The Hon'ble Madras High Court in M/s. D. Y. Beathel Enterprises v. the State Tax Officer [W.P. (MD) Nos. 2127 & Ors., dated 24 Feb 2021] quashed the order levying the entire GST liability on the purchasing dealer without involving the seller, where the purchasing dealer had paid the tax to the seller but the seller had not remitted it to the Government. The Court held that the seller's omission to remit tax should have been viewed seriously with strict action against the seller, not automatic reversal of ITC from the buyer.
Section 16 of the CGST Act, 2017 permits ITC to the buyer where GST is paid by the seller and the tax charged has actually reached the Government (in cash or via ITC utilisation). The Court noted that non-examination of the seller (Charles and his wife Shanthi) in the enquiry, and non-initiation of recovery action against them, were fundamental flaws.
The Court relied on a CBIC press release (4 May 2018) clarifying there is no automatic reversal of ITC from the buyer for non-payment by the seller — recovery should first be pursued against the seller, with buyer-side reversal reserved for exceptional cases (missing dealer, business closure, inadequate assets).
The matters were remitted back for fresh enquiry, with Charles and his wife to be examined as witnesses, and recovery action to be initiated against them in parallel. Writ petitions allowed, no costs.