Summary: The article discusses the Supreme Court’s judgment in Bhandari Scrap Traders vs. Union of India & Ors. upholding the constitutional validity of Section 16(2)(c) of the CGST Act and addresses the view that every recipient must independently prove that a supplier has deposited GST before claiming Input Tax Credit (ITC). It states that Section 16(2)(c) should be read together with the substituted Section 41 of the CGST Act and Rule 37A of the CGST Rules, which provide the statutory mechanism for monitoring supplier compliance, reversal of ITC where the supplier fails to furnish returns under Section 39, and re-availment once returns are filed. According to the article, the statutory framework relies on supplier return filing and the GST portal and does not require recipients to verify suppliers’ electronic cash ledger, electronic credit ledger, challans or payment records. It further states that the Supreme Court upheld Section 16(2)(c) as a valid statutory condition for ITC but did not state that recipients must independently collect evidence of tax payment. The article concludes that supplier compliance is governed through the statutory mechanism under the Act and Rules rather than by an investigative obligation on the recipient.
Bhandari Scrap Traders: Does the Supreme Court Require the Recipient to Prove Payment of Tax?
The recent judgment of the Supreme Court in Bhandari Scrap Traders vs. Union of India & Ors. (SLP(C) No. 23931 of 2026, decided on 24.07.2026) has generated widespread discussion among taxpayers and professionals. While the Supreme Court has upheld the constitutional validity of Section 16(2)(c) of the CGST Act, a misconception has rapidly emerged that every recipient is now required to prove that the supplier has actually deposited GST into the Government treasury before availing Input Tax Credit (ITC).
In my respectful view, there is nothing surprising in the judgement which does not flow from the statutory scheme of the CGST Act.
Section 16(2)(c) undoubtedly prescribes that ITC shall be available only where “the tax charged in respect of such supply has actually been paid to the Government.” However, this provision cannot be read in isolation. It must be interpreted along with the substituted Section 41 of the CGST Act and Rule 37A of the CGST Rules, which together provide the statutory mechanism for monitoring supplier compliance and regulating availment, reversal and re-availment of ITC.
The Finance Act, 2022 fundamentally changed the ITC framework by substituting Section 41. Under the present law, a registered person is entitled to avail self-assessed ITC, subject to the provisions of the Act. Where the supplier fails to furnish the return under Section 39 and consequently does not discharge the tax liability, Rule 37A specifically provides for reversal of ITC by the recipient. More importantly, the Rule also permits re-availment of such credit once the supplier subsequently furnishes the return.
This statutory mechanism is significant. It demonstrates that Parliament itself has prescribed how compliance with Section 16(2)(c) is to be administered. The law relies upon the supplier’s filing of GSTR-3B and the GST portal-based compliance framework. It does not cast an independent obligation upon the recipient to investigate whether the supplier has discharged tax through the electronic cash ledger, electronic credit ledger or any other mode.
The recipient has neither statutory authority nor practical access to verify the supplier’s electronic cash ledger, electronic credit ledger, challans or payment records. No provision of the CGST Act requires the recipient to obtain such evidence. Had Parliament intended to impose such an obligation, it would have expressly prescribed the manner in which such verification was to be undertaken. Instead, the Act and the Rules create a technology-driven compliance mechanism through return filing and portal-generated statements.
The phrase “tax has actually been paid to the Government” in Section 16(2)(c) therefore represents a statutory condition governing the supplier’s compliance. The evidence of such compliance is regulated through the return filing mechanism under Section 39, the substituted Section 41 and Rule 37A. Once the Legislature has itself prescribed this machinery, the provision cannot be interpreted as imposing an additional burden upon the recipient to establish payment of tax by independent evidence outside the statutory framework.
The Supreme Court in Bhandari Scrap Traders has upheld the constitutional validity of Section 16(2)(c). The Court has recognised that ITC is a statutory benefit and that the Legislature is competent to prescribe conditions for its availment. However, the judgment does not state that the recipient must collect GST payment challans from the supplier, inspect the supplier’s electronic cash ledger or prove the actual mode through which tax was discharged. Such an interpretation would amount to adding words to the statute, something which neither the Act nor the judgment contemplates.
The burden under Section 155 also deserves careful consideration. While the burden to establish eligibility for ITC undoubtedly rests upon the claimant, the burden extends only to compliance with the statutory conditions applicable to the recipient. It cannot be expanded into an obligation to prove facts that are exclusively within the knowledge and control of the supplier or available only on the GST portal maintained by the Government.
Accordingly, the correct legal position emerging after the Supreme Court judgment is that Section 16(2)(c) continues to operate as a valid statutory condition, but its implementation must necessarily be understood in conjunction with substituted Section 41 and Rule 37A. The recipient is expected to comply with the obligations expressly imposed under the Act and the Rules, while the statutory mechanism itself determines supplier compliance through filing of GSTR-3B and the consequent operation of Rule 37A.
The judgment therefore reinforces the validity of Section 16(2)(c) but does not create a new legal obligation requiring every purchaser to independently prove that the supplier has deposited tax into the Government treasury. The GST law provides a statutory compliance mechanism—not an investigative responsibility upon the recipient.
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Disclaimer: The views and opinions expressed in this article are those of the author. This article is intended for general information purposes only and does not constitute professional advice. Readers are strongly advised to consult a qualified professional for guidance specific to their individual situation before making any financial, legal, or tax-red decisions. The author shall not be held liable for any loss or damage of any kind incurred as a result of the use of this information or for any actions taken based on the content of this article.
