Kerala High Court’s Transformative Stand on GST ITC Denials: A Detailed Analysis of Recent Judgments

I. Introduction – When Rules Clash with Reality

The Goods and Services Tax (GST) was envisioned as a turning point for Indias indirect tax system—one that simplifies tax compliance, unifies markets, and strengthens transparency. Yet, for many businesses, GST’s promises often collide with harsh procedural realities. At the heart of the problem lies the mechanism of Input Tax Credit (ITC), and particularly, the rigid conditions under Sections 16(2)(c) and 16(4) of the CGST Act.

Let’s begin with the issue:

• Section 16(2)(c) says you, the buyer, can claim ITC only if your supplier has actually paid the tax to the government.

• Section 16(4) bars you from claiming that credit if you miss the deadline—which is the due date for filing returns for October of the following financial year, or the filing date of the annual return, whichever is earlier.

That might sound simple enough on paper. But in practice, this means that even if a taxpayer pays their supplier in full (GST included), holds proper documentation, and records the transaction correctly, their ITC can be denied if the supplier defaults. Likewise, even genuine delays—caused by technical glitches or operational issues—can lead to the permanent loss of otherwise valid credit.

For years, this has led to a wave of ITC denials across India, disproportionately affecting honest taxpayers, particularly MSMEs. Fortunately, the Kerala High Court has stepped in, not to overturn the law, but to breathe equity into its interpretation.

Beginning with M. Trade Links v. Union of India - 2024 (6) TMI 288 - KERALA HIGH COURT in 2024, and culminating in a batch of coordinated writ decisions in 2024 and 2025, the High Court has reshaped the legal landscape around ITC denials. These rulings:

• Uphold the constitutional validity of Sections 16(2)(c) and 16(4),

• But stress that they must be applied thoughtfully—not mechanically,

• And offer a lifeline to taxpayers who have acted in good faith but were tripped up by supplier failures or procedural delays.

Central to this judicial shift are two important CBIC circulars—183/15/2022-GST and 193/05/2023-GST—which recognize that alternate documentary evidence (like payment proofs, delivery records, and bank statements) can support ITC eligibility even when the supplier fails to comply.

In this article, we walk through the key Kerala High Court rulings—starting with the most recent—and explain how they collectively offer a more balanced, humane approach to GST compliance.

II. Kerala High Courts Recent Judgments: From Rules to Remedies

1. Hercules Automobiles International Pvt. Ltd. v. Union of India

• Citation: 2025:KER:40440 • Date: June 10, 2025 • Bench: Justice Ziyad Rahman A.A.

This case was the first to truly apply the logic of M. Trade Links in full measure. The company had claimed ITC worth Rs. 2,16,812 for FY 2020–21. Everything was in order: valid tax invoices, full payment (including GST), and proper reflection in returns.

Yet, because the supplier became untraceable and didn’t file GSTR-1, and the transaction didn’t show up in GSTR-2A, the department denied ITC.

The Court’s response? Fairness first.

It accepted that the buyer had no control over the supplier’s actions and had met all reasonable conditions. It ordered the denial to be reconsidered, subject to documentation, and pointed explicitly to the principles laid down in M. Trade Links and CBIC Circulars.

A crucial early sign: the Court wasn’t going to let honest taxpayers be punished for someone else’s fault.

2. The June 2024 Batch Judgment – A Unified Response to Repeated Problems

• Lead Case: Sasidharan Raghavan v. STO • Citation: 2024:KER:45645 • Date: June 10, 2024 • Bench: Justice Dinesh Kumar Singh

This judgment changed everything.

Faced with over 10 writ petitions—each involving nearly identical issues of ITC denial due to supplier default or missed deadlines—the Court chose not to treat them as isolated incidents. Instead, it issued a coordinated judgment, applying a uniform legal framework drawn from M. Trade Links.

Core Directions:

• ITC denials must be re-examined if:

o The buyer has tax invoices,

o Paid GST to the supplier,

o Has bank/payment proofs,

o And shows no signs of fraud or collusion.

• The non-appearance of a transaction in GSTR-2A is not conclusive proof of ineligibility.

• Each petitioner was given one month to submit their documents, and AOs were given two months to re-decide the matter.

A few notable petitioners:

• Sudheer Abubacker: Faced ITC denial solely due to GSTR-2A mismatch. Court clarified that 2A is not the final word.

