders draws a clear boundary for the invocation of Section 74 in ITC disputes. The Court has set a strict threshold: Section 74 cannot be triggered merely because a supplier’s registration is cancelled after the transaction. Unless the Revenue can demonstrate credible evidence of fraud, wilful misstatement, or collusion by the recipient, punitive proceedings are not justified. This means that the days of reversing ITC based on unverified, “borrowed information” about a supplier’s later non-existence are over. The focus now shifts to the actual facts and documentation available at the time of supply.

For practitioners, this ruling reinforces the primacy of contemporaneous evidence—registration status, banking payments, and GST return filings—over subsequent events. The Revenue must now conduct a substantive investigation and cannot rely on post-facto supplier issues to penalise genuine recipients. This risk-shifting compels tax authorities to establish a clear link between the recipient and any alleged fraud before issuing show cause notices or making reversals.

(For professional support, visit our Chartered Accountants Allahabad page.)

Common Misconceptions Addressed & Clarified

A number of persistent myths about ITC reversal are directly addressed by this judgment:

• Myth: Any post-transaction supplier deregistration or the so-called “fake invoice” doctrine automatically triggers ITC reversal.
• Reality: The Court has clarified that only proven fraud or collusion justifies reversal. Mere subsequent cancellation, without more, is not enough. (See blog post: Unveiling the Impact: Fake Invoices in GST)
• Myth: The recipient must guarantee the supplier’s ongoing compliance, even after the transaction.
• Reality: Once the recipient has conducted due diligence and maintained proper documentation, the burden shifts to the Revenue. The law does not require recipients to police their suppliers indefinitely.

This clarification is vital for both taxpayers and GST officers, as it prevents overreach and ensures that only genuine cases of fraud or misstatement are prosecuted under Section 74.

Strategic Compliance: Internal Checklists & Dispute Strategies Post-Singhal Iron Traders

The judgment is a call to action for companies to update their compliance protocols and dispute strategies:

• ITC Defense Files: Maintain a comprehensive file for each ITC claim, including supplier registration proof, tax invoices, e-way bills, banking payment evidence, and GST return extracts. Retain these for at least the statutory period (currently six years from the due date of annual return).
• Procurement SOPs: Procurement teams should verify supplier GST status before every transaction and document this check. Any alerts or discrepancies should be escalated and resolved before proceeding.
• Audit Response Drafting: When responding to audit queries or show cause notices, proactively reference the Allahabad HC judgment. Clearly state that, in the absence of fraud or collusion, adverse consequences cannot be fastened on the recipient.
• ERP Integration: Where possible, integrate supplier status checks and document retention protocols into your digital ERP systems for real-time compliance monitoring.

For companies outside Allahabad, professional expertise is also offered by our Chartered Accountants Chandigarh team.

Conclusion: Key Takeaways and Next Steps

The Singhal Iron Traders ruling sets a high evidentiary bar for ITC denial and Section 74 proceedings. For CFOs, accountants, and compliance teams, the message is clear: document every transaction, conduct reasonable due diligence at the time of purchase, and retain all supporting evidence. The law now protects recipients who act in good faith and maintain proper records, shifting the onus to the Revenue to prove actual fraud or collusion.

Going forward, companies should embed these updated protocols into their compliance frameworks, stay alert to supplier status changes, and be ready to cite this precedent in any dispute. This judgment is a powerful tool to deter overreach and ensure that genuine business transactions are not unfairly penalised.

Key Takeaways:

• Section 74 can only be invoked where there is credible evidence of fraud or wilful misstatement—not for mere supplier deregistration after the fact.
• Documentary evidence at the time of supply—registration, banking payments, GST returns—is your strongest defense.
• The burden of proof now lies with the Revenue; recipients are not required to guarantee supplier compliance beyond reasonable checks.
• Update internal checklists, train procurement and finance teams, and integrate compliance monitoring into your systems.

With these steps, businesses can confidently defend their ITC claims and navigate GST audits with greater assurance.

For professional advisory on GST matters, explore our GST Litigation Services and GST Audit Services pages.