Punjab & Haryana HC Bars Mechanical ITC Denial for Supplier Default

Summary: Punjab & Haryana High Court in Shaurya Alloys Pvt. Ltd. v. State of Punjab & Another laid down fourteen guidelines governing denial of Input Tax Credit (ITC) under Section 16(2)(c) of the CGST Act where suppliers fail to deposit tax, report nil or short liability, or subsequently face cancellation of GST registration. The Court held that supplier-side default or retrospective cancellation can trigger investigation but cannot, by itself, result in mechanical reversal of the purchaser’s ITC. The proper officer must investigate the nature of the supplier’s default, examine its nexus with the purchaser, disclose relied-upon material and consider evidence establishing the genuineness of the transaction. While the burden of proving ITC eligibility under Section 155 continues to rest on the purchaser, fraud attributable to the supplier cannot automatically be treated as fraud by the purchaser for invoking Section 74 or Section 74A. The Court also stressed examination of recovery proceedings against defaulting suppliers, the period-wise statutory position, Rule 37A, personal hearing and speaking orders. The guidelines apply to pending as well as future proceedings before proper officers within the Court’s jurisdiction.

ITC Denial for Supplier’s Default: Punjab & Haryana High Court Draws a Procedural Red Line

Analysis of Shaurya Alloys Pvt. Ltd. v. State of Punjab & Another and Connected Matters: Judgment dated 1 October 2026

In its judgment of 1 October 2026 in Shaurya Alloys Pvt. Ltd. v. State of Punjab & Another and a large batch of connected petitions, the Punjab & Haryana High Court has set out a detailed framework for invoking Section 16(2)(c) of the CGST Act, 2017 against purchasing dealers.

The decision matters, but not because it dispenses with the requirement that tax charged on a supply must actually reach the Government. It matters because it restricts the mechanical shifting of a supplier’s default onto the purchasing dealer.

The Court has said in so many words that its guidelines neither dilute nor add to Section 16(2). They exist so that the statutory conditions are enforced through the machinery the GST law itself contemplates.

The ruling therefore takes the law forward on several connected questions: supplier default, retrospective cancellation of registration, bogus-billing allegations, the burden of proof under Section 155, and proceedings under Sections 73/74/74A.

1. The Core Controversy

Subject to Section 41, Section 16(2)(c) bars a recipient from availing ITC unless the tax charged on the supply has actually been paid to the Government, whether in cash or through admissible ITC.

The difficulty that kept recurring before the Court is shown below.

In several of the proceedings, ITC was sought to be denied because the selling dealer had failed to pay tax, had shown nil or short tax liability, or had later suffered cancellation of registration, in some cases with retrospective effect.

The Court held that such circumstances can justify an investigation. They cannot, on their own, justify automatic denial of ITC.

2. The Fundamental Principle

Where the Department invokes Section 74 against a purchasing dealer on grounds of fraud, wilful misstatement or suppression, the notice itself must carry the foundational facts that connect that dealer with the alleged fraud.

Merely repeating words such as “fraud”, “wilful misstatement” or “suppression” will not do. Nor can gaps in the notice be filled later, by an affidavit in the High Court or by explanations devised after the notice was issued.

The practical consequences of this distinction are considerable.

3. What the Court Did, and What It Did Not Do

4. The Fourteen Guidelines: A New Adjudication Framework

The heart of the judgment is paragraph 103, in which the Court formulated fourteen guidelines for the administration of Section 16(2)(c). They fall naturally into three groups.

Guidelines I–IV: Investigation Before Demand

Guideline I: Supplier default is a starting point, not the conclusion

The following may legitimately set an inquiry in motion:

• retrospective or subsequent cancellation of the supplier’s registration;
• nil or short liability declared by the supplier;
• departmental alerts; and
• complaints or other intelligence.

None of these, taken alone, is enough to reverse the recipient’s ITC. The distinction is between information that gives a reason to investigate and a basis for automatic disallowance.

Guideline II: The proper officer must record satisfaction before issuing a notice

Before a notice resting on Section 16(2)(c) is issued, the proper officer must identify and examine the following.

