The Supplier Never Existed. Whose Credit Is It?

A notice alleging wrongly availed input tax credit usually makes one of two quite different allegations, and the reply is not the same for both.

In the first, the supplier existed, raised an invoice, delivered the goods and was paid, and then failed to deposit the tax. In the second, the supplier was a shell, registered to issue invoices and nothing else, with no goods ever moving. The notice frequently does not separate them. The orders do.

Where the supplier defaulted: the recipient is not the collecting agent

Section 16(2)(c) allows credit only where the tax charged has been "actually paid to the Government". Read literally, it puts the recipient at the mercy of a person over whom he has no control.

The Delhi High Court declined to read the equivalent VAT provision literally. In Arise India Ltd and On Quest Merchandising India (P) Ltd v. Government of NCT of Delhi, [2018] 56 GSTR 177 (Delhi), section 9(2)(g) of the Delhi Value Added Tax Act was challenged as violative of Article 14, and the Court read down the expression "dealer or class of dealers" as not including a purchasing dealer who had bona fide bought from a validly registered selling dealer against a tax invoice where there was no mismatch.

The Gauhati High Court has carried that into GST. In National Plasto Moulding v. State of Assam, WP(C) 2863 of 2022, decided 4 August 2024, a Division Bench held that the vires of sections 16(2)(c) and 16(2)(d) of the Assam GST Act can "be taken care of by reading down the said provisions" by applying On Quest. Its proposition, as reproduced in the judgments that follow it, is that for the failure of the selling dealer to deposit the tax, the purchasing dealer cannot be punished.

That is now applied in that Court as settled. In Metal Syndicate v. Union of India, WP(C) 2960 of 2026, decided 4 June 2026, standing counsel for the CGST "fairly submits that the issue raised in the present proceeding is squarely covered" by National Plasto Moulding, and both the order-in-original and the order-in-appeal were set aside. Advance Engineering Farms and Equipments v. State of Assam, WP(C) 4312 of 2024, decided 15 July 2026, reached the same result on a rectification order for 2017-18.

The caveat travels with the rule, and it is the part to read twice. National Plasto Moulding is explicit that "the Department is free to act in those cases, where the purchase transactions are not bona fide, in accordance with law." The reading down protects the bona fide purchaser. It protects nobody else.

The enquiry has to reach the supplier first

Even where the provision is applied as it stands, the Courts have insisted on a sequence.

Suncraft Energy (P) Ltd v. Assistant Commissioner of State Tax, MAT 1218 of 2023, was decided by a Division Bench of the Calcutta High Court on 2 August 2023. Credit had been denied because the supply did not appear in the supplier's GSTR-1. The Court held:

The first respondent without resorting to any action against the fourth respondent who is the selling dealer has ignored the tax invoices produced by the appellant as well as the bank statement to substantiate that they have paid the price for the goods and services rendered as well as the tax payable there on, the action of the first respondent has to be branded as arbitrarily.

The direction was that the authorities must first proceed against the selling dealer, and only in an exceptional case, where there has been collusion between the two or where the supplier is missing or has closed business, can proceedings be taken against the recipient.

Two supports underpin it. Form GSTR-2A, on Union of India v. Bharti Airtel Ltd, is "only a facilitator for taking a confirm decision while doing such self-assessment", so a mismatch in it is not a finding of anything. And the CBIC press release of 18 October 2018 said as much.

Suncraft was applied on 15 September 2026 in Termico Engineers and Erectors (P) Ltd v. Deputy Commissioner of Revenue, WPA 18141 of 2026, where a show cause notice for cancellation of registration was quashed and the section 61 scrutiny notice remitted for a reply to be considered in the light of Suncraft.

The older authority is D.Y. Beathel Enterprises v. State Tax Officer, WP(MD) 2127 of 2021, decided 24 February 2021, where the sellers had collected the tax and not remitted it. The Madras High Court was unsparing about where the enquiry had gone:

When it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him.

The orders were quashed, the enquiry was to be held afresh with the sellers examined as witnesses, and recovery action against them was to be initiated in parallel.

