Section 16(2)(c) CGST Held Constitutional — Buyer Denied ITC When Supplier Fails to Pay Tax: Gujarat High Court, Affirmed by Supreme Court

A Division Bench of the Hon'ble High Court of Gujarat at Ahmedabad in Maruti Enterprise through its Authorized Partner, Jigneshbhai Bharatbhai Tarpara vs. Union of India & Ors. [R/Special Civil Application No. 18080 of 2023 with connected group of petitions], by Common CAV Judgment dated May 1, 2026, upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, and declined both to strike it down as ultra vires and to read it down. The Court held that denial of Input Tax Credit (ITC) to a purchasing dealer, where the supplier has failed to actually deposit the tax with the Government, is neither unconstitutional nor onerous. The Court held that ITC is a statutory concession — not a vested or fundamental right — available only on strict compliance with the conditions in clauses (a) to (d) of Section 16(2), which must be read conjointly. Distinguishing the On Quest Merchandising and Shanti Kiran India line of decisions rendered under Section 9(2)(g) of the Delhi VAT Act, the Court held that the GST regime is materially different because of Section 41(2) (reversal and re-availment), Rule 37A (grace period and re-credit on supplier's payment), Section 53 (destination-based transfer of tax) and Section 155 (burden of proof on the person claiming ITC). While upholding the provision, the Court expressed the expectation that the Government should urgently put in place a robust, technology-driven mechanism to protect genuine purchasers and pursue defaulting suppliers.

The Hon'ble Supreme Court of India, in Bhandari Scrap Traders vs. Union of India & Ors. [SLP(C) No. 23931/2026 with SLP(C) Nos. 24088/2026 and 24103/2026], by Order dated July 24, 2026, dismissed the Special Leave Petitions challenging the Gujarat High Court judgment, expressing "complete and respectful agreement" with the views of the High Court and affirming it. The challenge to Section 16(2)(c) has therefore attained finality at the level of the Supreme Court.

FACTS OF THE CASE

A large group of petitions was filed before the Hon'ble High Court of Gujarat by various purchasing dealers challenging Section 16(2)(c) of the CGST Act, 2017. Special Civil Application No. 18080 of 2023 (Maruti Enterprise) was taken up as the lead matter, since a common issue arose in all the group petitions.

The petitioners were registered purchasing dealers who had purchased goods or services from registered suppliers, received the goods or services, held valid tax invoices, and paid the tax charged to their suppliers. Their Input Tax Credit stood reflected in the auto-populated Form GSTR-2A and the auto-generated ITC statement in Form GSTR-2B on the GST portal. On the strength of these statutory forms, the petitioners had availed and utilised ITC in discharging their own output tax liability.

The grievance of the petitioners arose from a single circumstance: the default of the supplier in depositing, with the Government, the tax that the supplier had collected from the petitioners. In such cases, the Revenue proceeded to deny/recover ITC from the purchasing dealers under Section 16(2)(c), which requires — as one of the conditions for availing ITC — that the tax charged on the supply "has been actually paid to the Government."

The petitioners contended that Section 16(2)(c) was arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution of India. In the alternative, they prayed that the provision be read down so as to apply only to transactions found to be fraudulent, collusive, or involving connivance between the purchasing dealer and the supplier, thereby excluding bona fide purchasers.

The principal submissions advanced on behalf of the petitioners were:

(i) Section 16(2) contains six cumulative conditions in clauses (a), (aa), (b), (ba), (c) and (d). The genuineness of a transaction is fully secured by clauses (a), (aa), (b) and (ba) — possession of a valid invoice, supplier-filed and GSTR-2A/2B-communicated details, actual receipt of goods/services, and absence of any restriction of the credit. Clause (c) therefore operates only on a pool of transactions that are already genuine, and introduces the single variable of whether the supplier has actually remitted the tax — a matter entirely outside the purchasing dealer's control, knowledge or verification.

