One of the most unfair situations in GST practice: you buy goods from a registered supplier, pay GST on the invoice, claim ITC — and months later, the department tells you to reverse it because the supplier's registration was cancelled retrospectively. You did nothing wrong, yet you lose your credit.
The Department's Position
When a supplier's registration is cancelled with retrospective effect under Section 29(2) of the CGST Act, the department argues that the supplier was effectively "unregistered" on the date of supply. Therefore, the buyer's ITC becomes ineligible under Section 16(2). Notices demanding reversal follow.
What the Courts Say
Multiple High Courts and the Supreme Court have consistently ruled against this approach:
- Supreme Court (October 2025): In Commissioner of Trade & Tax vs. M/s Shanti Kiran India Pvt. Ltd. (a Delhi VAT case with strong GST implications), the Court held that ITC cannot be denied to purchasers who bought from suppliers validly registered on the date of the transaction
- Calcutta HC: In M/s LGW Industries, the Court ruled that where a buyer produces unimpeached documentary evidence — tax invoices, e-way bills, bank payments — retrospective cancellation alone does not justify ITC denial
- Delhi HC: GST registration cannot be cancelled retrospectively in a mechanical manner — the officer must provide reasons and demonstrate consequences are warranted
Section 16(2) — The Key Conditions
ITC requires: (a) possession of a valid tax invoice, (b) actual receipt of goods/services, (aa) invoice details furnished by supplier in GSTR-1, (c) tax actually paid to government by the supplier, and (d) return filed under Section 39. Condition (c) is entirely outside the buyer's control — and courts have recognised this hardship.
How to Protect Your ITC
- Verify supplier's GST status on the portal before every major transaction
- Pay only through banking channels — never cash
- Preserve tax invoices, e-way bills, delivery challans, and bank statements
- Cross-check that supplier invoices appear in your GSTR-2B
- Periodically check whether suppliers are filing their GSTR-1 and GSTR-3B
If you receive a reversal notice, respond with full documentation and cite the Shanti Kiran ruling. The law is on your side — if the transaction was genuine.
Comments (5)
The CBIC 2018 press release said recover from supplier first. Field officers still ignore it. At least courts enforce it now.
We now verify GST status of every vendor quarterly. Added it to our SOP after getting burned once.
Condition (c) being outside buyer control was always the fundamental injustice. Glad courts recognized it.
Checking GSTR-2B monthly is non-negotiable now. One missed reconciliation can cost lakhs.
The Shanti Kiran SC ruling is a landmark. Should have come years ago. Too many genuine buyers suffered.