The practical question to put to any such order is therefore a short one: was the supplier examined? If the demand rests on a GSTR-2A mismatch and nothing was done to the supplier, that is the ground.

The counterweight: the burden is still on the person claiming

None of the above shifts the onus.

Section 155 provides that where a person claims he is eligible for input tax credit, "the burden of proving such claim shall lie on such person". Rule 36 sets the documentary conditions.

State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd, (2023) 18 SCC 809, is a VAT decision, but the Orissa High Court applied its guidance in the GST context in Manoja Kumar Nayak v. Commissioner, GST and Central Excise, WP(C) 12682 of 2025, decided 8 April 2026. At paragraph 8.19 it held that mere production of tax invoices and proof of payment through banking channels is insufficient to prove a genuine transaction, and that to rebut a notice under section 74 the recipient is required to provide additional evidence, "such as: e-way bills and vehicle tracking data; proof of physical delivery (weighbridge slips, gate passes)."

That sentence is the specification of the file. An invoice and a bank statement answer Suncraft. They do not answer Ecom Gill.

Two Karnataka revision petitions, decided under the VAT Act but on the same question, mark the edges. In Joint Commissioner of Commercial Taxes (Appeals)-6 v. Alankar Stones (P) Ltd, STRP 61 of 2025, decided 17 September 2026, the claim had been rejected both for failure to discharge the burden and for the selling dealer's non-payment; the assessee had produced documents and e-sugams establishing the movement of goods, which is precisely what Ecom Gill asks for, and the rejection did not survive. In K M Jayesh v. State of Karnataka, STRP 51 of 2025, decided 9 April 2026, the Tribunal had applied Ecom Gill to returns filed before that judgment was delivered; the High Court held that the authorities "were not justified in applying the said judgment retrospectively", set aside the orders and remitted the matter.

Section 74 is not a cure for a lapsed section 73

This is the most useful part of Manoja Kumar Nayak, and it is a limitation point rather than a point on the merits.

The facts are the ordinary ones. A DGGI alert notice named the supplier, M/s Auxesia Traders, as non-existent. A letter of 12 July 2024 asked the recipient to reverse credit of ₹4,39,970. He reversed it at once. The show cause notice under section 74 followed on 26 July 2024, for transactions of August to December 2017, which the Court noted was "conspicuously after 8 years of the alleged transactions."

The reasoning ran as follows. Section 73 carries a limitation, and it had elapsed. Section 74 requires fraud, wilful misstatement or suppression of facts with intent to evade tax, and those "circumstances are spelt out, which in the humble opinion of this Court are absent in the present case." Instruction No. 05/2023-GST dated 13 December 2023 impresses upon every field formation not to invoke section 74 mechanically. On Northern Operating Systems (P) Ltd and Lipi Boilers Ltd v. Commissioner of Central Excise, (2025) 11 SCR 578, "in the absence of any deliberate act on the part of the assessee with an intention to evade being established by the revenue, the essential precondition of wilful suppression with intent to evade duty is not satisfied." The Revenue having failed to establish a wilful intention to evade, the credit could not be held to have been wrongly availed by reason of fraud or suppression.

The reversal itself told in the assessee's favour. The Court recorded that "the petitioner has shown bona fide by reversing the amount of input tax credit the moment a letter from the Superintendent (Anti-Evasion) was issued bringing such conduct of the supplier to his notice."

The same jurisdictional approach appears, on quite different facts, in Bhagya Kalita v. Union of India, WP(C) 6154 of 2024, decided by the Gauhati High Court on 8 September 2026. That was a works contract price-adjustment matter rather than a fake invoice case, but the Court interfered at the stage of the show cause notice itself, treating the pre-conditions for section 74 as jurisdictional facts which must be found before the power is assumed. On maintainability it relied on Godrej Sara Lee Ltd, where the Supreme Court held that an alternative remedy is a rule of policy, convenience and discretion rather than an absolute bar.

Interest and penalty where the credit was reversed

Three further holdings in Manoja Kumar Nayak are each worth taking separately.

