Supplier default- Buyer is not required to reverse ITC in all bona fide cases.

The provisions contained in clause c of sub section 2 of section 16 are ruled down for the second consecutive time by the jurisdictional high courts. Hence, based on the latest judgement of the Karnataka High Court on 09/02/2026 in the matter of M/s. Instakart Services Private Limited Versus The Union of India, The Central Board of Indirect Taxes and Customs New Delhi, The Goods and Service Tax Council, The Principal Commissioner of Central Tax Bengaluru, The State of Karnataka. - 2026 (3) TMI 1674 - KARNATAKA HIGH COURT, wherein 71 case laws on the issues were referred, the position is settled and no more res integra.

As per the concept of one nation, one tax for GST, officers all over India are applying section 16 (2) (c) to their own advantage by disallowing the genuine ITC in all bona fide cases. The above clause is meant for situations where the buyer collude with the seller to avoid payment of GST to the Government. However, in all cases where section 16 (2)(c) is invoked, it is observed that hardly less that 10% of such cases are fit cases for such invocation.

ITC is denied on genuine cases also where transactions are fully reflected correctly in GST Returns based on the pretext that seller's registration is cancelled much later or seller defaulted payment of GST in some other cases etc. putting genuine buyers in to severe hardship.

This issue was examined at length by the Karnataka High Court, Bangalore and in a much detailed order running to several pages and it is ruled that 16 (2) (c) is not to be applied in all bona fide cases giving huge relief to genuine buyers. Let us hope that as GSTAT is becoming functional in a phased manner and more and more orders giving clarity on 16 (2) (c) are coming from jurisdictional high courts, all officers across India do not invoke 16 (2) (c) from today onwards except when circumstances warrant.

Major observations of the High Court are furnished below: Quote from referred case law.

55) Thus the respondents are not disputing that the petitioner did pay the GST of Rs.1,11,60,830/- to respondent no.4, the supplier, though they contend that the latter has not passed over the same to the Government. There is no allegation by the respondents that petitioner had failed to discharge its liability towards tax on the purchases made by it. It is their case that the respondent no.4 has fraudulently retained the GST paid by petitioner to it.

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 the Constitution of India;

(b) But Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud 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.

All pending applications are disposed of.'

The operative portions of the order are furnished below:

1. Petition is hereby disposed of in terms of the judgment of the Gauhati High Court in the case of National Plasto Moulding, M/s. Society Soap Works And Anr, Jugal Kishore Daga, Abhay Associates And Anr, Madhu Jain, Mahabir Prasad Mahendra Kumar, Dipankar Banik, Vijay Trading Co., Tolaram Surendar Kumar Kundalia And Anr, Surender Kumar Kundalia, Gunchand Dalchand, Hemkaran Stores, M/s. Rathi Traders And Anr, . Versus The State of Assam, The Commissioner of State Taxes (Earlier Known As The Commissioner of Taxes) Guwahati, The Superintendent of Taxes, Nishant Sales Corporation, The Union of India, The Commissioner Central Goods And Service Tax Guwahati, The Assistant Commissioner Central Goods Ana Service Tax Tezpur, Jvl Agro Industries Ltd - 2024 (8) TMI 836 - GAUHATI HIGH COURTandthe judgment of the Tripura High Court in the case of M/s. Sahil Enterprises Versus Union of India, through its Secretary, Government of India, Ministry of Finance, Department of Revenue, New Delhi., Commissioner, Central Goods & Services Tax, Tripura Assistant Commissioner, Tripura M/s. Sentu Dey, Represented by its Proprietor Sri Sentu Dey, Bairagi Bazar, Jumerdhepha. - 2026 (1) TMI 385 - TRIPURA HIGH COURT.
2. The impugned provisions contained in Section 16(2)(c) of the CGST / KGST Act and Rule 36(4) of the CGST / KGST Rules are hereby read down in a manner that allows the benefit of ITC to bona fide recipients such as the petitioner, which has complied with all other conditions under Section 16(2) of the CGST / KGST Act despite any fault / lapse or non-payment of tax to the government by the suppliers.

Conclusion: It is the most appropriate time for all those taxpayers who got adverse orders passed in adjudication / first appeal level based on section 16( 2 )(c) in the last two years to review all such cases so as to try the appeal before GSTAT shortly. As the last date for appeal before GSTAT is 30/06/2026 for all orders passed under section 107 up to 31/03/2026, readers are urged to take stock of recent cases on 16 (2) (c) and take advantage of latest case law of Karnataka High Court as above.