Section 16(2)(c) and Supreme Court decision of Bhandari Scrap Traders

By Roopa Nayak Goods and Services Tax Articles August 29, 2026

Supreme Court in Bhandari Scrap Traders Upholds Section 16(2)(c) and Supplier Tax Payment Condition for ITC

Summary: Section 16(2)(c) of the CGST Act makes ITC conditional upon actual payment of tax charged on the supply to the Government. The article examines divergent High Court decisions on the provision and the Supreme Court’s decision in Bhandari Scrap Traders vs UOI, SLP (C) No. 23931 of 2026, decided on July 24, 2026. The Supreme Court agreed with the Gujarat High Court’s approach in Maruti Enterprise Vs UOI, holding that Section 16(2)(c) should not be declared unconstitutional or read down. The article also considers earlier taxpayer-favourable decisions, including National Plasto Moulding vs State of Assam, Sahil Enterprises vs UOI and M/s. Instakart Services Pvt. Ltd. vs. Union of India. It concludes with practical compliance measures concerning supplier return filing, payment records, invoices, receipt and movement of goods, follow-up communications and vendor indemnity provisions.

Background
Analysis of the decision
Observations and Conclusion by High Court
Final observations
Held
Action points and conclusion
Specifically in the case of goods

Background

Under GST law, Section 16 of the CGST Act sets out the eligibility and conditions for taking of ITC. Section 16(1) of the CGST Act deals with the eligibility of a dealer to avail ITC and clauses (a), (b), (c) & (d) of Section 16(2) of the GST Act deal with the conditions for enabling such benefits. Therein 16(2)(c) sets out that that ITC will be available to the purchasing dealer only if the supplier has paid the tax to the Government.

Various judicial precedents in erstwhile laws[under Central Excise and VAT] have held that ITC cannot be denied to a genuine recipient merely because the supplier has not discharged the corresponding tax liability, provided the recipient has otherwise fulfilled the applicable conditions for availing ITC.

In the recent Apex Court decision of Bhandari Scrap Traders vs UOI [SLP (C) No. 23931 of 2026], decided on July 24, 2026., the Apex Court has agreed with the view expressed by the Gujarat High Court in Maruti Enterprise Vs UOI (R/Special Civil Application No. 18080 of 2023 and allied matters] which had earlier declined to declare Section 16(2) (c) of the CGST Act as unconstitutional or to read down the provisions.

At this juncture, it would do well to relook at the earlier judgements from various High Courts, on the subject of section 16(2)(c).

Some High Courts have earlier upheld the Constitutionality of Section 16(2) (c) of the Act without reading it down. These are:

(a) Kerala High Court in Trade Links v. UOI (2024 SCC OnLine (Ker.) 2744), Nahasshukoor and another v. Assistant Commissioner(2023 SCC online Ker 11369),

(b) Patna High Court in Aastha Enterprises vs. State of Bihar (2023 SCC Online Pat 4395)

(d) Madras High Court in M/s Baby Marine (Eastern) Exports v. UOI and ors (2025 (8) TMI 791(Madras)

Judgements in favour of purchasing seller/ recipient were given in below decisions.

a. The Gauhati High Court in National Plasto Moulding vs State of Assam (2024) 8 TMI 836 observed that the controversy was squarely covered by the decision of the Delhi High Court in On Quest Merchandising India Private Limited [2018] 10 GSTL 182 (Del), as approved by the Supreme Court in Arise India 2022 (60) GSTL 215 (SC), and also read down the said provision and declined to apply it to a purchasing dealer, who had bona fide entered into purchase transactions with validly registered selling dealers. the Held that tax authorities cannot deny Input Tax Credit (ITC) to a bona fide purchasing dealer solely because the selling dealer failed to deposit the collected tax

b. In Sahil Enterprises vs UOI[(2026) 154 GSTR 108 (Tri.)] the Tripura High Court after considering the decision in the case of On quest Merchandising India (P) Ltd. (supra) and after examining the provision of Section 16(2)(c) of the CGST Act has reiterated the principle of law and has applied the doctrine of reading down to the provision of 16(2) (c) of the CGST Act.

c. Similarly Karnataka High Court in the case of M/s. Instacart Services Pvt. Ltd. vs. Union of India [Writ Petition No. 4917 of 2021]

In this background the paper writer has analysed the recent decision of Bhandari supra from the Supreme Court and the Gujarat High Court decision of Maruti supra. Also in light of the latest developments, author has given the action points for compliant tax payers to reduce risk of denial of ITC citing section 16(2)(c) wrt the non payment of GST by vendors.

Analysis of the decision

It can be recalled in Maruti Enterprise supra, before the Gujarat High Court, it was the case of the petitioners that

the provision of Section 16(2)(c) of the CGST Act is arbitrary, ultra vires and
violative of Articles 14[Equality before law], 19(1)(g)[right to carry on business or profession], 265[no tax to be imposed without authority of law], and 300A[Property not to be deprived other than by authority of law] of the Constitution of India.
In the alternative, prayer that the said provision be read down so as to apply only to such transactions that are found to be fraudulent, collusive or involving connivance between the purchasing dealer and the supplier,
thereby excluding those bona fide purchasers.