(ii) The provision fails to distinguish between a diligent bona fide purchaser and a purchaser who has colluded with a defaulting or bogus supplier, visiting both with the identical consequence of denial of ITC — treating unequals alike, in violation of Article 14. Reliance was placed on On Quest Merchandising India (P) Ltd. vs. Government of NCT of Delhi (Delhi HC), affirmed by dismissal of SLP in Commissioner of Trade & Tax, Delhi vs. Arise India Ltd. and approved in Commissioner of Trade & Tax, Delhi vs. Shanti Kiran India (P) Ltd., and on State of Karnataka vs. Tallam Apparels and Arpit Pravinbhai Shah vs. ACIT (Gujarat HC).

(iii) The purchaser has no statutory, contractual or factual means of verifying whether the supplier has discharged his output liability, as the supplier's Form GSTR-3B is not accessible to the recipient — "the Petitioner cannot be called upon to do the impossible."

(iv) Denial of ITC to a purchaser who has already paid GST to a registered supplier results in double taxation, contrary to Article 265 and to the object of ITC (elimination of cascading effect), and violates Articles 19(1)(g) and 300A. Reliance was placed on the maxim "Lex non Cogit Ad Impossibilia" and on the judgment of the Court of Justice of the European Union in Axel Kittel vs. Belgian State and Belgian State vs. Recolta Recycling SPRL.

The Revenue, through the learned Advocate General, submitted that GST is charged on the supply and is payable by the supplier; that ITC is availed on the basis of the supplier's Form GSTR-1 without any authority's intervention at that stage, on a presumption of authenticity that is "washed off" if the supplier does not file GSTR-3B / pay the tax; that Section 41(2) requires the purchaser to reverse credit on the supplier's non-payment, with re-availment on subsequent payment under Rule 37A; that Section 155 places the burden of proof on the person claiming ITC; that Section 53 makes the regime destination-based, so allowing credit without payment would force originating States to transfer amounts they never received; and that ITC is a concession, not a vested right, to be strictly construed. The Revenue distinguished the DVAT cases on the ground that Section 41(2), Section 155 and Rule 37A have no parallel in the DVAT Act, and relied on State of Karnataka vs. Ecom Gill Coffee Trading Pvt. Ltd. (which set aside the Karnataka High Court view and held that production of invoices/payment by cheque does not discharge the burden of proof).

Following the Gujarat High Court judgment, Special Leave Petitions were filed before the Supreme Court, including SLP(C) No. 23931/2026 (Bhandari Scrap Traders) arising out of the connected SCA No. 749/2025 decided by the same common judgment.

ISSUE

Whether Section 16(2)(c) of the CGST Act, 2017 — which denies Input Tax Credit to a purchasing dealer unless the tax charged on the supply "has been actually paid to the Government" — is arbitrary, ultra vires and violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution of India, or is otherwise liable to be read down so as to protect bona fide purchasing dealers who have complied with all other conditions but whose supplier has defaulted in depositing the tax; and whether the reasoning in the On Quest Merchandising / Shanti Kiran India line of cases under Section 9(2)(g) of the DVAT Act can be applied to the scheme of the CGST Act.

HELD BY THE COURT

A. By the Hon'ble High Court of Gujarat (per Hon'ble Mr. Justice A.S. Supehia, for the Bench comprising himself and Hon'ble Mr. Justice Pranav Trivedi):

The Court held that before striking down or reading down a statutory provision, the Statement of Objects and Reasons (SOR) must be examined. Clause 5(b) of the SOR of the CGST Bill, 2017 makes availment of ITC "available in respect of taxes paid." Thus, availment of ITC is intrinsically connected with the factum of "taxes paid," and Section 16(2)(c) is in tune with the legislative scheme.

The Court held that the clauses of Section 16(2), from (a) to (d), must be read conjointly and not independently. Eligibility for ITC is established only after receipt of goods/services and upon the tax charged being duly paid to the Government. A registered person cannot be held entitled to ITC unless all conditions up to clause (c) are satisfied; the Revenue cannot be directed to "stop at clause (b)."

