Delhi High Court rejects blanket GST credit denial over suppliers’ retrospective deregistration

The court upheld Section 16(2)(c) of the CGST Act but ruled that authorities must identify disputed invoices and prove fraud or ineligible credit with transaction-specific evidence.

The Delhi High Court has reinforced a point that is likely to matter far beyond one copper-wire maker’s tax dispute: input tax credit cannot be denied on broad allegations alone. In Treco Wire India Private Limited v. Additional Commissioner, Central Tax, Delhi North, the court upheld the constitutionality of Section 16(2)(c) of the CGST Act, but said the tax authorities still had to prove the factual basis for any demand and could not rely simply on retrospective cancellation of a supplier’s registration.

The case arose from a GST audit covering transactions from 1 July 2017 to 31 March 2021. Treco Wire said its purchases were genuine and that the suppliers were registered when the invoices were issued. The department, however, questioned credit claimed on purchases from suppliers whose registrations were later cancelled retrospectively. According to the judgment discussed by Indian Kanoon and analysed by tax commentators, the court held that cancellation by itself does not answer whether a particular invoice was fake, whether goods moved, or whether the buyer knew of any irregularity.

That distinction mattered because the department’s order was not built out supplier by supplier. The court said an authority seeking to disallow input tax credit must identify the suppliers, the invoices in dispute, the amount of credit said to be wrongfully claimed and the evidence supporting that conclusion. A general assertion that registrations were cancelled or that tax was not paid upstream is not enough. The buyer must be told precisely which transactions are under attack and given a fair chance to respond.

The court also drew a clear line between payment to the supplier and payment to the government. A bank transfer showing that the buyer paid the invoice proves only that the seller received money. It does not, on its own, prove that the seller passed the tax to the exchequer. That point is central to Section 16 of the CGST Act, which is designed to prevent bogus credit claims while still requiring the department to prove that the legal conditions for denial have actually been met. Commentary on Section 16 has long noted that the provision exists to curb fake invoice fraud and safeguard revenue, but Treco Wire shows that the protection of revenue does not excuse weak adjudication.

The Delhi court was also firm that a demand under Section 74 needs more than an accusation that credit was ineligible. Section 74 applies where the tax department alleges fraud, wilful misstatement or suppression of facts with intent to evade tax. The judgment said those elements must be supported by specific facts and reasoning. Merely repeating the statutory language is not the same as showing that the purchaser acted fraudulently. That matters because the penalties under Section 74 are serious and cannot rest on inference alone.

The court’s approach is consistent with a broader judicial trend. A Tripura High Court judgment earlier this year said Section 16(2)(c) could not be applied mechanically to punish a bona fide purchaser for a supplier’s default. At the same time, the Supreme Court’s July ruling in Bhandari Scrap Traders made clear that GST and earlier VAT laws are not interchangeable, and that the credit-reversal mechanism built into GST is part of the statutory design. In other words, the law keeps the credit condition intact, but it does not allow authorities to collapse every supplier-side problem into purchaser fraud.

Treco Wire also underscores a basic procedural point: if a taxpayer submits a reply, the officer must actually deal with it. The court said it was not enough for the adjudication order to sit on the file while ignoring the core defence that the purchases were genuine and the suppliers were registered at the time of supply. If the department wants to rely on retrospective cancellation, it must explain how that cancellation connects to the invoices in question and why the taxpayer’s records are not persuasive.

The court ultimately set aside the order-in-original and related proceedings and sent the matter back for fresh adjudication. That does not mean the taxpayer has won the credit dispute outright. It means the authority must start again with proper notice, transaction-specific particulars, a genuine examination of the evidence and a reasoned finding on whether Section 74 can properly be invoked at all. In practical terms, Treco Wire is a reminder that tax recovery must be evidence-led, not assumption-led.