TaxTMI 
TaxTMI 
Section 16(2)(c): Beyond What the Hon'ble Supreme Court Decided.
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....ection 16(2)(c): Beyond What the Hon'ble Supreme Court Decided.<br>By: - VISHAKA GOYAL<br>Goods and Services Tax - GST<br>Dated:- 10-8-2026<br>What the Hon'ble Supreme Court's Section 16(2)(c) ruling decided - and what it left open A trader checks his supplier's GSTIN on the portal. Active. He receives the goods, the invoice, the e-way bill. He pays the full amount through the bank - value and tax. A few weeks later the invoice appears in his GSTR-2B, the Government's own statement telling him the credit is his to take. He takes it. Three years later a notice arrives. The supplier never deposited the tax. Reverse the credit. Pay again, with interest and penalty. He did everything the law asked of him. He is still as....
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....ked to pay twice. On 24 July 2026, in Bhandari Scrap Traders Versus Union of India & Ors. - 2026 (7) TMI 1839 - SC Order , the Hon'ble Supreme Court held that Section 16(2)(c) of the CGST Act is constitutionally valid and cannot be read down. But a great deal else is not closed. And it is the judgment itself that says so. 1. The section was upheld on a machinery that arrived years late As per paragraph 3 of the order, the Hon'ble Court sustained the provision because the buyer is not permanently deprived - he is "entitled to re-avail the reversed ITC after the supplier-dealer is made to discharge the tax liability." That entitlement lives in Section 41(2) and Rule 37A. Section 41 was substituted only by the Fin....
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....ance Act, 2022, with effect from 1 October 2022. Before that it was headed "Claim of input tax credit and provisional acceptance thereof" - it created no duty to reverse and no right to re-avail. The matching machinery in Sections 42 and 43 was never operationalised; GSTR-2 and GSTR-3 were suspended and never came into working use. Section 43A was inserted in 2018 and never brought into force for a single day before being omitted. Rule 37A, which supplies the entire reversal-and-re-availment procedure, arrived on 26 December 2022. Rule 36(4), the first restriction linking credit to what the supplier had filed, came in only on 9 October 2019 - and even then with a 20% cushion, tightened to 10%, then 5%, and only from 1 January 2022 to full m....
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....atching. Section 16(2)(aa) itself is a 1 January 2022 provision. So for the initial years, the mechanism simply did not exist in the statute book. 2. The Department's own instruction: go to the seller first On 4 May 2018 the CBIC issued a press release which has never been withdrawn: There shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller ... reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets. - CBIC, 4 May 2018 Bu....
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....ilding on this, the Calcutta High Court in Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others - 2023 (8) TMI 174 - CALCUTTA HIGH COURT set aside a recovery from the buyer and directed the authorities to first proceed against the defaulting supplier, and to touch the recipient only in the exceptional situations the Board itself had listed. The Revenue's appeal was not entertained by the Supreme Court on 14 December 2023, the demand being small, so it is the High Court's reasoning that carries the weight. It has since been followed by the Kerala High Court in Diya Agencies Versus The State Tax Officer, The State Tax Officer, Union Of India, The Central Board Of I....
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....ndirect Taxes & Customs, The State Of Kerala - 2023 (9) TMI 955 - KERALA HIGH COURT and relied on by the Gauhati High Court in M/s. Mcleod Russel India Limited Versus The Union of India, The State of Assam, The Commissioner, Central Goods & Service Tax, Guwahati, The Commissioner of State Taxes, Assam - 2025 (12) TMI 756 - GAUHATI HIGH COURT, which read down Section 16(2)(aa) to require that a bona fide buyer be heard on his bona fides before credit is denied. None of this is disturbed by Bhandari Scrap. Section 16 governs entitlement. Sections 73, 74, 78 and 79 govern recovery - from whom, and in what order. 3. The judgment itself asked the Government to fix this The Gujarat High Court judgment [Maruti Enterprise T....
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....hrough 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] which the Supreme Court affirmed, in words of "complete and respectful agreement", contains two passages every honest taxpayer should know. The availment of ITC can be denied only if it is shown that the recipient knew or ought to have known that their purchase was connected with a fraudulent evasion of tax. - Maruti Enterprise, para 87, adopting Axel Kittel (CJEU) There is a pressing need for legislative amendments or clarifications ... to alleviate the disproportionate financial and administrative burdens currently placed upon pu....
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....rchasers who have an honest claim of ITC. ... the Government should implement a robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time, thereby insulating bona fide recipients from the defaults of their vendors. Simultaneously, the Government has to take prompt and immediate steps for recovery of tax from the erring suppliers, instead of compelling the purchasers to avail themselves of alternate cumbersome remedies. - Maruti Enterprise, para 88 That is the affirmed judicial view of what fairness requires: real-time, invoice-level verification, and prompt action against the defaulter. Until the GST Council and the CBIC deliver it, the gap between what the law....
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.... demands of an honest buyer and what he is actually able to do stays open. Note too that only a week earlier, on 17 July 2026, the Supreme Court declined to disturb the Allahabad High Court's decision in Safecon Lifesciences, which quashed an input tax credit reversal demand raised under Section 74 for want of any finding of fraud, wilful misstatement or suppression - as CBIC Instruction No. 05/2023-GST dated 13 December 2023 itself requires. The condition is valid; the demand must still be lawfully made. 4. What honest businesses should do The eight-point protocol • Before releasing payment, take a dated screenshot of the vendor's registration status from the portal and file it. Contemporaneous proof is worth man....
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....y times more than proof created after a notice. • Reconcile the purchase register with GSTR-2B every month, not once a year, and preserve the reconciliation. • Check each material vendor's GSTR-3B filing status monthly on the portal. If it is unfiled, escalate in writing and stop further purchases. • Run the Rule 37A calendar: by 30 September each year list invoices where the supplier has not filed GSTR-3B, and reverse that credit in the return filed on or before 30 November. Reverse within the window and no interest arises at all. • Maintain a re-availment register, so that when the supplier eventually files, the reversed credit is taken back rather than forgotten. • Put ....
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....a GST indemnity, a right of set-off and a retention clause into vendor contracts. • Preserve movement evidence for every consignment as routine: e-way bill with Part-B, lorry receipt, weighbridge slip, gate entry, GRN, stock and consumption records. Invoices and bank payments alone are not enough. • If a notice arrives, ask the Department in writing what action it has taken against the supplier and what it has recovered. The Tripura High Court called for exactly that affidavit 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. Sent....
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....u Dey, Represented by its Proprietor Sri Sentu Dey, Bairagi Bazar, Jumerdhepha - 2026 (1) TMI 385 - TRIPURA HIGH COURT, and the answer often changes the case. A closing thought The Hon'ble Supreme Court has upheld Section 16(2)(c). That settles the constitutional challenge, but it does not settle every dispute that may arise under it. Whether the Department can recover from a bona fide recipient without first exhausting remedies against the defaulting supplier, whether the statutory mechanism can be invoked for periods when it did not exist, and whether a demand satisfies the requirements of Sections 73 or 74 will continue to depend upon the facts of each case. The judgment marks an important milestone, but not the final chap....
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....ter, in the jurisprudence governing input tax credit. =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....