TaxTMI 
TaxTMI 
TaxTMI 
On 06/01/2026, the division bench of the Tripura High Court has examined the above clause c of sub section 2 of section 16 of the CGST Act. This is a landmark judgement which is going to guide the GSTAT across India which is going to be flooded with cases under the above clause as adjudicating officers are ruthless in declining the eligible ITC on imaginary as well as flimsy grounds such as tollgate crossing evidence not available etc. for which there is no such requirements under GST Law.
It is an interesting case originated on 07/01/2021 and ended exactly on completion of the fifth year on 06/01/2026. The buyer was issued with a show cause notice on 07/01/2021 stating that ITC is not available. This happened so due to audit at the premises of the seller revealed that the applicable GST was not paid to the Government, even though buyer has paid full consideration including taxes to the seller. The SCN was properly replied but disregarding the facts the jurisdictional assistant commissioner confirmed the demand on 17/05/2022.
The dispute relates to the period from 01/07/2017 to 31/01/2019 and the entire available balance in the electronic credit ledger as on 08/02/2021 was blocked by the GST officials quoting the reason that ITC was not eligible as per 16 (2) (c). As the demand was confirmed on 17/05/2022, aggrieved by the order, writ petition was filed in the high court.
While passing the order, the high court has examined in detail the practical aspects connected with this clause and ruled that the legislature, while enacting this clause has failed to distinguish between Bonafide buyers and others. Being convinced by the arguments put forth by the petitioner, the high court has passed one of the finest judgements which is most likely to put issues likely to arise under 16 (2) (c) in future at rest. Few paragraphs of the order dated 06/01/2026 are worth to be reproduced and presented before adjudicating authorities in future, as the intention of this article is to spread awareness amongst all concerned. Accordingly, they are reproduced.
19) In our opinion, there is a failure by the Parliament, while enacting Section 16(2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.
20) The purchasing dealer cannot be asked to do the impossible, i.e., to identify a selling dealer who will not deposit with the Government, the tax collected by him from purchasing dealers, and avoid transacting with such selling dealers.
21) Alternatively, what section 16(2)(c) of the Act requires the purchasing dealer to do is that after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer; and if the selling dealer fails to do so, undergo the risk of being denied the ITC. It would be extremely difficult for a purchasing dealer to ensure that the selling dealer deposits the GST collected from him with the Government.
56) Consequently, it has to be held that the transaction between the petitioner and the respondent no. 4 is a bona fide transaction and not a collusive transaction tainted by fraud etc., and that the conduct of respondent no. 4 is blameworthy. Petitioner therefore cannot be penalised by invoking Section 16(2)(c) of the Act and denied the ITC.
57) For all the aforesaid reasons, the Writ Petition is partly allowed as under:
(a) Section 16(2)(c) of the Act is held not violative of Art. 14,19(1)(g) or 265 or 300-A of theConstitution of India;
(b) But Section 16(2)(c) of the Act ought not to be interpreted to deny ITC to purchasers in a bonafide transaction like the petitioner and it should be read down and applied only where thetransaction is found to be not bona fide or is a collusive transaction or fraudulent transaction todefraud the revenue.
(c) The order dt.7.5.2022 passed by respondent no. 3 is set aside.
(d) The respondents are directed to forthwith allow the petitioner ITC to the extent of Rs. 1,11,60,830/- denied to it.
(e) No costs.
Conclusion: The section has been examined by the High Court exhaustively and my only intention is that this article must reach GST officials in large numbers so that some developments take place in future while applying this clause.