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 provides critical insights into how the judiciary views Show Cause Notices (SCN).

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.

Key Takeaways

• ITC cannot be denied solely due to retrospective supplier cancellation without factual inquiry.
• Personal hearing is a mandatory safeguard before adverse orders.
• Robust documentation beyond invoices strengthens ITC defenses.

Who This Applies To

GST-registered businesses facing ITC denial due to supplier registration cancellations.

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 on the grounds that its suppliers' registrations were cancelled retrospectively due to fraud. The department alleged a "circular fashion" of routing invoices through dummy companies. During the pendency of the writ petition, an adjudication order was passed confirming the demand without providing a personal hearing.

The petitioner argued that they fulfilled all conditions under Section 16(2), including possession of invoices, E-way bills, and bank statements. They contended that suppliers were registered at the time of the transaction.

The Law

• Section 16(2): Mandatory conditions for claiming Input Tax Credit.
• Section 29(2)(e): Retrospective cancellation of registration if obtained by fraud.
• Section 74: Determination of tax not paid or ITC wrongly availed by reason of fraud.
• Section 155: The burden of proof to claim ITC lies on the taxpayer.

Arguments

The Revenue contended that the SCN is merely an inquiry based on prima facie satisfaction. They argued that the taxpayer bears the burden under Section 155 to prove genuineness beyond basic documentation when legitimacy is doubted.

The Court referred to Suncraft Energy Private Limited (ITC cannot be denied solely due to supplier's default) and LGW Industries Limited (retrospective cancellation does not automatically invalidate past ITC if the buyer was genuine).

The Hon’ble High Court established that a Show Cause Notice (SCN) is an invitation to present one's case and does not constitute a final determination. However, the Court quashed the adjudication order because it violated the principles of natural justice by not providing the petitioner a personal hearing.

Taxpayers should maintain robust documentation beyond simple invoices (like Lorry Receipts and weighment slips) to prove movement of goods. Always demand a personal hearing as mandated under Section 75(4) of the GST Act.

Practical Impact

Taxpayers can challenge ITC denial orders where hearings were denied or where evidence beyond invoices was ignored.