The Gauhati High Court in M/s McLeod Russel India Ltd. v. Union of India examined the constitutional validity and operational fairness of Section 16(2)(aa) of the CGST/AGST Acts, which conditions the availability of Input Tax Credit (ITC) to a recipient upon the supplier’s compliance in uploading invoice details in GSTR-1. The petitioner challenged the provision as arbitrary, unreasonable, and violative of the fundamental structure of GST, particularly where denial of ITC occurs despite the recipient having acted bona fide and paid tax to the supplier.
The Court acknowledged that ITC is in the nature of a concession/exemption, not an absolute right, and therefore can validly be subjected to statutory conditions. It also accepted the legislative intent behind inserting Section 16(2)(aa), namely, curbing fake invoicing, preventing fraudulent ITC claims, and improving supplier compliance within the GST framework. On this count, the Court declined to strike down the provision as unconstitutional.
However, the Court undertook a purposive and equitable analysis, recognizing a serious structural imbalance created by the provision. It observed that the recipient has no statutory control or enforcement mechanism to compel a supplier to correctly file GSTR-1, yet bears the harsh consequence of ITC denial for the supplier’s default. Such denial, in the Court’s view, defeats the core objective of GST, which is to tax only value addition and avoid cascading of taxes. Denial of ITC in these circumstances effectively results in double taxation on the same transaction, shifting the tax burden from the supplier to the purchaser—an outcome inconsistent with the GST scheme.
Drawing support from precedents such as Suncraft Energy Pvt. Ltd. (affirmed by the Supreme Court), Diya Agencies, and earlier VAT jurisprudence including Shanti Kiran India (P) Ltd. and On Quest Merchandising, the Court emphasized the protection traditionally afforded to bona fide purchasers who have acted in good faith and possess valid tax invoices.
Balancing revenue interests with taxpayer equity, the Court adopted a “reading down” approach. It held that while Section 16(2)(aa) would continue to operate, ITC cannot be denied mechanically. Where the supplier defaults, the recipient must be afforded an opportunity to establish bona fides through invoices and supporting documents before ITC is denied. This reading down is intended as an interim safeguard until the CBIC formulates a practical mechanism to address supplier-side non-compliance without penalizing compliant recipients.
In conclusion, the judgment reinforces that administrative convenience and anti-evasion measures cannot override substantive fairness, and that GST authorities must ensure that compliance burdens do not become oppressive or impossible for genuine taxpayers. The ruling is a significant reaffirmation of proportionality and natural justice within GST adjudication.
It is to be noted that the recent Supreme Court judgment in Commissioner Trade and Taxes Delhi vs. M/s. Shanti Kiran India Pvt. Ltd., Civil Appeal No.(s) 2042-2047/2105, Judgment dated 09.10.2025. marks a significant milestone in protecting the rights of bona fide purchasing dealers under VAT laws. The core issue before the Court was whether Input Tax Credit (ITC) can be denied to purchasers who have paid tax through valid invoices issued by registered selling dealers, even when those sellers later defaulted in depositing the collected tax with the Government.
The Supreme Court affirmed the Delhi High Court’s view that when a purchaser buys goods from a dealer who was duly registered on the date of the transaction, pays tax in good faith, and possesses proper invoices that match statutory returns, ITC cannot be denied merely because the seller failed to deposit the tax. The Court emphasized that the Department must pursue the defaulting seller, not penalize the innocent purchaser.
Relying on the earlier judgment in On Quest Merchandising India Pvt. Ltd., the Court reiterated that denying ITC in such circumstances would violate Article 14, making Section 9(2)(g) of the DVAT Act operative only against fraudulent or collusive transactions. Since no discrepancy was found in invoices or purchases of Shanti Kiran India, the Supreme Court refused to interfere and upheld the ITC entitlement. This judgment provides strong reassurance to genuine traders, ensuring that tax compliance by purchasers is not unfairly jeopardized by the misconduct of sellers.
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