Allahabad HC: ITC can’t be denied if supplier registered; GSTR-1/3B filed

Executive Summary

The Allahabad High Court’s decision in M/s Saniya Traders v. Additional Commissioner Grade-2 marks a significant milestone for GST practitioners and businesses. The Court has made it clear: if a supplier was registered at the time of supply, and the transaction is duly reflected in GSTR-1 and GSTR-3B, the recipient’s Input Tax Credit (ITC) cannot be denied—even if the supplier’s registration is later cancelled or the supplier is alleged to be part of a bogus network. This ruling provides a robust legal shield for bona fide recipients, reinforcing the principle that ITC rights are not to be jeopardised by subsequent supplier-side lapses outside the recipient’s control.

The key takeaway for businesses and tax professionals is that, so long as the recipient’s documentation and compliance are in order, Section 16 of the CGST Act protects their ITC claim. This precedent is especially valuable for defending against Section 74 notices that seek to reverse ITC based solely on supplier irregularities discovered after the transaction. For detailed guidance on responding to such notices, refer to our GST Litigation Services page.

Case Background and Facts

The dispute arose when Saniya Traders, a registered dealer in waste plastic and scrap in Uttar Pradesh, purchased old scrap batteries from Mohan Enterprises, Bihar, on 28 June 2021. The transaction was supported by a valid tax invoice and an e-way bill, with payment made through regular banking channels. Mohan Enterprises, the supplier, was registered under GST at the time and had duly reported the sale in its GSTR-1 and paid the tax via GSTR-3B. The transaction was also reflected in Saniya Traders’ GSTR-2A/2B.

Trouble began when GST authorities, investigating a network of alleged non-existent suppliers, flagged Mohan Enterprises as part of a suspected bogus network. The authorities argued that the transaction was non-genuine, citing a lack of evidence for actual movement of goods and the supplier’s subsequent registration cancellation. On this basis, they issued a notice under Section 74, demanding reversal of ITC, interest, and penalty—despite Saniya Traders’ detailed rebuttal and full documentation.

Both the initial adjudication and the first appeal went against Saniya Traders, prompting a writ petition before the Allahabad High Court, Uttar Pradesh (chartered accountants Allahabad).

Allahabad HC Ruling: Key Legal Observations

The High Court’s analysis centred on Section 16 of the CGST Act, which sets out the conditions for availing ITC. The Court found that Saniya Traders had fulfilled all statutory requirements: the supplier was registered at the time of supply, the transaction was properly documented, and the tax was paid and reflected in the relevant GST returns.

Crucially, the Court held that subsequent cancellation of the supplier’s registration or allegations about the supplier’s network do not, by themselves, invalidate the recipient’s ITC—provided the supplier was registered and compliant at the time of the transaction. The Court dismissed the revenue’s insistence on proving actual movement of goods as an additional litmus test, especially when the documentary trail was complete and unchallenged.

This approach aligns with the principle that the GST system is designed to be technology-driven and document-based. Once the recipient demonstrates good faith and compliance, the burden shifts to the authorities to prove fraud or collusion, not mere procedural lapses by the supplier. For a broader understanding of GST compliance principles, see our blog post on “GST Practical Guide: Input Tax Credit”.

Documentary Trail: Defensible ITC in Light of the Ruling

For practitioners and businesses, the Allahabad HC ruling underscores the importance of maintaining a robust documentary trail. Here’s a checklist of evidence that strengthens a recipient’s ITC claim:

• Supplier’s GSTIN was valid and active on the date of supply
• Authentic tax invoice issued by the supplier
• E-way bill matching the invoice and route details
• Payment made via banking channels (ensuring traceability)
• Transaction reflected in GSTR-2A/2B of the recipient
• Supplier’s GSTR-1 reporting the outward supply
• Supplier’s GSTR-3B showing tax payment for the period

Aligning these documents with Section 16 requirements not only fortifies the recipient’s position but also demonstrates bona fide intent and compliance. In the Saniya Traders case, the presence of all these elements was pivotal in the Court’s decision to quash the ITC reversal.

For assistance with compliance and GST return filing services, businesses may consider expert professional help.

Revenue Argument Analysed: Movement-of-Goods Issue

The revenue authorities argued that Saniya Traders failed to prove the actual movement of goods, relying on the Supreme Court’s decision in Ecom Bill Coffee. However, the Allahabad HC found this argument unpersuasive in the present context. The Court noted that when the recipient’s documentation is complete and the supplier was registered and compliant at the time of supply, the burden cannot be shifted to the recipient to prove physical movement of goods beyond the statutory requirements.

For practitioners, this means that while evidence of movement (like e-way bills and transport records) is important, the absence of further proof cannot, by itself, justify ITC denial if the core documentary trail is intact. If movement is questioned, recipients should be ready to provide supporting documents such as lorry receipts, weighbridge slips, or gate entry records—but these are supplementary, not primary, requirements under Section 16.

Refer also to our insights on E-Way Bill 2.0: Key Changes in GST E-Way Bill System for compliance best practices.

Interplay with Prior Judicial Precedents

The Allahabad High Court’s approach in Saniya Traders is not an outlier—it builds on a growing body of judicial thought that prioritises recipient compliance and bona fide conduct. The Supreme Court’s decision in Shakti Kiran India (P) Ltd. is particularly instructive: it held that if the supplier was registered at the time of the transaction, subsequent cancellation or doubts about the supplier’s network cannot, by themselves, defeat the recipient’s ITC claim. The Allahabad High Court’s own rulings in Khurja Scrap Trading Company and Solvi Enterprises echo this logic, reaffirming that the registration status at the date of supply is the determinative factor.

