Input tax credit conditions read down to protect bona fide recipients from denial based on supplier default.

Section 16(2)(c) of the CGST Act and Rule 36(4) of the CGST Rules were upheld in validity but read down to preserve input tax credit for bona fide recipients who satisfy the other statutory conditions. The Court reasoned that making credit dependent on the supplier's actual tax remittance, despite the recipient having no effective control over that act, imposes an onerous burden and risks arbitrary denial of credit in genuine transactions. Denial of credit was therefore confined to non-bona fide, collusive, or fraudulent transactions, consistent with the GST scheme's anti-cascading purpose.

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Issues: Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 and Rule 36(4) of the Central Goods and Services Tax Rules, 2017 are unconstitutional or ultra vires, or whether they must be read down so as not to deny input tax credit to a bona fide recipient who has complied with the other conditions for availing credit.

Analysis: Input tax credit is part of the GST scheme designed to avoid cascading of tax. The provision under challenge made entitlement to credit depend on the supplier having actually paid the tax to the Government, even though the recipient has no practical mechanism to verify or control the supplier's compliance. The Court held that this places an onerous and impossible burden on a bona fide purchaser, and that the statute failed to distinguish between honest purchasing dealers and defaulting or collusive transactions. Following the line of authority that a bona fide recipient cannot be penalised for the supplier's default, the Court held that the provision need not be struck down if it is confined by interpretation to non-bona fide, collusive, or fraudulent transactions. Rule 36(4) was treated consistently with that approach.

Conclusion: Section 16(2)(c) and Rule 36(4) were upheld in validity but read down so that denial of input tax credit is confined to transactions that are not bona fide or are collusive or fraudulent, and not to a bona fide recipient who otherwise satisfies the statutory conditions.

Ratio Decidendi: A tax credit condition that makes a bona fide recipient's entitlement depend on the supplier's act of remittance, despite the recipient having no effective control over that act, must be read down to avoid unconstitutional arbitrariness and to preserve the credit mechanism in genuine transactions.

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