A GST notice alleging that ITC was claimed on purchases from a supplier whose GST registration was subsequently cancelled—often with retrospective effect—raises a question that the High Courts have addressed repeatedly: does the cancellation of the supplier’s registration, by itself, justify denial of the recipient’s credit? The judicial answer is increasingly clear: retrospective cancellation alone is not enough; the department must independently verify the genuineness of the transaction.
The Retrospective Cancellation Problem
Section 29(2) of the CGST Act permits cancellation with retrospective effect. One consequence is that the supplier’s customers may be denied credit for supplies made during the period covered by the cancellation. The recipient is often unaware of the supplier’s compliance failures, and the cancellation can occur years after the transactions. The department’s notice typically asserts that the supplier’s GSTIN was cancelled and that the credit is therefore inadmissible.
The Judicial Position
The GSTAT Thane has held that retrospective cancellation of a supplier’s GST registration, by itself, does not justify denial of ITC without independent verification of the transactions. The Allahabad High Court has held that without establishing connivance or collusion, ITC cannot be denied merely based on retrospective cancellation. The Gujarat High Court has ruled that retrospective cancellation cannot automatically invalidate ITC of past transactions that were genuine and completed. The consistent principle is that the recipient’s substantive entitlement is not defeated by the supplier’s subsequent registration failure where the transaction was genuine.
The Independent-Verification Evidence
The recipient should lead with the evidence of a genuine transaction: the purchase order, the invoice, the e-way bill, the transport documents, the payment proof, the receipt of goods, the stock records and the consumption or sale of the goods. The recipient should also obtain the supplier’s confirmation, the supplier’s GSTIN status at the time of the transaction, and any available evidence that the supplier paid the tax. The department’s verification should be tested: a notice that simply records the cancellation without examining the transaction evidence is vulnerable to challenge.
The Cancellation Notice and Reasons
The Supreme Court and High Courts have scrutinised retrospective cancellations that are mechanical and without reasons. A cancellation order that does not specify the grounds or apply objective criteria is itself vulnerable. The recipient can challenge the cancellation as a collateral attack where it forms the sole basis for the credit denial, or can require the department to produce the cancellation record.
What the Recipient Should Control
The cancelled-supplier outcome depends on three variables: whether the transaction evidence demonstrates a genuine supply; whether the department has independently verified the transaction rather than relying solely on the cancellation; and whether the cancellation itself is legally sound. The recipient that controls these variables can resist a mechanical denial and shift the burden back to the department.
Call to Action: We advise taxpayers on cancelled-supplier ITC notices, retrospective cancellation challenges and independent-verification evidence. For an ITC-defence engagement, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.