The Court distinguished the DVAT regime and the decision in On Quest Merchandising India (P) Ltd. The Delhi High Court had read down Section 9(2)(g) of the DVAT Act because (i) the phrase "dealer or class of dealers" conferred unguided discretion on the Department to proceed against either the purchasing or the selling dealer, vulnerable under Article 14; and (ii) the purchasing dealer had no access to the selling dealer's returns, which were confidential under Section 98(1) of the DVAT Act. The Court held that these features are absent under the GST regime, which has a materially different, transparent, form-driven scheme (GSTR-1, GSTR-2A, GSTR-2B, GSTR-3B).

The Court held that, unlike the VAT regime where ITC was confined to the originating State, the GST regime is destination-based, and Section 53 requires the tax component utilised by an inter-State supplier to be transferred to the destination State. If credit were allowed without the tax being actually deposited, the originating State would be forced to transfer amounts it never received, causing loss of several crores in each tax period and rendering the GST scheme unworkable. The Court relied on the exposition of this scheme by the Kerala High Court in M Trade Links.

The Court held that the purchasing dealer is not left remediless. Under Section 41(2) (as substituted by the Finance Act, 2022), the purchaser must reverse ITC with interest if the supplier fails to pay, but the proviso permits re-availment once the supplier pays. Rule 37A of the CGST Rules, 2017 provides an operational grace period: where the supplier has not paid tax / filed GSTR-3B by 30 September of the following financial year, the recipient must reverse the ITC by 30 November, with interest accruing only if the reversal is missed beyond that date; and on the supplier subsequently discharging the liability, the recipient re-avails the credit in the succeeding month. The Revenue is separately empowered to recover from the defaulting supplier under Sections 73 and 74. Thus, mere delay or hardship cannot be a ground for reading down the provision.

The Court held that the contention of double taxation is misconceived. ITC is not a constitutional or vested right but a statutory concession, subject to conditions. The entitlement operates on the statutory assumption that the tax collected by the supplier has been remitted; credit reflects in the Electronic Credit Ledger only upon such payment. Where the statute itself provides for reversal and re-availment, this cannot be characterised as double taxation. The Court relied on Commissioner of Sales Tax, U.P. vs. Modi Sugar Mills Ltd. (equitable considerations are out of place in interpreting a taxing statute), Kailash Chandra vs. Mukundi Lal (a provision is not to be read in isolation), and ALD Automotive Pvt. Ltd. vs. CTO (ITC is a concession, conditions of which must be strictly complied with).

On the burden of proof, the Court held that Section 155 of the CGST Act places the burden of proving eligibility for ITC squarely on the person claiming it. The expression "eligible" cannot depend on the purchaser's unilateral act of claiming credit; it has a direct nexus with the actual payment of tax by the supplier. Neither the Delhi High Court nor the Tripura High Court (in Sahil Enterprises) had considered the effect of Section 155.

On "Lex non Cogit Ad Impossibilia" / "Impotentia Excusat Legem," the Court held that the GST scheme does not attract the maxim, because Section 41 read with Rule 37A ensures the purchaser is not unfairly penalised, and because a purchaser can protect itself through contractual due diligence — for instance, by incorporating an indemnity clause in the agreement holding the supplier liable if the purchaser suffers loss due to the supplier's default in remitting tax.

Applying the doctrine of reading down as explained in Authorized Officer, Central Bank of India vs. Shanmugavelu and B.R. Enterprises vs. State of U.P., the Court held that reading down is a last resort available only where a provision, on its plain meaning, cannot be saved from invalidation. Section 16(2)(c) is "clear, self-explanatory and unambiguous," and its plain reading gives rise to no constitutional or legal infirmity. The Court expressly recorded its disagreement with the contrary view of the Tripura High Court in Sahil Enterprises, which had read down Section 16(2)(c) without adequately considering the interplay of Sections 41 and 53 read with Rule 37A.

