LGW Industries Ltd. vs. Union of India (2022) – Calcutta High Court on ITC Denial Due to Non-Existent Suppliers

🧾 LGW Industries Ltd. vs. Union of India (2022) – Calcutta High Court on ITC Denial Due to Non-Existent Suppliers

📌 Background

The judgment in LGW Industries Ltd. vs. Union of India [(2022) 134 Taxmann.com 42 (Calcutta High Court)] deals with a recurring and critical issue under the GST regime — denial of Input Tax Credit (ITC) to buyers on the ground that suppliers were later found to be non-existent.

The Calcutta High Court in this case took a balanced and pragmatic approach, holding that genuine purchasers who have exercised due diligence and whose transactions are supported by valid documents cannot be denied ITC merely because their suppliers defaulted or were later found to be non-existent.

🧾 Facts of the Case

• The assessee, LGW Industries Ltd., engaged in the business of trading goods, received show-cause notices from the Revenue authorities denying ITC on the ground that the vendors were non-existent or fake.
• The Revenue alleged that the suppliers had obtained GST registrations using fake documents and that the transactions were sham.
• The assessee, in turn, contended that all transactions were genuine, duly supported by tax invoices, e-way bills, bank payments, and were duly reflected in Form GSTR-2A on the GST portal.
• The assessee challenged the notices before the Calcutta High Court, seeking quashing of the denial of ITC and direction to the department to reconsider the matter.

❓ Point of Dispute

Whether the denial of Input Tax Credit (ITC) to the assessee on the ground that the suppliers were non-existent or fake was justified, particularly when:

• The suppliers’ registrations were valid at the time of transactions; and
• The transactions were genuine and supported by documentary evidence.

👨‍💼 Submissions by the Assessee

The assessee put forth a strong defense emphasizing good faith, due diligence, and documentary compliance:

1. Verification of Supplier Details:
   • The assessee verified the GST registration details of the suppliers on the official GST portal, which showed them as valid and active at the time of the transactions.
2. No Collusion with Fake Entities:
   • The assessee contended that it had no role or knowledge of any fraudulent activity by the suppliers.
   • Unless the Revenue could establish collusion or willful participation in any tax evasion scheme, the assessee’s bona fide claim for ITC should not be disallowed.
3. Documentary Evidence of Genuineness:
   • The assessee had paid the entire purchase consideration, including GST, through banking channels.
   • The purchase invoices, e-way bills, and entries in GSTR-2A clearly corroborated the genuineness of the transactions.
4. Timing of Transactions:
   • All the purchases were made prior to the cancellation of registration of the defaulting suppliers.
   • Hence, the transactions were valid at the time of supply, and the assessee fulfilled all conditions under Section 16(2) of the CGST Act.
5. Constitutional Challenge:
   • The assessee also questioned the constitutional validity of Section 16(2)(c) of the CGST Act to the extent it made ITC dependent on actual tax payment by the supplier to the Government.

🧑‍⚖️ Submissions by the Revenue

• The Revenue asserted that the suppliers were fake and non-existent, and their bank accounts were opened using fraudulent documents.
• It was contended that the assessee failed to verify the genuineness of the suppliers and their business activities beyond merely checking their registration status.
• Since the supplier did not deposit the tax collected, the ITC claimed by the assessee was not supported by genuine transactions and had to be disallowed.

❓ Legal Issue in LGW Industries Ltd. vs. Union of India

The primary question before the Calcutta High Court in LGW Industries Ltd. vs. Union of India (2022) was whether ITC can be denied to a purchaser when:

• The suppliers’ GST registration was valid at the time of the transaction, and
• The purchaser acted in good faith with full documentation.

⚖️ Legal Principles and Court’s Analysis

The Calcutta High Court took a fair and evidence-based approach, observing that the burden of proof cannot be unfairly placed upon the purchaser in all situations.

1. Supplier’s Status on GST Portal

The Court noted that when the suppliers were shown as registered taxable persons on the Government’s GST portal at the time of supply, the assessee had no reason to doubt their genuineness.

Therefore, the subsequent discovery that such suppliers were non-existent could not automatically invalidate the assessee’s claim for ITC.

2. No Failure in Statutory Obligations

The Court held that the assessee had fulfilled all statutory obligations under the GST law, including verifying supplier registration, maintaining valid tax invoices, and making payments through banks.

Hence, the assessee could not be faulted for failing to perform any duty required by law.

3. Genuineness of Transactions

The Court emphasized that ITC should not be denied if the purchases are genuine and supported by valid documents, including proof of tax payment and the existence of the transaction in the books of account.

4. Need for Fresh Verification

Given that the Revenue had not conclusively disproved the genuineness of the transactions, the Court directed the authorities to re-examine the matter afresh, focusing on:

• Whether payment of consideration and tax was actually made by the assessee to the suppliers; and
• Whether the transactions occurred before the cancellation of the suppliers’ registrations.

🧾 Conclusion

The Calcutta High Court held that:

• Denial of ITC solely on the ground that the suppliers were non-existent is not justified if the transactions were otherwise genuine.
• The Revenue must verify whether the assessee made payments (including GST) to the suppliers through legitimate banking channels and whether such transactions were prior to the cancellation of the suppliers’ registration.
• The matter was remanded to the department for fresh consideration of the assessee’s entitlement to ITC after conducting proper verification.

💡 Practical Implications

• This judgment protects honest taxpayers from being penalized for defaulting suppliers’ fraudulent conduct.
• Taxpayers who have exercised due diligence — verifying GSTIN, maintaining invoices, and making bank payments — can rely on this ruling when defending ITC claims.
• The ruling reinforces the principle that ITC cannot be denied on technical or procedural grounds if the underlying transaction is genuine.

🔑 Key Takeaways

1. ITC cannot be denied merely because suppliers were later found non-existent.
2. Due diligence and documentary proof are crucial to substantiate genuine transactions.
3. Authorities must verify the genuineness of payments and timing of transactions before rejecting ITC.
4. The ruling provides judicial relief to bona fide purchasers who acted in good faith.

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