Thursday, April 25, 2024

Defending Input Tax Credit (ITC) Claims: A Comprehensive Legal Analysis in Cases of Alleged Bogus Suppliers

The robust defense of Input Tax Credit claims hinges on meticulous documentation, diligent compliance, and the strategic harnessing of judicial precedents, ensuring that genuine transactions are shielded and the integrity of the GST framework is upheld.


The framework of the Goods and Services Tax (GST) in India was designed as a progressive and comprehensive indirect tax levy on the manufacture, sale, and consumption of goods and services at the national level. Integral to the GST's efficacy is the Input Tax Credit (ITC) mechanism, which is aimed at eliminating the cascading effect of taxes and fostering a seamless flow of credit throughout supply chains. However, the rise of fraudulent activities, particularly involving bogus suppliers, poses significant challenges for legitimate businesses seeking to claim ITC. This detailed analysis explores the legal landscape, judicial interpretations, and strategic defenses that assist genuine buyers in maintaining their ITC entitlements, even when faced with allegations of involvement with fictitious suppliers.

Legal Framework and Judicial Insights

Establishing the Genuineness of Transactions

Under the CGST Act, specifically through provisions in Sections 16 and 17, taxpayers are entitled to ITC provided they fulfill certain conditions, including possession of a valid tax invoice, receipt of goods or services, and timely filing of GST returns. The burden of proof, as delineated by Section 155, rests on the taxpayer to substantiate the genuineness of their transactions.

Documentary Evidence and Due Diligence

The foundation of substantiating ITC claims involves meticulous documentation:

  • Tax invoices or debit notes authenticated by the supplier.
  • Transportation records such as delivery challans, e-way bills, and freight invoices, which corroborate the physical movement of goods.
  • Payment records demonstrating financial transactions correlating to respective invoices, preferably through traceable banking channels.
  • GST compliance reports, including GSTR-2A for auto-populated purchase details and GSTR-3B for summary of tax payments, which should align with each other to reflect accurate transaction records.

Pivotal Case Law Interpretations

1. State of Karnataka vs. Ecom Gill Coffee Trading P. Ltd. (2023)

The Supreme Court emphasized the necessity for recipients not only to possess valid invoices but also to provide concrete proof of delivery or receipt of goods/services. This ruling highlights the court's stance on the physical verification of transactions and the essential nature of tangible evidence in validating business operations.

2. LGW Industries Ltd v UOI (2022)

The judgment from the Calcutta High Court is a significant relief to genuine businesses caught in supplier frauds. It was held that ITC cannot be denied to a buyer who has conducted all statutory due diligence and possesses the requisite documents at the time of transaction. The judgment underscores the principle of protecting bona fide transactions against retrospective supplier fraud.

3. State of Maharashtra v Suresh Trading Co. (1998)

This landmark decision supports the legitimacy of relying on the GST registration of the supplier as a trust factor at the time of transactions. The court declared that actions based on valid registration cannot be faulted retrospectively, even if the registration is later cancelled due to supplier malfeasance.

Advanced Litigation Strategy and Procedural Defenses

Substantiation of Transaction Authenticity

To effectively defend against claims involving bogus suppliers, it is critical for businesses to establish a robust linkage between documentation and actual transactions. This includes:

  • Physical verification: Conducting or obtaining reports of on-site audits or inspections of supplier premises.
  • Third-party confirmations: Acquiring acknowledgments from intermediaries or transporters confirming the movement of goods.

Strategic Legal Doctrines and Judicial Protections

  • Doctrine of Lex Non Cogit Ad Impossibilia: This legal principle states that the law does not compel the doing of the impossible. Businesses cannot foresee or be held liable for the hidden fraudulent intents of a supplier if all outward indications and verifiable checks were fulfilled.
  • Protection of bona fide purchasers: Several legal precedents safeguard the interests of bona fide purchasers who engage in transactions based on existing evidence without fraudulent intent.

Analyzing Procedural Requirements and Ensuring Compliance

Businesses must ensure procedural compliance in all facets, including:

  • Timely filing of GST returns: Demonstrating compliance helps establish the credibility of the taxpayer.
  • Regular reconciliation of invoices with GSTR-2A: This helps identify discrepancies early and take corrective actions.


The challenge of defending ITC claims in the context of allegations involving bogus suppliers necessitates a deep understanding of both the statutory provisions of GST and strategic legal defenses. Through a combination of rigorous documentation, adherence to procedural norms, and leveraging of judicial precedents, genuine businesses can effectively safeguard their rights to claim ITC. This comprehensive approach not only supports the individual taxpayer but also reinforces the integrity and objectives of the GST system as a whole