Judicial Affirmation of Bona Fide Credit Entitlement: A Landmark Supreme Court Ruling

The Supreme Court of India, in Commissioner of Trade & Tax, Delhi v. M/s Shanti Kiran India (P) Ltd. (judgment dated 9 October 2025), upheld the principle that a bona fide purchasing dealer cannot be denied Input Tax Credit (ITC) merely due to the selling dealer's failure to deposit collected tax. Affirming the Delhi High Court's earlier ruling in Quest Merchandising and the constitutional doctrine under Article 14, the Supreme Court held that responsibility for non-payment of tax rests with the defaulting seller, not the compliant purchaser.

Introduction

The judgment marks a significant reaffirmation of the principle of fairness and bona fide credit entitlement in indirect taxation. The issue — whether a purchasing dealer can be denied ITC merely because the selling dealer failed to deposit tax with the Government — resonates strongly with ongoing disputes under the Goods and Services Tax (GST) regime. This decision reinforces the foundational objective of ease of doing business, ensuring genuine buyers are not penalised for non-compliance by the selling dealer that is beyond their control.

Case Background and Facts

Under the Delhi Value Added Tax Act, 2004 (DVAT Act), M/s Shanti Kiran India (P) Ltd., a registered dealer, had paid VAT to its sellers on valid invoices. The sellers' registration was valid on the date of transaction but was later cancelled, and they failed to deposit the tax with the department. As a result, the Department denied ITC to the purchaser under Section 9(2)(g) of the DVAT Act, which permits ITC only if the selling dealer has deposited the tax.

The principal issue before the judiciary was whether ITC is available to purchasing dealers who:

Paid taxes to registered selling dealer(s) in accordance with the invoices raised by them.
Were bona fide purchasers who had paid taxes in good faith to registered selling dealer(s).
Transacted with seller(s) who were registered with the Department on the date of the transaction.

The Delhi High Court, following Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi (2017), held that bona fide purchasers cannot be denied ITC merely because the seller defaulted. It held that:

The expression "dealer or class of dealers" in Section 9(2)(g) should be read as excluding a purchasing dealer who bona fide entered into transactions with validly registered selling dealers, with no mismatch between Annexure 2A and 2B of the Delhi VAT Return.
The Department could not invoke Section 9(2)(g) to deny ITC where the selling dealer was validly registered and had issued a tax invoice reflecting the TIN.
If the selling dealer failed to deposit the tax collected, the proper remedy was for the Department to proceed against the defaulting seller — not to deny ITC to the purchaser.
The Department could still proceed under Section 40A of the DVAT Act where collusion between buyer and seller was established.

Supreme Court's Findings

A two-judge bench comprising Justice Manoj Misra and Justice Nongmeikapam Kotiswar Singh upheld the Delhi High Court's view and dismissed the Department's appeal, directing it to grant ITC after due verification of invoices. The Court noted that the sellers' registration was undisputed on the date of transaction, and neither the transactions nor the invoices had been doubted on any inquiry into their veracity.

Legal Reasoning and Constitutional Perspective

The Delhi High Court had earlier read down Section 9(2)(g) to avoid constitutional invalidity under Article 14, since a literal interpretation would make a purchaser vicariously liable for another's default. ITC, therefore, should be denied only where collusion or fraud exists — reasoning the Supreme Court upheld in full.

"The issue, whether a purchasing dealer can be denied Input Tax Credit (ITC) merely because the selling dealer failed to deposit tax with the Government, resonates strongly with ongoing disputes under the Goods and Services Tax (GST) regime."

Relevance under the GST Regime

Though decided under the Delhi VAT Act, the principles bear directly on Section 16(2)(c) of the CGST Act, 2017, which similarly requires that tax charged by the supplier be "actually paid to the Government." High Court decisions in Bharti Telemedia Ltd. (2021), D.Y. Beathel Enterprises (2021), and Suncraft Energy (2023) have echoed this reasoning, holding that bona fide purchasers should not be denied ITC and that the Department must instead pursue the defaulting supplier.

In Suncraft Energy, the Calcutta High Court relied on a similar reading of Section 9(2)(g) by the Delhi High Court in Arise India Limited v. Commissioner of Trade and Taxes, Delhi, holding the DVAT scheme of ITC availment to be substantially the same as under GST, subject only to procedural and statutory-form changes. The Department's special leave petition challenging Arise India was dismissed by the Supreme Court on 10 January 2018.

Conclusion

The Supreme Court's judgment in Shanti Kiran India (P) Ltd. delivers more than a VAT-era clarification — it lays down a constitutional principle relevant to the entire indirect tax system, including GST. A taxpayer who has acted bona fide, purchased from a registered supplier, paid GST to that supplier, and discharged tax on its own output liability should not be deprived of ITC merely because the supplier failed to remit it. The ruling affirms input tax neutrality, protects genuine taxpayers, and reinforces equitable administration of tax law, giving GST taxpayers a strong precedent to invoke in similar disputes.

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