By CA Surekha Ahuja
An Authoritative Legal Framework for ASMT-10 Scrutiny, DRC-01A and SCNs under Sections 73 / 74
Input Tax Credit (ITC) related allegations arising during assessment, scrutiny under ASMT-10, or through pre-SCN and SCN proceedings constitute the single largest category of GST litigation. A consistent departmental approach has been to mechanically invoke Sections 73 or 74 of the CGST Act for alleged mismatches, excess claims, or supplier-side defaults, often without appreciating the statutory architecture of Section 16 and the settled principles governing burden of proof.
At the heart of ITC eligibility lies Section 16(2) of the CGST Act, which creates a statutory fortress. ITC entitlement crystallises if, and only if, all four conditions are cumulatively satisfied at the time of availment:
Possession of a valid tax invoice or debit note;
Actual receipt of goods or services;
Tax charged has been paid to the Government; and
Inputs or services are used in the course or furtherance of business.
Once these conditions stand satisfied contemporaneously, the statute does not impose any continuing or perpetual obligation on the recipient to police the supplier’s future compliance. Section 16(2)(c), read harmoniously with Section 155, protects bona fide taxpayers and squarely places the burden on the department to establish ineligibility, collusion, or mens rea.
The following categories represent the most litigated ITC disputes, along with the correct statutory interpretation, judicial guidance, and evidentiary standards.
ITC from Suppliers Whose GSTIN is Cancelled Retrospectively
Core Statutory Interpretation
Section 16(2)(c) provides that ITC shall not be available unless the registered person has exercised due diligence to ensure that tax has actually been paid to the Government. The expression “due diligence” must be understood with reference to the date of claim, not as an obligation of perpetual monitoring. Contemporaneous verification through GSTR-2A / 2B and payment through banking channels satisfies this requirement.
Retrospective cancellation of a supplier’s GSTIN is a consequence of departmental action against the supplier and cannot, by itself, invalidate a recipient’s vested ITC where statutory conditions stood fulfilled at the time of availment.
Paradigm Example
A registered person avails ₹2 crore ITC on purchase of TMT bars in July 2025. The supplier’s GSTIN is cancelled retrospectively in December 2025 due to non-filing of returns. An SCN proposes reversal of ITC along with interest and penalty under Section 74.
Judicial Position
Supreme Court – Suncraft Energy Ventures Pvt. Ltd. v. Union of India (2023)
Once tax charged has been deposited with the Government, denial of ITC to the recipient would violate Article 265 of the Constitution. The law does not contemplate vicarious liability absent collusion or fraud.Calcutta High Court – Aarna Notung Sales Pvt. Ltd. (2021)
Reflection of invoices in GSTR-2A at the time of claim constitutes statutory due diligence. Retrospective cancellation cannot prejudice a compliant recipient.
Evidentiary Standard
Tax invoice and e-way bill;
Proof of payment to supplier through banking channels;
GSTR-2A / 2B reflecting the invoice for the relevant period.
Once these are produced, the onus shifts entirely to the department under Section 155.
Allegations of Fake Invoices or Circular Trading (Non-receipt of Goods or Services)
Core Statutory Interpretation
Section 16(2)(b) mandates actual receipt of goods or services. The term “received” is satisfied through a complete documentary trail evidencing movement, delivery, and accounting of goods or services. Physical verification or personal supervision by the recipient is not a statutory requirement.
Paradigm Example
An SCN alleges that machinery invoices amounting to ₹50 lakh are fake on the basis that the supplier’s premises were found non-functional, despite machinery being installed and used by the recipient.
Judicial Position
Gujarat High Court – Bharti Airtel Ltd. v. Union of India (2023)
Denial of ITC requires positive evidence of non-receipt. Mere doubts about the supplier or its premises are insufficient.Supreme Court – VKC Footsteps India Pvt. Ltd. (2021)
Statutory compliance through invoices, delivery documents, and accounting records establishes receipt.
Documentary Chain Establishing Receipt
Invoice → Delivery challan (Rule 55) → Transport document / LR → Goods Receipt Note → Inward register → Production or consumption records.
Departmental instructions also clarify that non-existence of supplier premises alone does not justify ITC denial where receipt is otherwise established.
GSTR-2A / GSTR-3B Mismatches due to Delayed Filing of GSTR-1 by Supplier
Core Statutory Interpretation
Post 1 January 2022, Rule 36 recognises GSTR-2B as the primary reference document. Once the supplier files GSTR-1 and pays tax, timing mismatches do not extinguish substantive ITC rights.
Paradigm Example
Supplier reports an August 2025 invoice in October 2025. Recipient claimed ITC in September 2025. A mismatch is flagged through DRC-01A.
Judicial Position
Supreme Court – Suncraft Energy Ventures Pvt. Ltd. (2023)
The decisive test is whether tax has reached the Government. Procedural timing differences cannot defeat substantive entitlement.Delhi High Court – Canon India Pvt. Ltd. (2021)
Rule-based restrictions cannot override Section 16(2). Subordinate legislation must yield to the parent Act.
Reconciliation Matrix
A month-wise reconciliation demonstrating invoice value, date of GSTR-1 filing, supplier tax payment, and eventual 2B reflection conclusively addresses such disputes.
Blocked Credits under Section 17(5)
Core Statutory Interpretation
Section 17(5) is not absolute. Its provisos carve out explicit exceptions permitting ITC where goods or services are used for further supply, transportation, plant and machinery, or specified passenger vehicles.
Common Disputes
ITC on demo vehicles;
ITC on factory or business premises rent;
ITC on transportation and logistics vehicles.
Judicial and Administrative Guidance
CBIC Circular No. 151/07/2021 permits ITC on demo vehicles used for further supply.
Madras High Court – Matrix Cellular Services Ltd. recognises office premises rent as eligible where business nexus is established.
Evidence
Utilisation logs, sale invoices, lease agreements, utility bills, and employee transport records collectively establish business use.
Provisional ITC Reversals under Earlier Rule 36(4) Caps
Core Statutory Interpretation
Section 16(2) prevails over restrictive rules. Courts have consistently held percentage-based caps to be arbitrary and unconstitutional when they defeat substantive entitlement.
Judicial Position
Delhi High Court – Canon India Pvt. Ltd. (2021)
Karnataka High Court – LinkedIn Technology (2022)
Post-amendment jurisprudence recognises GSTR-2B as conclusive, rendering earlier provisional reversals unsustainable.
Ultimate Reply Architecture for ASMT-10, DRC-01A and SCNs
A structured reply built on the following framework has demonstrated consistently high success at the adjudication stage:
Demonstration of compliance with all four conditions of Section 16(2);
Annexure-wise documentary evidence;
Judicial authorities addressing the precise allegation;
Clear invocation of Section 155 placing burden on the department;
Rebuttal of Section 74 invocation in absence of suppression, fraud, or intent.
A tabular compliance matrix mapping statutory conditions to evidence and judicial authority significantly strengthens the defence.
Prayer
In the absence of any finding of collusion, suppression, or wilful misstatement, proceedings deserve to be dropped under Section 75. Mere procedural lapses or supplier-side defaults cannot attract interest or penalty where substantive compliance is established.
