ITC Denial on Retrospective Cancellation: Lessons from the Jyoti Tar Products Case

The eligibility of Input Tax Credit (ITC) remains one of the most litigated areas under the GST regime. Taxpayers often find themselves in a difficult position when their suppliers' registrations are cancelled retrospectively by the department, leading to the denial of ITC. The recent judgment by the Calcutta High Court in M/s Jyoti Tar Products Private Limited & Anr. Vs The Deputy Commissioner, State Tax provides critical insights into how the judiciary views Show Cause Notices (SCN) issued in such circumstances and the burden of proof placed on the taxpayer.

The Empathetic Expert's View

Filing GST returns and claiming ITC is a structured process, yet the sudden receipt of a notice questioning past transactions can be stressful. It is essential to understand that while the department has the power to investigate, the law also provides safeguards to ensure that legitimate businesses are not unfairly penalized for the defaults of their suppliers, provided they maintain robust documentation.

Case Analysis: M/s Jyoti Tar Products Private Limited

The Facts

M/s Jyoti Tar Products Private Limited, engaged in trading crude tar, received a Show Cause Notice (SCN) under Section 74 of the WBGST Act, 2017. The department sought to deny ITC to the petitioner on the grounds that its suppliers' registrations were cancelled retrospectively due to fraud or suppression of facts.

The department alleged that an examination of the ITC chain revealed a "circular fashion" of routing invoices through shell or dummy companies, suggesting connivance between the petitioner and its suppliers to evade tax. During the pendency of the writ petition, an adjudication order was passed confirming the demand without providing a personal hearing.

The Law

The case primarily revolves around the interplay between the following sections of the GST Act:

• Section 16(2): Conditions for claiming Input Tax Credit.
• Section 29(2)(e): Cancellation of registration from a retrospective date if obtained by fraud.
• Section 74: Determination of tax not paid or ITC wrongly availed by reason of fraud or wilful misstatement.
• Section 155: The burden of proof to claim ITC lies on the taxpayer.

Arguments

Petitioner's Stand:

• The petitioner fulfilled all conditions under Section 16(2), including possession of tax invoices, E-way bills, weighbridge receipts, and bank statements.
• The suppliers were registered at the time of the transaction, and their return filing status was verified on the GST portal.
• The SCN reflected a "pre-determined mind" by questioning the genuineness of transactions simply due to the absence of non-statutory documents like factory gate passes or inspection reports.

Revenue's Stand:

• The SCN is merely an inquiry based on prima facie satisfaction.
• Data from the CTD database revealed a chain of cancelled suppliers, indicating fraudulent passing of ITC.
• The taxpayer bears the burden under Section 155 to prove the genuineness of the transactions beyond basic documentation when legitimacy is doubted.

Precedents Considered

The Court referred to several key judgments:

• Suncraft Energy Private Limited vs. Assistant Commissioner [2023-VIL-487-CAL]: Where it was held that ITC cannot be denied solely due to the supplier's default without the department first taking action against the supplier.
• Krishna Wax Private Limited [2019-VIL-37-SC-CE]: Establishing that an SCN is a prima facie view and not a final determination.
• LGW Industries Limited & Others [2021-VIL-868-CAL]: Emphasizing that retrospective cancellation does not automatically invalidate past ITC if the buyer was genuine.

The Ratio

The Hon’ble High Court established that:

1. A Show Cause Notice (SCN) is an invitation to present one's case and does not constitute a final determination.
2. If the authority has prima facie material (like a suspicious ITC chain) to doubt a transaction, it is justified in issuing a notice under Section 74.
3. The burden of proof for ITC eligibility under Section 155 is on the taxpayer, and in cases of suspected fraud, basic documents like invoices and E-way bills may not be the "be-all and end-all" of proof.

Analysis: Why the SCN was Upheld but Order Quashed

The Court noted that the SCN extensively used the term "prima facie," indicating the process was still at the inquiry stage. Therefore, it did not exhibit a pre-determined mindset.

However, the Court quashed the adjudication order passed during the pendency of the writ because it violated the principles of natural justice by not providing the petitioner a personal hearing.

Practical Action Steps for Taxpayers

To safeguard your ITC claims against retrospective supplier cancellations, consider the following:

1. Beyond Basics: In addition to invoices, maintain Lorry Receipts (LR), weighment slips, and proof of payment of freight, even if freight is paid by the supplier.
2. KYC of Suppliers: Keep screenshots of the supplier's GST portal status at the time of transaction.
3. Address the SCN: Never treat an SCN as a final order. File a detailed reply with all possible evidence of the movement of goods.
4. Demand Natural Justice: Always request a personal hearing as mandated under Section 75(4) of the GST Act.
5. Proactive Reconciliation: Use the Invoice Management System (IMS) to identify and resolve mismatches before they trigger an SCN.

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Case Identification: WPA 20118 of 2025 with CAN 1 of 2025 Order Date: 27.02.2026 Judicial Authority: High Court at Calcutta Justice Om Narayan Rai