Landmark GST relief on ITC: Karnataka & Tripura HCs protect bona fide buyers

1. Why this update matters

Two recent High Court decisions have given very strong support to genuine GST taxpayers who face Input Tax Credit (ITC) denial only because their supplier did not pay tax to the Government.

These cases are:

• M/s Instakart Services Pvt. Ltd. v. Union of India & Others– High Court of Karnataka, Bengaluru, W.P. No. 4917 of 2021 (T-RES), Judgment dated: 9 February 2026
• M/s Sahil Enterprises v. Union of India & Others– High Court of Tripura, Agartala, W.P.(C) No. 688 of 2022, Judgment dated: 6 January 2026

Together, they send a clear and simple message:

“A bona fide purchaser who has done everything correctly cannot be punished and deprived of ITC just because the seller has failed to deposit GST with the Government.”

This is a powerful tool for all honest dealers when ITC is denied only on the ground of supplier default or GSTR-2A/2B mismatch.

Provisions discussed

• Section 16(2)(c) of the CGST/KGST Act – condition regarding tax actually paid to Government by the supplier.
• Rule 36(4) of the CGST Rules – restriction on availment of ITC based on details uploaded by the supplier.

Both Courts have taken the view that these provisions must be applied in a manner consistent with principles of fairness, proportionality, and the basic structure of the GST ITC scheme, and cannot operate to penalise bona fide recipients for the independent default of suppliers.

Key legal propositions emerging

• ITC is not a mere concession; it is a core structural feature of GST, intended to avoid cascading.
• Where:
  • The transaction is genuine,
  • Tax invoices are valid,
  • Goods/services are actually received,
  • Consideration including tax is paid, and
  • The supplies are used in the course of business,
    denial of ITC only because of non-payment of tax by the supplier is arbitrary and unsustainable.
• The department must exercise its enforcement powers directly against the defaulting supplier, instead of using the buyer as an easy recovery target.
• “Reading down” of Section 16(2)(c) and Rule 36(4) means that these provisions cannot be applied mechanically to every 2A/2B mismatch case; the buyer’s bona fides must be examined.

2. Basic facts in simple language

Instakart case – Karnataka High Court

• Instakart (Flipkart’s logistics arm) purchased services from various vendors.
• It had:
  • Proper tax invoices in its name.
  • Actually, received the services.
  • Paid the full invoice value (including GST) to the suppliers through banking channels.
  • Used the services for its business and reported the ITC in returns.
• Later, the department found that some suppliers had not deposited the GST with the Government or had not properly reported it.
• On this basis, relying on Section 16(2)(c) and Rule 36(4), the department denied Instakart’s ITC, even though Instakart itself had complied with all normal ITC conditions.

Sahil Enterprises case – Tripura High Court

• Sahil Enterprises was in a similar situation: it had paid GST to the supplier and fulfilled the usual ITC conditions.
• ITC was denied only because the selling dealer did not pay the tax to the Government.
• The Tripura High Court held that a genuine purchasing dealer cannot be denied ITC merely due to such supplier default.

3. What the Karnataka High Court has held

In Instakart, the Karnataka High Court has:

1. Accepted the principle of Sahil Enterprises (Tripura HC) and applied it to Instakart’s case.

2. Held that a bona fide recipient cannot be denied ITC merely because the supplier has failed to pay tax to the Government, when:

• • The buyer has tax invoices in proper form.
  • Goods/services are actually received.
  • Payment (including GST) is made to the supplier.
  • Supplies are used in the course or furtherance of business.
  • All other conditions under Section 16(2) are satisfied.

3. Read down Section 16(2)(c) and Rule 36(4) to the extent they operate harshly against genuine purchasers. In other words, these provisions cannot be used blindly to punish honest buyers for someone else’s wrong.
4. Emphasised that:

• • ITC is a substantive benefit under the GST scheme.
  • The department has independent powers to act against defaulting suppliers – attachment, recovery, prosecution, etc.
  • Therefore, the burden of supplier default cannot be shifted onto a buyer who has acted in good faith.

