2026 (3) TMI 1674 - HC - GST

Input tax credit provisions read down to protect bona fide recipients from supplier default under GST.

The statutory conditions for input tax credit under the CGST/KGST framework were examined against bona fide recipients who had complied with their own ... Reading down of ITC conditions - bona fide recipient of input tax credit - impossibility of compliance - supplier's tax default and denial of ITC - constitutional validity of input tax credit restrictionsReading down of ITC conditions - bona fide recipient of input tax credit - supplier's tax default and denial of ITC - impossibility of compliance - Section 16(2)(c) of the CGST/KGST Act and Rule 36(4) of the CGST/KGST Rules were not struck down, but were read down so that ITC is not denied to a bona fide recipient who has complied with the other statutory conditions merely because the supplier failed to remit tax to the Government. - HELD THAT: - The Court accepted the line of authority holding that a purchasing dealer or recipient who has entered into a bona fide transaction and satisfied the statutory requirements within its control cannot be compelled to ensure that the supplier actually deposits the tax. Such an interpretation would cast an impossible burden upon the recipient and visit it with consequences for the default of another. Agreeing with the view adopted by the Gauhati High Court and the Tripura High Court, and noticing the earlier decisions under analogous VAT provisions, the Court held that the impugned provisions must be construed so as to permit ITC to bona fide recipients, and to apply against cases involving non-bona fide, collusive or fraudulent transactions rather than against genuine recipients affected only by supplier default. [Paras 17, 18]The challenge to the vires was not accepted in the sense of invalidation; instead, Section 16(2)(c) and Rule 36(4) were read down to preserve ITC in favour of bona fide recipients despite supplier non-payment of tax.Final Conclusion: The petition was disposed of by reading down Section 16(2)(c) of the CGST/KGST Act and Rule 36(4) of the CGST/KGST Rules. The Court held that ITC cannot be denied to a bona fide recipient who has complied with the other conditions merely because the supplier failed to pay the tax, the provision being applicable only in cases lacking bona fides or involving collusion or fraud. Issues: Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 and the corresponding Karnataka provision, and Rule 36(4) of the CGST / KGST Rules, are unconstitutional or whether they must be read down so as not to deny input tax credit to a bona fide recipient who has otherwise complied with the statutory conditions.Analysis: The statutory scheme makes entitlement to input tax credit contingent upon the tax charged on the supply having been actually paid to the Government, but the recipient has no practical mechanism to verify or control the supplier's remittance. Denial of credit to a bona fide purchaser who has paid tax to a registered supplier would place an onerous and impossible burden on the recipient, create disproportionate consequences, and defeat the object of avoiding cascading tax. The provision was therefore examined in the light of the settled approach that a taxing statute may be preserved by reading it down where the offending breadth arises from its application to honest transactions. Applying that approach, the impugned provision was held valid in principle, but not capable of being applied to bona fide transactions in the manner urged by the Revenue.Conclusion: Section 16(2)(c) and Rule 36(4) are not unconstitutional, but they must be read down so that input tax credit cannot be denied to a bona fide recipient merely because the supplier failed to remit the tax; the petitioner is entitled to the claimed credit.Ratio Decidendi: A provision denying input tax credit cannot be applied to bona fide recipients so as to shift to them the impossible burden of ensuring the supplier's tax remittance, and such provision must be read down to avoid arbitrariness and preserve constitutionality.