No interest where the ledger carried the balance. Section 50(3) read with Rule 88B and Circular No. 192/04/2023-GST dated 17 July 2023 leaves "no ambiguity that when the Electronic Credit Ledger has sufficient balance left for adjustment of reversal of input tax credit no interest is chargeable or payable under Section 50."

Penalty cannot be mechanical. The credit having been reversed before the section 74 proceeding began, and there being no tax implication, "the imposition of penalty cannot be a mechanical exercise of power and, thus such order is unsustainable."

Demanding tax equal to credit already reversed is double taxation. In terms: "raising demand of 'tax' equivalent to the amount of 'input tax credit' already reversed would tantamount to subjecting a person to double taxation and is, therefore, liable to be nullified."

The order-in-original was quashed and both writ petitions were allowed.

Blocking of the credit ledger under Rule 86A

Rule 86A has a discipline of its own. The power is exercisable where the officer "has reasons to believe" that the credit was fraudulently availed or that the person was ineligible, which the Madras High Court in Tvl. J.M. Traders v. Deputy Commissioner (ST), W.P. No. 1387 of 2024, treated as requiring both an objective satisfaction and reasons that are recorded.

The remedy must still be pursued, and promptly. In SSAP Traders v. Deputy Commissioner (CT), WP(MD) 26344 of 2026, decided 11 September 2026, the writ was dismissed. Blocking runs for one year under Rule 86A(3), and once the credit is blocked it is "incumbent on the part of the petitioner to move an application inviting the Commissioner to pass an order under Rule 86A(2)". The petitioner had "kept quiet all this while" and was held to be seeking to take advantage of J.M. Traders. Liberty was given to challenge the DRC-07 and then ask for unblocking.

Where the writ court will not go

A caution on forum. On 7 September 2026 the Delhi High Court disposed of a substantial batch, of which Singhal Trading India (P) Ltd v. Union of India, W.P.(C) 7290 of 2026, is one, arising out of a single investigation and raising challenges to penalty under section 122, the retrospective application of section 122(1A), and evidentiary objections. The Court relegated the petitioners to the appellate authority, directing it to examine all grounds, including the questions left open, "on their own merits and uninfluenced by any observations made herein". It also held that appeals from notices issued before 1 October 2025 are governed by section 107(6) as it stood at the date of the notice.

The division is reasonably clear. Where the dispute is about the sufficiency of the evidence, the writ court will ordinarily send it to the appellate authority. Where it is about the jurisdiction to issue the notice at all, Bhagya Kalita shows that it may not.

In short

1. Read the notice for which allegation it actually makes. Supplier defaulted, or supplier never existed. They are answered differently, and the orders do not treat them alike.
2. Where the supplier defaulted, the first question is what was done to the supplier. Suncraft and D.Y. Beathel both turn on that omission.
3. Where section 16(2)(c) is applied literally against a bona fide purchaser, National Plasto Moulding and On Quest are the answer, and the bona fides are the condition of it rather than a decoration.
4. Build the file to the Ecom Gill standard, not the Suncraft standard. E-way bills, vehicle and transport records, weighbridge slips, gate passes, a quantitative tally. The invoice and the bank statement are the floor.
5. Check the limitation before the merits. If the period under section 73 has run out and section 74 has been invoked without any finding of intent to evade, that is the stronger ground.
6. Reverse early where the credit is indefensible, and record why. In Manoja Kumar Nayak prompt reversal became evidence of bona fides and defeated the penalty.
7. Check the credit ledger balance. With a sufficient balance no interest arises under section 50(3) read with Rule 88B.
8. Resist a demand for tax equal to credit already reversed. That is double taxation.
9. If the ledger is blocked, apply under Rule 86A(2) at once. Silence cost SSAP Traders the writ.

The income tax analogue, where the question is not the credit but the quantum of the addition, is dealt with separately in Alleged Bogus Purchases: What the Addition Comes To.

This note is general information drawn from reported decisions and is not advice upon any particular matter. The lines of authority described above subsist alongside one another, and the outcome in any case depends upon its own record.