Adopting a balanced approach aligned with the principle in Axel Kittel & Recolta Recycling SPRL (ECJ), the Court noted that ITC can be denied only where it is shown that the recipient knew or ought to have known that the purchase was connected with a fraudulent evasion of tax — while emphasising that the Department is not destitute and retains full recovery powers against the defaulting supplier under Sections 73 and 74.

Final conclusion: The Court declined to read down Section 16(2)(c). Consequently, the question of declaring it ultra vires Part III of the Constitution, including Article 14, did not arise. However, in its Final Observations, the Court acknowledged the "dicey situation" faced by genuine purchasers and expressed the expectation that the Government should undertake a comprehensive re-evaluation, issue legislative amendments or clarifications, and implement a robust, technology-driven, real-time tracking mechanism to verify supplier payments against specific invoices and to promptly recover tax from erring suppliers — so as to insulate bona fide recipients. The Registry was directed to list the writ petitions for decision on merits, with the rest of the contentions and rights of the parties left open.

B. By the Hon'ble Supreme Court of India (per the Bench of Hon'ble Mr. Justice Sanjay Kumar and Hon'ble Mr. Justice Sanjeev Sachdeva):

The Supreme Court noted that the detailed analysis undertaken by the Gujarat High Court from paragraph 42 onwards — bringing out the distinctions between the DVAT Act and the CGST Act, together with the scheme of availing ITC under the GST regime set out in paragraph 56 — clearly demonstrated that no parity can be drawn between a purchasing dealer under the CGST Act and a purported bona fide purchasing dealer under the Delhi VAT Act. This exercise had not been undertaken by the Tripura High Court in Sahil Enterprises.

The Supreme Court further noted the Gujarat High Court's reliance on Section 41 and Sections 73 and 74 of the CGST Act, in the context of the purchasing dealer being entitled to re-avail the reversed ITC after the supplier is made to discharge the tax liability.

The Court held that the High Court was "fully justified" in holding that no grounds were made out to declare Section 16(2)(c) unconstitutional or to read it down, expressed "complete and respectful agreement" with the views of the High Court, and affirmed and upheld the impugned judgment. The Special Leave Petitions were accordingly dismissed.

RELEVANT SECTIONS

Section 16(2)(c) of the CGST Act, 2017 — Eligibility and conditions for taking input tax credit

"(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless — ... (c) subject to the provisions of section 41 [or section 43A], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and ..."

Section 41(2) of the CGST Act, 2017 — Availment of input tax credit (as substituted by the Finance Act, 2022)

Requires the recipient to reverse the ITC availed, along with applicable interest, where the supplier fails to pay the tax due on the supply; the proviso permits re-availment of such reversed credit once the supplier pays the tax.

Section 53 of the CGST Act, 2017 — Transfer of input tax credit

On utilisation of ITC availed under the Act for payment of IGST dues, the central tax collected stands correspondingly reduced and the Central Government transfers an equivalent amount from the central tax account to the integrated tax account (with a parallel provision in the State laws), ensuring the destination-based transfer of tax.

Section 155 of the CGST Act, 2017 — Burden of proof

"Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person."

Sections 73 and 74 of the CGST Act, 2017 — Empower the Department to recover tax from defaulting parties in cases of non-payment, short payment, and wrongful utilisation of credit (including from the defaulting supplier).

Rule 37A of the CGST Rules, 2017 — Prescribes the operational procedure for reversal of ITC where the supplier has not paid tax / filed GSTR-3B by 30 September of the following financial year (reversal to be made by 30 November, with interest only on delayed reversal) and for re-availment of such credit once the supplier subsequently pays the tax.

Articles 14, 19(1)(g), 265 and 300A of the Constitution of India — Equality before law; right to carry on trade and business; no tax to be levied or collected except by authority of law; and no deprivation of property save by authority of law — being the constitutional provisions on which the challenge was founded.

