TaxTMI 
TaxTMI 
A. FACTS
A batch of over 60 writ petitions was filed before the Gujarat High Court, challenging the vires of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 ('CGST Act'). The petitioners were purchasing dealers who had been denied Input Tax Credit ('ITC') solely on the ground that their respective suppliers had collected GST but failed to deposit it with the Government.
The petitioners contended that they had no means of verifying whether a supplier had actually remitted tax collected from them, and sought either a declaration that Section 16(2)(c) is unconstitutional, or that it be 'read down' to exclude bona fide purchasers, limiting its application only to cases involving fraud or collusion between the purchaser and supplier.
The Gujarat High Court dismissed the challenge and upheld the provision. One of the petitioners (Bhandari Scrap Traders) carried the matter to the Supreme Court by way of Special Leave Petitions, which came to be dismissed on 24.07.2026, thereby affirming the Gujarat High Court's ruling.
B. LAW
Section 16(2)(c) of the CGST Act makes actual payment of tax by the supplier to the Government a precondition for the recipient's entitlement to ITC (subject to Section 41). The key statutory provisions and arguments considered were:
Petitioners' case: Section 16(2) prescribes six cumulative conditions [(a), (aa), (b), (ba), (c), (d)]; genuineness of a transaction is already tested by clauses (a), (aa), (b) and (ba). Clause (c) then penalises a bona fide purchaser for a supplier's default over which the purchaser has no control or means of verification - invoking Article 14 (equality), Article 19(1)(g) (right to trade), Article 265 (no tax except by authority of law - alleging double taxation) and Article 300A (property), and the maxim Lex non cogit ad impossibilia. Heavy reliance was placed on On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), Damson Technologies Pvt. Ltd., Solvochem, M/s. Meenu Trading Co., & Mahan Polymers Versus Government of NCT of Delhi & Ors. & Commissioner of Trade & Taxes, Delhi And Ors. - 2017 (10) TMI 1020 - DELHI HIGH COURT, affirmed by the Supreme Court in Commissioner of Trade And Taxes Delhi Versus Arise India Limited, On Quest Merchandising India Pvt. Ltd. - 2018 (1) TMI 555 - SC Order, where a similarly worded provision under the Delhi VAT Act (Section 9(2)(g)) was read down.
Revenue's case: ITC is a statutory concession, not a vested or fundamental right, to be strictly construed. Section 16(2)(c) cannot be read in isolation - it must be read with Section 41(2) (reversal of ITC on supplier default, with re-availment once the supplier pays), Section 155 (burden of proof of eligibility lies on the recipient), Rule 37A of the CGST Rules (mechanism for reversal/re-availment), and Section 53 (inter-State transfer of tax component to the destination State). Since GST, unlike VAT, operates on a destination-based, cross-State credit chain, permitting ITC without actual payment by the supplier would cause cascading revenue loss across States. The Delhi VAT scheme examined in On Quest lacked equivalent provisions and is therefore not comparable.
Holding: The Gujarat High Court held that the six conditions under Section 16(2) must be read conjointly, not independently, and that clause (c) cannot be isolated from Sections 41,53 and 155. ITC was reaffirmed as a statutory concession rather than an absolute right, to be strictly interpreted. The Court found no constitutional infirmity or ambiguity warranting the doctrine of reading down, which is a tool of last resort available only where a plain reading produces a constitutional conflict. The precedents under the Delhi VAT Act were held distinguishable, since that Act did not contain provisions analogous to Section 41(2), Section 53 or Section 155 of the CGST Act. The Court also noted that a purchaser is not left remediless - ITC reversed for non-payment by the supplier can be re-availed once the supplier discharges the tax liability (including via Revenue action under Sections 73/74), and recommended that the Government put in place a real-time supplier-payment verification mechanism and consider legislative relief for genuine purchasers, without disturbing the provision's validity. On 24.07.2026, the Supreme Court dismissed the SLPs against this ruling, agreeing that the CGST scheme is materially different from the Delhi VAT scheme and that no parity could be drawn.
C. CONCLUSION
Section 16(2)(c) of the CGST Act stands upheld as constitutionally valid and has not been read down. A purchasing dealer's ITC remains conditional on the supplier actually depositing the tax collected, and the burden of establishing this eligibility rests on the purchaser under Section 155. The remedy for a bona fide purchaser whose ITC is denied/reversed on this ground is to await re-availment once the supplier pays (with recourse against the Revenue's recovery action against the supplier under Sections 73/74), rather than to resist the denial itself on constitutional grounds.
D. COMERCINATE'S COMMENTS
This ruling, now affirmed by the Supreme Court, closes off (for the present) the argument that bona fide purchasers can claim blanket protection from ITC denial merely because their supplier defaulted - the Delhi VAT-based 'reading down' line of cases (On Quest, Arise India, Shanti Kiran, and the Tripura High Court's Sahil Enterprises) cannot be relied upon in GST matters.
Clients should treat GSTR-2A/2B matching and supplier tax-payment status as a live commercial risk, not merely a compliance formality - due diligence at the vendor on-boarding stage (registration status, filing track record) is now the primary line of defence, since litigation-based relief is significantly narrowed.
We recommend building an indemnification clause into purchase/supply agreements, obligating the supplier to make good any ITC loss (plus interest) arising from its failure to deposit tax - the Gujarat High Court itself flagged this as an available commercial safeguard.
Where ITC has been reversed for non-payment by a supplier, the amount is not permanently lost - it can be re-availed under Rule 37A once the supplier deposits the tax (including pursuant to Revenue's own recovery action against the supplier). Clients should track such suppliers and their GSTR-3B filings to trigger timely re-availment.
Since the Supreme Court's dismissal was at the SLP (admission) stage rather than after a detailed hearing on merits, and the Court itself has urged the Government to consider a real-time verification mechanism and possible legislative relief for genuine purchasers, this position may still evolve - we will continue to track any Circular, Rule amendment, or larger-bench reference on this issue.
This note is for general information and client awareness only and does not constitute legal advice on specific facts. For queries, please write to us at [email protected].
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