Section 16(2)c is constitutionally valid, all conditions of sec 16 should be fullfiled before allowing ITC to recipient: SC
Summary: Article discusses the Supreme Court’s dismissal of the Special Leave Petitions in BHANDARI SCRAP TRADERS vs UOI & Others, SLP to to Appeal (C) No. 23931/2026, affirming the Gujarat High Court’s decision in Jigneshbhai Bharatbhai Tarpara Vs Union of India & Ors. upholding the constitutional validity of Section 16(2)(c) of the CGST Act, 2017. The challenge was based on the contention that bona fide recipients should not be denied Input Tax Credit (ITC) where suppliers failed to deposit GST despite issuance of tax invoices, receipt of goods or services and reflection of transactions in GSTR-2A/2B. The Gujarat High Court held that ITC is a statutory benefit subject to prescribed conditions, distinguished the GST framework from the Delhi VAT regime, noted that Section 41 and Rule 37A permit re-availment of ITC after the supplier pays the tax, and referred to the importance of Section 53 in the GST settlement mechanism. The Supreme Court agreed that the Gujarat High Court had comprehensively analysed the GST framework, held that the CGST Act provisions cannot be equated with those under the Delhi VAT Act, observed that Sections 16, 41, 73 and 74 provide an adequate statutory mechanism, affirmed the High Court’s judgment and dismissed the Special Leave Petitions.
Background
Several taxpayers had challenged the constitutional validity of Section 16(2)(c), contending that a bona fide purchaser should not be denied ITC merely because the supplier failed to deposit GST with the Government.
The petitioners argued that:
1. They had received the goods/services.
2. Tax invoices were duly issued.
3. Transactions were reflected in GSTR-2A/2B.
4. They had no mechanism to verify whether the supplier had actually paid the tax.
Accordingly, they sought either to declare Section 16(2)(c) as unconstitutional or to read it down so that it would not apply to bona fide recipients.
Gujarat High Court’s Findings
in case of Maruti Enterprise, Through Its Authorized Partner, Jigneshbhai Bharatbhai Tarpara Vs Union of India & Ors. at Gujrat High Court, After an extensive analysis of the GST framework, the Gujarat High Court rejected the constitutional challenge and observed:
1. ITC is not an absolute or vested right. It is a statutory benefit available only upon fulfilment of the conditions prescribed under the Act.
2. The GST regime is fundamentally different from the earlier VAT regime. Therefore, judgments rendered under the Delhi VAT Act, including On Quest Merchandising and Arise India, cannot automatically be applied to the GST framework.
3. Section 41 and Rule 37A provide a statutory safeguard. Where ITC is reversed because of supplier default, the recipient is entitled to re-avail the credit once the supplier deposits the tax.
4. The Court also emphasized the importance of Section 53 (IGST settlement mechanism), observing that permitting ITC without actual payment of tax by the supplier would adversely affect the destination-based GST model and inter-governmental settlement mechanism.
Accordingly, the Court held that Section 16(2)(c) is neither arbitrary nor unconstitutional and does not warrant being read down.
Supreme Court’s Verdict
The Supreme Court agreed with the reasoning of the Gujarat High Court and categorically observed that:
1. The Gujarat High Court had undertaken a comprehensive analysis of the GST framework.
2. The provisions of the CGST Act cannot be equated with those under the Delhi VAT Act.
3. The statutory mechanism under Sections 16, 41, 73 and 74 adequately addresses the issue by permitting re-availment of ITC after payment by the supplier
Consequently, the Supreme Court affirmed the Gujarat High Court’s judgment and dismissed the Special Leave Petitions, thereby upholding the constitutional validity of Section 16(2)(c).
Also Read: Bona Fide Purchaser Not Liable for Supplier’s default to deposit GST: Tripura HC