PARI MATERIA / CASES REFERRED

Distinguished / disagreed with:

• On Quest Merchandising India (P.) Ltd. vs. Government of NCT of Delhi, [2017] 87 taxmann.com 179 / [2018] 10 GSTL 182 (Del) — read down Section 9(2)(g) of the DVAT Act; distinguished as inapplicable to the CGST scheme.

  
  

• Commissioner of Trade & Tax, Delhi vs. Arise India Ltd., 2022 (60) GSTL 215 (SC) — SLP dismissed affirming On Quest; distinguished.

  
  

• Commissioner of Trade & Tax, Delhi vs. Shanti Kiran India (P.) Ltd., [2025] 179 taxmann.com 665 (SC) — distinguished.

  
  

• Sahil Enterprises vs. Union of India (Tripura High Court), [(2026) 154 GSTR 108 (Tri.)] — respectfully disagreed with by the Gujarat High Court for reading down Section 16(2)(c) without considering Sections 41, 53 and 155 and Rule 37A.

  
  

• State of Karnataka vs. Tallam Apparels, 2021 SCC OnLine Kar 15785 — distinguished (line of reasoning set aside in Ecom Gill).

  
  

• Arpit Pravinbhai Shah vs. Assistant Commissioner of Income Tax, (2026) 182 taxmann.com 691 (Guj.) — distinguished; Section 205 of the Income Tax Act has no parallel in the GST Act.

  
  

Relied upon by the Court:

• State of Karnataka vs. Ecom Gill Coffee Trading Pvt. Ltd., (2023) 18 SCC 809 — burden of proof under the tax statute is not discharged merely by production of invoices or payment by cheque.

• Authorized Officer, Central Bank of India vs. Shanmugavelu, (2024) 6 SCC 641 — principles governing the doctrine of reading down; harshness of a provision is no reason to read it down if its plain meaning is unambiguous and valid.

• B.R. Enterprises vs. State of U.P., (1999) 9 SCC 700 — reading down as a tool to salvage legislation and achieve its objective.

• Commissioner of Sales Tax, U.P. vs. Modi Sugar Mills Ltd., AIR 1961 SC 1047 — equitable considerations are entirely out of place in interpreting a taxing statute.

• Kailash Chandra vs. Mukundi Lal, [2002] 2 SCC 678 — a provision in a statute is not to be read in isolation.

• ALD Automotive Pvt. Ltd. vs. Commercial Tax Officer, (2019) 13 SC 225 — ITC is a benefit/concession, receivable only as per the scheme of the statute.

• Director of Income Tax vs. American Express Bank Ltd., 2025 SCC OnLine (SC) 2806 — interpretation of taxing provisions.

• M Trade Links vs. Union of India, 2024 SCC OnLine (Ker.) 2744 — exposition of the operation of ITC under the GST regime.

• Axel Kittel vs. Belgian State (C-439/04) and Belgian State vs. Recolta Recycling SPRL (C-440/04), CJEU (Third Chamber), 06.07.2006 — ITC/VAT deduction can be denied only where the recipient knew or ought to have known of connection with fraudulent evasion.

Cases: (1) Maruti Enterprise vs. Union of India & Ors., R/SCA No. 18080 of 2023 (with connected group of petitions), High Court of Gujarat at Ahmedabad (2) Bhandari Scrap Traders vs. Union of India & Ors., SLP(C) No. 23931/2026 (with SLP(C) Nos. 24088/2026 & 24103/2026), Supreme Court of India

Dates of Judgment: High Court of Gujarat — Reserved 21 April 2026, Pronounced 1 May 2026 | Supreme Court of India — 24 July 2026

Bench (Gujarat High Court): Hon'ble Mr. Justice A.S. Supehia and Hon'ble Mr. Justice Pranav Trivedi

Bench (Supreme Court): Hon'ble Mr. Justice Sanjay Kumar and Hon'ble Mr. Justice Sanjeev Sachdeva

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