Observations and Conclusion by High Court

The Statement of objects and Reasons (SOR) emphatically mentions about “input tax credit making it available in respect of taxes paid”.
Section 16(2)(c) of the CGST Act cannot be equated with the VAT regime, as examined by the Delhi High Court in On Quest Merchandising India (P) Ltd. (supra).
It is also noticed that the Tripura High Court in Sahil supra, has read down Section 16(2)(c). With respect, we are unable to agree with the said view. The Tripura High Court did not adequately consider the interplay of Sections 41[Availment of ITC]and 53 of the CGST Act[Transfer of ITC] read with Rule 37A[reversal of ITC in case of non payment of tax by vendor and reavailment on payment by vendor] of the CGST Rules, 2017.
Legal frame work of the provisions of Section 16(2)(c) read with Section 41(2) read with Rule 37A maintains the interest of revenue and the purchaser.
As per Section 155 of the CGST Act, the burden lies upon the dealer to establish entitlement up to the stage of clause (c), and such benefit. Hence, the clauses under section 16 sub-section (2), from (a) to (d), are to be read conjointly and not independently of each other.
Doctrine of reading down: Thus, doctrine of reading down is a judicial tool used to salvage the constitutionality of a statute by giving a provision a narrowed or limited interpretation, thereby mitigating potential conflicts with constitutional or legal principles. We do not find that the provision of Section 16(2)(c) if read with the scheme of GST regime as discussed, conflicts with constitutional or legal principles

The following propositions can be culled out from the aforenoted observations.

a) In interpreting a taxing statute, equitable considerations are entirely out of place.

b) The Court must interpret a taxing statute in the light of what is clearly expressed: it cannot imply anything which is not expressed; it cannot import provisions into the statute so as to supply any assumed deficiency.

c) A provision in the statute is not to be read in isolation; rather, it has to be read along with other related provisions itself, more particularly when the subject matter inter-relates with different Sections or parts of the same statute.

d) A taxing statute is to be interpreted literally, and further, it is in the domain of the legislature as to how much tax credit is to be given under what circumstances.

e) ITC is a form of concession extended to a dealer under the statutory scheme. The concession can be received by the beneficiary only as per the scheme of the statute.

f) Whenever a concession is given by statute or notification, etc., the conditions thereof are to be strictly complied with in order to avail such concession.

Final observations

A balanced approach is needed, which finds place in the decision expressed by the European Court of Justice (‘ECJ’) in the case of Axel Kittel vs. Belgian State (C-439/04) & Belgian State vs. Recolta Recycling SPRL (C-440/04).
Under this principle, the availment of ITC can be denied only if it is shown that the recipient knew or ought to have known that their purchase was connected with a fraudulent evasion of tax.
the Government should implement a robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time, thereby insulating bona fide recipients from the defaults of their vendors.
Take prompt and immediate steps for recovery of tax from the erring suppliers, instead of compelling the purchasers to avail themselves of alternate cumbersome remedies.

Held

The judgement clearly demonstrate that there is no possibility of drawing parity between the provisions of the two enactments[Delhi VAT and GST], so as to treat a purchasing dealer under the CGST Act on par with a purported bonafide purchasing dealer under the Delhi VAT Act in relation to ITC, when the supplier-dealer fails to pay the requisite tax.
The High Court of Gujarat has also referred to the provisions of Section 41 of the CGST Act and also Sections 73 and 74 thereof in the context of the purchasing dealer under the CGST regime being entitled to re-avail the reversed ITC after the supplier-dealer is made to discharge the tax liability.
In that view of the matter, the High Court was fully justified in holding that no grounds were made out to declare Section 16(2) (c) of the CGST Act as unconstitutional or read down the provisions
In complete and respectful agreement with the views expressed by the High Court of Gujarat and affirm and uphold the impugned judgment..

The Supreme Court in Bhandari supra has upheld the view of the Gujarat High Court.

Action points and conclusion

As of now, there is no specific mechanism available on the GST Portal to verify whether the supplier has actually discharged the GST collected from the recipient to the Government.

The GST Portal provides a “Search Taxpayer” facility through which the recipient can check the supplier’s GSTIN status and filing status. It shows whether the supplier has filed GSTR-1 and GSTR-3B for the respective tax periods, along with the date of filing. However, this only confirms that the return has been filed and does not confirm whether the corresponding GST liability has actually been paid.

In order to avoid demands of reversal/payment of ITC availed citing non fulfilment of conditions in section 16(2), we suggest to take the precautionary actions set out below.

Ensure that the conditions of section 16 are being satisfied on the procured goods/services by recipient namely:
- Goods/services received under cover of tax invoice
- ITC reflected in GSTR 2B for the recipient and not restricted u/s 38
- Credit availed in GSTR 3B
- Vendor has filed returns and deposited taxes to Government on timely basis.

Also ensure that there is proof of payment made to vendor by cheque

Specifically in the case of goods

Details of the vehicle which has delivered the goods,
Payment of freight charges,
Acknowledgement of taking delivery of goods,
tax invoices against payment particulars and
the actual physical movement of the goods

To minimise the possibility of departmental seeking to object to ITC citing non payment of GST by vendors, tax payers may consider the following measures:

Regularly check the GSTR-1 and GSTR-3B filing status of major suppliers through the GST Portal.
Send mail communication to newly onboarded vendors to file returns on timely basis, discharging applicable taxes.
If any major supplier has not filed GSTR-3B, send a reminder to the supplier requesting timely filing and payment of GST.
Where payment to the supplier is pending and the supplier has not filed the relevant GSTR-3B, may, withhold the GST component until the supplier completes the required compliance.

Inthis regard, it is recommended that an indemnity clause should be inserted in agreement with vendors. To specifically cover that vendor shall pay to recipient if any demands arise from revenue on account of reversal of ITC, along with interest, penalty, litigation expenses and any other consequential loss suffered by recipient due to the supplier’s default.
The clause should also specifically cover the supplier’s obligation to correctly report the invoices in FORM GSTR-1 and discharge the corresponding GST liability within the prescribed time in GSTR 3B.