ITC Denied explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 16(2)(c) says credit is available only if the tax has actually been paid to the Government — and the buyer has no way of making that happen. Two rulings, one from the Supreme Court, address who bears that risk.
"A bona fide purchasing dealer cannot be denied ITC merely because the selling dealer failed to deposit tax with the Government. Remedy of recovery lies against the defaulting seller, not the innocent purchaser." — Commissioner, Trade & Tax, Delhi v. Shanti Kiran India (P) Ltd., Civil Appeal Nos. 2042-2047/2015, Supreme Court of India.
Shanti Kiran: the Supreme Court, on a VAT provision
The facts are pre-GST but the structure is identical. The assessee "purchased taxable goods from registered selling dealers, paid tax as shown on valid tax invoices, and claimed ITC under Section 9 of the DVAT Act." Later, "the selling dealers had not deposited the tax collected from the purchaser into the Government treasury."
The provision invoked was section 9(2)(g) of the DVAT Act, which "Denies ITC if the tax paid by the purchaser has not been deposited by the seller or lawfully adjusted" — the direct ancestor of section 16(2)(c).
The Court's findings: "the selling dealers were registered on the date of transactions and that the invoices were genuine"; "No material was produced to doubt the veracity or bona fides of the purchasing dealers."
And it affirmed the Delhi High Court's reasoning in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi [2017]:
- "Bona fide purchasing dealers cannot be denied ITC due to the seller's failure to deposit tax."
- "Section 9(2)(g) must be read down to preserve constitutional validity."
- "Revenue's remedy lies against the defaulting sellers, not the innocent buyers."
And the limit: "It clarifies that ITC claims can only be denied if there is evidence of collusion, fraud, or fake invoices."
"Read down" rather than struck down is the important verb. The provision survives; it is confined to cases where the purchaser is not bona fide.
R.T. Infotech: the same question under GST
The assessee used "mobile recharge services from Bharti Airtel Ltd., during the period July 2017 to March 2018", availing credit of ₹28,52,370 on purchases of ₹1,58,46,502. "The payments for these purchases, including GST, were made through banking channels."
The department nonetheless ordered "reversal of ITC, along with interest and penalty", and the appellate authority dismissed the appeal — on the ground that "the supplier had not deposited the tax with the government."
The Court's answer is direct: "it is common knowledge that the purchaser cannot compel the seller to file its returns within stipulated time or deposit the amount of tax realized from the purchaser with the government treasury."
"The purchasing dealer cannot be left at the mercy of the selling dealer. When a buyer discharges all duties diligently, it becomes the responsibility of the Department to initiate action against the defaulting supplier."
Relying on the Supreme Court in Suncraft Energy Pvt. Ltd. [2023] and the Madras High Court in D.Y. Beathel Enterprises [2021], the Court "quashed the assessment and appellate orders" and remanded the matter "after affording opportunity of hearing and keeping in mind the purchaser's bona fide conduct."
What actually protects the buyer
Read across the two cases, the protective facts are consistent:
- the supplier was registered at the time of the transaction;
- the invoices were genuine and correctly issued;
- payment, including the tax, was made through banking channels;
- the goods or services were actually received;
- there was no evidence of collusion.
Payment through banking channels does more work than it appears to. It converts the taxpayer's assertion that it paid the tax into documentary evidence — which is precisely what is missing in a fake-invoice case, where the money usually returns to the buyer.
The counterpart is equally clear. Where there is collusion, fraud or fake invoicing, none of this applies, and denial of credit is unremarkable.
And the practical caution: the immediate outcome is usually a remand, not a refund. Both courts sent the matter back rather than allowing the credit outright, which means the taxpayer must still put the bona fide case on record before the adjudicating authority.
Key takeaways
- Shanti Kiran (Supreme Court) affirms that a bona fide purchaser cannot be denied credit because the seller did not deposit the tax.
- Section 9(2)(g) of the DVAT Act was read down, not struck down — the same approach that underlies the GST arguments.
- The Revenue's remedy is against the defaulting seller.
- Denial is permissible only on evidence of collusion, fraud or fake invoices.
- R.T. Infotech (Allahabad) applied the principle under section 16(2)(c), quashing a ₹28,52,370 reversal with interest and penalty.
- The Court held the purchaser "cannot be left at the mercy of the selling dealer".
- It relied on Suncraft Energy (SC, 2023) and D.Y. Beathel Enterprises (Madras, 2021).
- The protective facts are registered supplier, genuine invoice, payment through banking channels, actual receipt, no collusion.
- The usual outcome is a remand for fresh adjudication, not automatic allowance.
Read next
- Section 16(4) and the Retrospective Section 16(5)
- ITC and the Wrong GSTIN on a Supplier's Invoice
- Inverted Duty Refund: A Circular Cannot Override Section 54(3)
Disclaimer: Positions stated as on 5 September 2026, based on Commissioner, Trade & Tax, Delhi v. Shanti Kiran India (P) Ltd. (Supreme Court), R.T. Infotech v. Additional Commissioner Grade [(2025:AHC:93151)], section 16(2)(c) of the CGST Act, 2017 and section 9 of the DVAT Act, 2004, as summarised in the ICAI compilation Significant Judicial and Advance Rulings in GST (Second Edition, February 2026).