• Thalore Co-operative Bank: Delay in ITC claim due to internal processes. Court acknowledged systemic hurdles.

• Mahal Glass and Plywoods: Time-barred credit due to COVID-related delay. Court allowed reconsideration.

• Kaypee Traders: ITC on multiple low-value invoices was denied—Court allowed cumulative review.

• Jacob Alias & Co. and Cherry Creations: Faced technical rejections that were reversed through the same equitable lens.

The real takeaway? Intent matters. Compliance must be judged with context.

III. M. Trade Links v. Union of India - 2024 (6) TMI 288 - KERALA HIGH COURT – A Jurisprudential Milestone in ITC Denial Litigation

1. The Story Behind the Case

At the heart of M. Trade Links lies a familiar, frustrating story—one that many GST registered taxpayers across India know all too well.

The petitioner, M. Trade Links, had engaged in genuine business transactions. They had valid tax invoices, received goods, paid the full value (including GST) to their suppliers, and reflected everything in their returns. Yet, they were denied Input Tax Credit for one simple reason: their suppliers hadn’t paid the tax to the government or hadn’t filed GSTR-1.

In other words, the recipient had done everything right, but the default of a third party— completely outside their control—led to a substantial tax hit. Some parts of their claim were also time-barred under Section 16(4) due to technical or clerical delays.

With nowhere else to turn, the petitioner approached the Kerala High Court, challenging the legality, constitutionality, and fairness of these denials.

2. The Legal Questions the Court Had to Answer

The case raised some big, fundamental questions:

• Is it constitutional to deny ITC just because the supplier failed to pay the tax?

• Is the time limit under Section 16(4) too rigid, especially when honest taxpayers face genuine delays?

• Can a taxpayer be penalized without fault?

• Do CBIC circulars offer any real protection—or are they just advisory?

3. The Framework: What the Law Says

Let’s briefly recap the two problematic sections:

• Section 16(2)(c) says you can only claim ITC if the tax has actually been paid to the government.

• Section 16(4) sets a deadline—claim the credit before October of the following financial year, or lose it, no matter how valid.

While the purpose of these rules is to prevent tax evasion, the way they were being applied was hurting the very people who were trying to comply.

4. What M. Trade Links Argued

The petitioner’s arguments were logical and powerful:

• They had no control over whether the supplier paid the tax.

• They made full payment, including GST, through proper banking channels.

• They weren’t trying to evade tax—they were just caught in a procedural trap.

• They cited CBIC Circular No. 183/15/2022, which outlines when ITC can still be granted even if the supplier defaults.

They also raised constitutional concerns—arguing that these sections violated Article 14 (equality before the law) and Article 19(1)(g) (right to carry on trade) because they created a disproportionate burden on the buyer.

5. The Government’s Stand

The tax authorities defended the law. Their arguments:

• ITC is a conditional benefit, not a guaranteed right.

• Buyers must do due diligence—check GSTR-2A, ensure the supplier is compliant.

• Denying credit ensures revenue protection and deters fake invoicing.

• Circulars cannot override the law—they are just administrative guidance.

6. The Court’s Balanced Judgment

Justice Dinesh Kumar Singh delivered a carefully reasoned judgment that struck a middle path. The Court upheld the validity of Sections 16(2)(c) and 16(4)—but said that they cannot be applied mechanically.

Here’s what the Court decided:

a) ITC Is Not a Gift—It’s Part of the GST Design

GST is a value-added tax system. ITC isn’t a concession—it’s built into the structure. Denying credit without reason breaks the chain and distorts the tax logic.

b) Don’t Punish the Innocent

A buyer who has paid tax, received goods, and has no link to fraud should not be punished. The principle of proportionality applies—the punishment must fit the conduct.

c) Use Documentary Evidence, Not Just Portals

The Court endorsed CBIC Circular 183/2022, which says ITC can be allowed if:

1. There’s a valid tax invoice,

2. Goods/services were received,

3. Payment was made (including tax),

4. It’s recorded in books,

5. There’s no collusion.

d) GSTR-2A Isn’t the Final Word

Just because something doesn’t appear in GSTR-2A doesn’t mean the transaction is fake. The portal is a tool, not the truth. Officers must look beyond system mismatches.

e) Time Limits Matter—but Context Matters More

The Court didn’t strike down Section 16(4), but said minor delays should be treated with flexibility, especially when the taxpayer has acted in good faith.