The Court set aside the orders denying ITC and allowed Instakart’s writ petition.

4. Why this is a landmark for bona fide taxpayers

For honest taxpayers and their advisors, these judgments are extremely helpful because they:

• Recognise in clear words that “genuine buyers cannot be punished” for supplier default.
• Provide a direct reply when officers mechanically rely on:
  • Section 16(2)(c),
  • Rule 36(4), and
  • GSTR-2A / GSTR-2B mismatches,
    to deny ITC, even though the buyer has paid the supplier and holds clean documentation.
• Strengthen the argument that:
  • The first target should be the defaulting supplier, and
  • ITC denial to the buyer should be a last resort, and only after examining the buyer’s bona fides.

In simple terms, the Courts have said:

“Once the buyer has acted in good faith, with proper invoices, proof of payment, and genuine business use, the department cannot treat him as an offender just because his supplier failed in his duty.”

5. How clients and professionals can use these rulings

For taxpayers (dealers, businesses, professionals)

If you receive a notice or order denying ITC only because of supplier default or 2A/2B mismatch, you should:

1. Collect and keep ready:

• • Copies of tax invoices.
  • Proof of receipt of goods/services (delivery challans, GRs, agreements, work completion certificates, etc.).
  • Proof of payment to the supplier (bank statements, UTRs).
  • Proof that the supplies are used in your business (purchase orders, internal records).

2. Point out, in your reply, that:

• • You are a bona fide purchaser who has complied with all conditions of Section 16(2).
  • Any default is on the supplier’s side, not yours.

3. Through your consultant, cite and rely on:

• • Instakart – Karnataka High Court.
  • Sahil Enterprises – Tripura High Court.

For professionals (CAs, tax practitioners, advocates)

You can use these cases as a standard defence template in:

• Reply to show cause notices on ITC denial due to supplier default.
• Appeals where ITC has been disallowed invoking Section 16(2)(c) and Rule 36(4), or based purely on 2A/2B mismatch.
• Writ petitions where the department has:
  • Not examined the buyer’s bona fides, or
  • Simply shifted the entire burden of supplier non-payment onto the recipient.

A simple way to put it in your written submissions:

“In light of the Karnataka High Court decision in M/s Instakart Services Pvt. Ltd. v. Union of India and the Tripura High Court decision in M/s Sahil Enterprises v. Union of India, ITC cannot be denied to a bona fide purchasing dealer who has fulfilled all conditions under Section 16(2), merely because the selling dealer has failed to deposit tax with the Government or due to a mismatch in GSTR2A / 2B.”

6. Important caveats

These decisions do not protect:

• Buyers who are part of collusive or bogus arrangements.
• Cases where invoices are fake, goods never moved, or payment is only on paper.
• Situations where the buyer has not maintained basic evidence of receipt and payment.

They are meant to protect bonafide taxpayers, not to legalise fraudulent ITC.

7. Concluding message

As an auditor and tax consultant, my view is:

• These judgments bring much-needed balance into the GST system.
• They reaffirm that genuine business transactions should not be destroyed by mechanical, onesided application of Section 16(2)(c) and Rule 36(4).
• Every honest dealer who has done the right thing now has a strong legal shield to rely on.

Taxpayers should, however, continue to:

• Choose suppliers carefully.
• Maintain good documentation.
• Act promptly when any notice is received – ideally with professional assistance.

Footnotes

1. “M/s Instakart Services Private Limited v. Union of India & Others, W.P. No. 4917 of 2021 (T-RES), judgment dated 09.02.2026, High Court of Karnataka, Bengaluru, per Hon’ble judge S.R. Krishna Kumar J.”

2. “M/s Sahil Enterprises v. Union of India & Others, W.P.(C) No. 688 of 2022, judgment dated 06.01.2026, High Court of Tripura, Agartala.”

3. “Section 16(2)(c), Central Goods and Services Tax Act, 2017 read with corresponding State enactments.”

4. “Rule 36(4), Central Goods and Services Tax Rules, 2017 and corresponding State rules.”