However, practitioners should note that while these precedents are persuasive, their binding force is strongest within the jurisdiction of the Allahabad High Court (chartered accountants Uttar Pradesh) and Delhi (chartered accountants Delhi). Other states may still see divergent departmental approaches, and the Supreme Court’s final word on the interplay between Section 16 and supplier-side lapses is awaited. Until then, these judgments provide a strong defensive shield, but not an absolute guarantee, outside these jurisdictions.

For a deeper dive into similar Allahabad HC rulings, see the blog post: “Allahabad HC: ITC Can’t Be Denied for Supplier’s Later Cancellation; Section 74 Set Aside”.

Practitioner’s Toolbox: Responding to Section 74 Notices

When a Section 74 notice lands, alleging ITC ineligibility due to supplier-side issues, a methodical response is essential:

• Collate and present all primary documentation: GSTIN status at supply date, tax invoice, e-way bill, payment proof, GSTR-2A/2B reflection, and evidence of supplier’s GSTR-1/3B filings.
• Prepare a detailed reconciliation: Map each ITC claim to the supporting documents, highlighting compliance with Section 16.
• Cite relevant case law: Reference Saniya Traders, Shakti Kiran, Khurja Scrap, and Solvi Enterprises in your written reply, emphasising the legal threshold for bona fide recipients.
• Template argument: Stress that the recipient has no control over post-supply supplier actions or departmental investigations, and that all statutory conditions were met at the time of supply.
• If the notice is based solely on post-transaction cancellation or network allegations: Point out that such grounds have been expressly rejected by the Allahabad HC and Supreme Court, unless fraud or collusion is established.

A proactive, well-documented response not only strengthens your case but also signals to the authorities that the business is diligent and aware of its rights.

Our GST Refund Services and litigation expertise can assist in managing these disputes effectively.

Clarifying Common Myths: Section 16, ITC Eligibility, and the “Litmus Test”

A persistent misconception is that recipients must prove actual movement of goods or monitor the ongoing compliance of every supplier. The Allahabad HC clarifies that the “litmus test” is documentary compliance at the time of supply—not post-facto supplier conduct. Once the recipient shows a valid GSTIN, tax invoice, e-way bill, banking payment, and GSTR-2A/2B reflection, the burden shifts to the authorities to prove fraud or collusion.

However, this protection is not absolute. If there is evidence of willful collusion, circular trading, or fraud, ITC can still be denied. The ruling draws a clear line: bona fide recipients with a clean documentary trail are protected, but those complicit in sham transactions are not.

For myth-busting and clarifications in related areas, see our blog: “GST Sellers Beware! Buyer can Recover Penalties if ITC Denied Due to Seller’s Fault”.

Action Items for Businesses and Tax Teams

To safeguard ITC claims, especially when a supplier’s registration is cancelled after the transaction:

• Document the supplier’s GSTIN status and registration validity at the time of supply.
• Retain all contemporaneous evidence: IRN, e-way bill, payment proof, and copies of supplier returns.
• Monitor supplier status regularly: Use GSTN portals or compliance software to flag changes in supplier registration.
• For future transactions, especially in high-risk sectors:

1. Conduct pre-supply KYC and verification of supplier credentials.
2. Set up watchlists for supplier compliance and blacklist alerts.
3. Automate reconciliation of GSTR-2A/2B with internal purchase registers.
4. Segregate “risky” claims for additional scrutiny and documentation.

These steps not only strengthen your defence in case of a dispute but also demonstrate a culture of compliance. Businesses in regions like Chandigarh and Aligarh can engage local experts for tailored assistance.

Caveats and Practical Risks

Despite robust compliance, ITC may still be denied in certain scenarios:

• Evidence of collusion or fraud: If authorities can show the recipient was complicit in a sham transaction, the protection of Saniya Traders will not apply.
• Retrospective cancellation deemed ab initio: In rare cases, if the supplier’s registration is cancelled from inception, courts may treat the transaction as void.
• Mismatched values or duplicate claims: Discrepancies between invoices, returns, and actual movement can still trigger reversals.
• Evolving legal landscape: Departmental appeals, new CBIC circulars, or Supreme Court clarifications may alter the risk calculus.

Practitioners should stay alert to new developments and review ITC positions regularly. For updates and procedural insights, explore our GST Latest Notifications and Updates blog.

Conclusion

The Allahabad High Court’s ruling in Saniya Traders has shifted the risk calculus for ITC claims, placing the onus on authorities to prove fraud or collusion when the recipient’s documentation is in order. For businesses and tax teams, the message is clear: invest in robust documentation, monitor supplier compliance, and respond decisively to notices. While the legal landscape continues to evolve, procedural discipline and proactive risk management remain the best shields against unwarranted ITC reversals.

Key Takeaway

Bona fide recipients who maintain a clean, contemporaneous documentary trail are well-protected under the Allahabad HC precedent—even if their supplier’s registration is later cancelled or questioned. The focus must remain on compliance at the time of supply, not on post-facto supplier lapses.

For further queries or clarifications, always consult your tax advisor and keep abreast of the latest judicial and departmental updates.