7. What Relief Was Granted

• The assessment order was quashed.

• The petitioner was given 30 days to submit evidence.

• The officer had to re-assess eligibility within 60 days.

• Most importantly, the Court said these directions could be applied to similar cases across the board

8. Why This Judgment Became a Template

M. Trade Links became the bedrock for several follow-up judgments because it laid out a clear method:

• Start with facts,

• Check for genuine compliance,

• Apply the CBIC circular test,

• And don’t deny credit just because the supplier failed or the system glitched.

It also established that judicial equity and fairness must guide tax enforcement—not blind adherence to forms and portals.

IV. The Ripple Effect: How Other Judgments Followed M. Trade Links

1. From One Case to a Doctrine

After M. Trade Links, the Kerala High Court began applying its principles in a series of connected cases. Whether it was supplier default, portal errors, or procedural delay, the approach was the same: is the buyer honest, and are the documents in order?

Here are a few important cases:

2. Sudheer Abubacker v. STO The issue?

A mismatch in GSTR-2A. But the buyer had received goods, paid tax, and filed returns. The Court held that 2A is not decisive. Real-world evidence counts more.

3. Thalore Co-operative Bank Ltd. v. State of Kerala

ITC was denied because the claim was made late. The delay? Caused by internal bank approvals and procedural issues. The Court accepted this as genuine hardship, not negligence.

4. Mahal Glass & Plywoods

Another late claim. The taxpayer explained it was due to COVID-related disruptions and portal issues. The Court agreed that these were valid reasons to allow reconsideration.

5. Kaypee Traders

Denied credit on several small-value invoices. The department said the amounts were too scattered to verify. The Court disagreed—each rupee counts, and every valid invoice deserves scrutiny.

6. Jacob Alias & Co.

The supplier defaulted after the supply. The department assumed the supply was fake. But the Court said: look at the timing. If the supply was genuine at the time, later defaults don’t change that.

7. Cherry Creations

Goods were shipped to one branch, but invoiced to another GSTIN under the same PAN. The Court said: substance over form. If the goods were received and used, credit can’t be denied just due to an address mismatch.

V. Sectoral Impact and Compliance Takeaways in the Post–M. Trade Links Era

The Kerala High Court’s evolving jurisprudence does more than settle disputes. It sends a strong message: GST compliance is not about ticking boxes—it’s about substance over form and fairness over formality.

This shift has significant consequences, especially for businesses in sectors where ITC claims are frequent, high-value, and complex.

1. MSMEs, Distributors, and Small Traders – The Hardest Hit

Why they’re vulnerable:

• Dependence on small or inconsistent suppliers.

• Lack of dedicated GST compliance teams.

• Often unaware when suppliers default on GSTR-1 or tax payment.

• Reliance on third-party accountants, leading to filing delays.

Case tie-in: Kaypee Traders

• Faced denial for low-value invoices across multiple vendors.

• Court allowed relief based on cumulative evidence.

Takeaways:

• Start vetting suppliers for compliance: regular GSTR-1 filers, active GSTINs.

• Build alerts for mismatches in GSTR-2A/2B before filing 3B.

• Use procurement software to track real-time eligibility.

• Educate vendors about the consequences of their non-compliance.

2. Real Estate and Construction – The Tangled Supply Chain

Why they’re high-risk:

• Multiple layers of subcontracting.

• Frequent state-crossing procurement.

• Invoices often raised in one location, material delivered elsewhere.

• Suppliers may be non-filers or cash vendors.

Parallel: Mahal Glass & Jacob Alias cases

• Highlighted how one vendor’s failure can collapse downstream ITC.

Takeaways:

• Ensure contracts mandate GST compliance.

• Add indemnity clauses for ITC losses due to vendor default.

• Reconcile 2B monthly, and flag late or missing invoices before filing.

• Maintain strong documentation trail: e-way bills, delivery challans, ledger entries.

3. Co-operative Societies & Institutions – Caught in Bureaucratic Lags

Why unique:

• Governance involves multiple approvals (Board, Registrar, Auditor).

• Manual accounting or outdated software.

