TaxTMI 
TaxTMI 
08 Aug 2026 
Bhandari Scrap Traders Versus Union of India & Ors. - 2026 (7) TMI 1839 - SC Order
Facts in Brief
The batch of Special Leave Petitions before the Supreme Court arose from the judgment of the Gujarat High Court in Maruti Enterprise Through Its Authorized Partner, Jigneshbhai Bharatbhai Tarpara, Bhandari Scrap Traders Through Its Prop. Gopalbhai Champaklal Sharma Versus Union Of India & Ors. - 2026 (5) TMI 127 - GUJARAT HIGH COURT, wherein the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 ("CGST Act") was upheld. The petitioners, including Bhandari Scrap Traders, challenged the denial of Input Tax Credit (ITC) solely on the ground that the respective suppliers had failed to remit the tax collected from the recipients to the Government.
The petitioners contended that they had fulfilled every statutory obligation expected of a bona fide purchaser, namely possession of tax invoices, receipt of goods, payment of consideration along with GST, and reflection of the transaction in statutory returns. They argued that the supplier's subsequent default in depositing tax was beyond the purchaser's knowledge or control and, therefore, denial of ITC was arbitrary and violation of Articles 14, 19(1)(g), 265 and 300A of the Constitution.
The Supreme Court, by order dated 24 July 2026, dismissed the Special Leave Petitions and affirmed the reasoning adopted by the Gujarat High Court, thereby conclusively upholding the constitutional validity of Section 16(2)(c) of the CGST Act.
Legal Framework
Section 16 of the CGST Act governs the entitlement of a registered person to avail Input Tax Credit. While Section 16(1) grants the substantive right to claim ITC, Section 16(2) prescribes mandatory conditions precedent for its availment.
Clause (c) of Section 16(2) stipulates that no registered person shall be entitled to ITC unless the tax charged in respect of the supply has actually been paid to the Government, either in cash or through utilization of admissible input tax credit by the supplier.
The controversy centered upon whether this condition could validly make the recipient's entitlement dependent upon the supplier's statutory compliance, particularly when such compliance remains outside the recipient's direct control.
The petition also involved consideration of Section 41 relating to availment and re-availment of ITC, together with Sections 73 and 74 dealing with recovery proceedings against defaulting taxpayers under the CGST Act.
Parties' Submissions
Petitioners
The petitioners argued that Section 16(2)(c) imposed an impossible burden upon genuine purchasers. Once a recipient has discharged the contractual consideration including GST, obtained a valid tax invoice, received the goods or services, and complied with all documentary requirements, the recipient has no statutory mechanism to verify whether the supplier has actually deposited the tax with the Government.
Reliance was placed upon the doctrine lex non cogit ad impossibilia, contending that the law cannot compel a person to perform an impossible act. The petitioners further relied upon decisions rendered under the Delhi VAT Act, particularly 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 ., wherein similar provisions had been read down to protect bona fide purchasing dealers. They also referred to the Tripura High Court decision in 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, which had adopted a liberal interpretation of Section 16(2)(c). It was submitted that the provision violated constitutional guarantees under Articles 14 and 19(1)(g) by penalizing an innocent purchaser for the independent default of another taxable person.
Respondents
The Union of India submitted that ITC is not an inherent or vested right but a statutory concession, the availability of which is entirely subject to fulfilment of legislative conditions.
It was argued that the GST framework is built upon seamless tax credit flowing only when tax has actually reached the Government. Allowing ITC where tax has not been deposited would defeat the destination-based tax structure and expose the revenue to fraudulent claims.
The Government further submitted that the CGST Act itself provides sufficient safeguards. Upon eventual payment of tax by the supplier, the recipient is entitled to re-avail the reversed ITC under Section 41 read with the statutory scheme. Consequently, the provision cannot be characterized as arbitrary or confiscatory.
Observations of the Court
The Supreme Court expressly concurred with the comprehensive reasoning adopted by the Gujarat High Court. It observed that the GST framework is fundamentally distinct from the earlier VAT regime and, therefore, precedents interpreting the Delhi VAT Act could not be mechanically imported into the CGST Act.
The Court particularly approved the Gujarat High Court's analysis distinguishing the statutory architecture of GST from the Delhi VAT legislation. It noted that the GST regime contains an integrated mechanism governing availment, reversal and re-availment of ITC, including Sections 41, 73 and 74 of the CGST Act.
The Court held that the existence of these statutory safeguards negates the argument that a bona fide recipient is left remediless. Where the supplier subsequently discharges the outstanding tax liability, the purchasing dealer is entitled to restore the reversed credit in accordance with the statutory provisions.
Rejecting the plea for reading down Section 16(2)(c), the Court held that the Legislature had consciously incorporated actual payment of tax as a condition for availment of ITC. Such a policy choice neither suffers from manifest arbitrariness nor violates constitutional guarantees.
The Supreme Court further observed that parity could not be drawn between the provisions of the Delhi VAT Act and the CGST Act because of substantial differences in legislative design, compliance architecture and statutory safeguards under the GST regime. Accordingly, no ground existed to declare Section 16(2)(c) unconstitutional.
The Verdict
The Supreme Court dismissed the Special Leave Petitions and affirmed the Gujarat High Court judgment in its entirety.
The Court conclusively held that:
- Section 16(2)(c) of the CGST Act is constitutionally valid.
- ITC remains conditional upon actual payment of tax by the supplier to the Government.
- The provision is neither arbitrary nor violative of Articles 14, 19(1)(g), 265 or 300A of the Constitution.
- Earlier judgments rendered under the Delhi VAT Act are distinguishable and cannot govern interpretation of the CGST Act.
- A purchasing dealer may re-avail ITC if the supplier subsequently deposits the outstanding tax in accordance with the statutory scheme.
Author's Understanding
The judgment marks one of the most significant constitutional pronouncements under the GST regime. By affirming Section 16(2)(c), the Supreme Court has unequivocally established that Input Tax Credit is a conditional statutory entitlement rather than an absolute or vested right.
From a compliance perspective, the decision substantially enhances the responsibility of recipients to undertake rigorous vendor due diligence before engaging in transactions. Businesses can no longer rely solely upon possession of tax invoices or payment of GST to suppliers. Vendor compliance monitoring, periodic reconciliation of returns, contractual indemnity clauses and continuous verification of supplier tax behaviour will now become integral components of GST governance.
The judgment also reinforces the legislative objective of protecting Government revenue and curbing fraudulent ITC claims. However, it simultaneously increases commercial risk for genuine taxpayers, who may suffer temporary denial of ITC despite acting bona fide. While the statutory mechanism for re-availment offers eventual relief, it may not adequately address working capital constraints arising from prolonged supplier defaults.
Conclusion
The decision in Bhandari Scrap Traders v. Union of India settles a long-standing controversy surrounding Section 16(2)(c) of the CGST Act. The Supreme Court has firmly held that actual remittance of tax by the supplier constitutes an indispensable statutory condition for availing Input Tax Credit and that such legislative requirement withstands constitutional scrutiny.
The ruling reinforces the principle that ITC is a concession governed strictly by statutory conditions rather than an unconditional right. Going forward, businesses must strengthen vendor selection, contractual safeguards and GST compliance monitoring to mitigate exposure arising from supplier defaults. The judgment is likely to serve as the definitive precedent governing disputes concerning supplier default and recipient entitlement to ITC under the GST regime.
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