• Late entries due to non-centralized systems.

Case tie-in: Thalore Service Co-op Bank

• Denied ITC due to time-bar under Section 16(4).

• Court allowed reassessment considering institutional hurdles.

Takeaways:

• Create monthly dashboards for ITC tracking.

• Mandate a calendar-based return filing discipline (don’t wait for last dates).

• Appoint a compliance officer responsible for GSTR-2B to 3B alignment.

• Maintain an aging schedule for pending credits.

4. Retail Chains & Franchisees – The Address Mismatch Problem

Why exposed:

• Multiple GST registrations under one PAN.

• Goods delivered to one branch, invoiced to another.

• ITC claimed at head office for branches purchases. Case tie-in: Cherry Creations

• Court said ITC cannot be denied purely for address mismatch if the goods are received and used.

Takeaways:

• Match invoice details with recipient GSTIN.

• Maintain internal documentation: stock transfer notes, goods inward registers.

• Train branches on how to claim ITC correctly.

5. Manufacturing Sector – Cross-Unit Procurement Risks:

Why sensitive:

• Inputs move between locations (Unit A receives, Unit B claims).

• Central procurement with decentralized consumption.

• Volume of ITC is high—errors are costly.

Case analog: Jacob Alias & Co.

• Supplier was deregistered later, but the supply was genuine at the time.

Takeaways:

• Implement a reverse audit trail to catch late supplier non-compliance.

• Map invoice to location in ERP; flag credits booked against wrong units.

• Store all gate entries, e-way bills, and GRNs centrally.

6. Strategic Advice for Tax Professionals:

The M. Trade Links ruling shifts the burden from portal automation to judgment-based verification. This empowers professionals—but also raises the bar.

A. Litigation Preparation

• Build case around facts and fairness, not just GSTR-2A.

• Highlight full payment, invoice possession, and supplier communication.

B. Document Everything

• Save NEFT/RTGS slips tagged to invoice.

• Maintain supplier compliance logs.

• Screenshot 2A/2B at time of purchase—document portal status.

C. Educate Clients

• Train accounts teams on Section 16 conditions.

• Emphasize timely credit booking before October return filing.

• Encourage monthly reconciliation with supplier follow-ups.

7. Compliance Culture: What Every Business Should Do Now

M. Trade Links isn’t just a shield. It’s a wake-up call.

Companies must strengthen their systems to prove compliance—not just assume it.

A. Vendor Risk Grading

• Tier 1: Regular filers, visible in 2A/2B – full credit allowed.

• Tier 2: Irregular filers – credit with caution, request compliance proof.

• Tier 3: Non-filers, known defaulters – credit only with solid backup docs.

B. Systemized Reconciliation

• Automate reconciliation of GSTR-2B vs. Purchase Register.

• Flag and follow up on discrepancies before filing 3B.

C. Documentation Policy

• Maintain digital logs: email trails, ERP entries, bank proofs.

• Store physical documents: delivery notes, inward registers, e-way bills.

D. Section 16(4) Deadline Discipline

• Introduce internal cut-off controls: e.g., ITC from invoices dated FY 2024–25 must be claimed by October 30, 2025.

• Escalate late invoices to CFO-level review

VI. Conclusion – Toward a More Just and Practical GST Ecosystem

M. Trade Links and the judgments that followed are not about relaxing the law. They’re about interpreting it with reason and equity.

They show us that:

• Compliant taxpayers should not suffer for the defaults of others.

• The GST system must work for real businesses, not just theoretical models.

• Technology is a tool—not a judge.

Most importantly, these rulings restore trust—in the judiciary, in the tax system, and in the idea that fairness still has a place in taxation.

For taxpayers, the message is simple: document everything, act in good faith, and don’t be afraid to stand your ground.

For tax officers: apply the law with logic and compassion.

And for policymakers: this is a moment to think boldly—about safe harbors, risk scoring, and smarter ways to build compliance.

Final Thought:

M. Trade Links is more than a case—it’s a doctrine. A declaration that in a complex economy, rules must serve people, not trap them. It tells us that even in the age of automation, justice still needs judgment.

Disclaimer: This article is intended for informational and educational purposes only and does not constitute professional advice or a legal opinion. Readers are advised to consult with a qualified tax professional or legal advisor before making any decisions based on the contents of this article.