Guideline III: The investigation must examine nexus with the purchaser

Where a violation of Section 16(2) is alleged, the investigation must establish some direct link between the purchaser and the supplier. This carries particular weight in alleged bogus-billing chains.

Guideline IV: Material relied upon must be disclosed

The show cause notice must state the basis of the proposed ITC denial together with supplier-wise particulars. The documents relied upon may include:

• alert notices and inspection reports;
• panchnamas and statements recorded during investigation;
• e-way bill and vehicle registration data;
• toll information; and
• banking data.

All of these are to be supplied to the noticee, subject to any privilege lawfully claimed.

Guidelines V–VIII: Fraud, Burden of Proof and Supplier Recovery

Guideline V: Fraud cannot travel automatically from seller to buyer

If Section 74, or Section 74A for the relevant period, is invoked alleging fraud, suppression or wilful misstatement, the notice must itself explain why the purchaser is alleged to have taken part in that conduct. The logic is set out below.

Guideline VI: The Section 155 burden remains on the purchaser

The judgment is no charter for automatic allowance of ITC. The Court expressly accepts that, under Section 155, the burden of proving eligibility rests on the person claiming credit. A purchasing dealer may discharge it with material such as the following.

The proper officer must consider this evidence and deal with it in the order. The balance struck here is worth noting: the Department cannot proceed mechanically, but the purchaser also cannot rest on a tax invoice alone where genuineness is seriously disputed.

Guideline VII: Retrospective cancellation of the supplier’s registration

Where the denial of ITC rests on retrospective cancellation, the officer must examine three things:

1. why the registration was cancelled;

2. from what date the cancellation took effect; and

3. whether those grounds actually affect the genuineness of the particular supply made to the purchaser.

The ruling thus discourages the habit of treating retrospective cancellation as conclusive proof that every earlier transaction of that supplier was fictitious.

Guideline VIII: Proceedings against the supplier matter

The Court gives real weight to the remedies available against the defaulting supplier. The proper officer must ascertain and record the status of proceedings against the seller. Where the supplier falls under another Central or State jurisdiction, the officer should communicate with the concerned jurisdictional officer.

More significantly, if tax on the same supply has already been recovered from, or deposited by, the supplier, that must be recognised so that the same tax is not realised twice. Credit may then be re-availed to the extent permitted by Section 41(2), Rule 37A and other applicable provisions, subject to Section 17(5)(i).

This part of the judgment reads the GST law as an integrated statutory scheme, and not Section 16(2)(c) in isolation.

Guidelines IX–XIV: Period-wise Law, Registration and Procedure

Guideline IX: Different tax periods require different law

One of the technically strongest parts of the judgment is its recognition that the ITC provisions have changed substantially over time. The Court identifies three phases.

The Court cautions that a condition or mechanism brought in by a later amendment cannot be applied to an earlier tax period. It names clause (aa) of Section 16(2), effective from 01.01.2022, in this connection. For periods before 26.12.2022, the absence of a re-availment mechanism must be kept in mind when deciding the consequence of the supplier’s default.

This direction can have a substantial bearing on pending ITC disputes for earlier financial years.

Guideline X: The purchaser’s registration cannot be cancelled automatically

The purchaser’s registration, particularly with retrospective effect, cannot be cancelled merely because ITC was availed from a supplier whose registration was later cancelled. The officer must be independently satisfied that a ground under Section 29(2) exists, and must then follow the prescribed procedure.

Guideline XI: Personal hearing and cross-examination

The Court reaffirms Section 75(4), and a personal hearing must be granted. Where statements of third persons are relied upon and the noticee seeks cross-examination, the officer must consider the request and decide it by a reasoned order, keeping in view whether those statements form the basis of the proposed action.

Cross-examination has not been declared automatic in every case. What the Court requires is reasoned consideration of the request, depending on the evidentiary role of the statement.

Guideline XII: A speaking order is not optional

Flowing from Section 75(6), the final order must:

• state the relevant facts;
• state the basis of the decision;
• deal with the taxpayer’s reply;
• consider the documents produced;
• give a finding on each disputed condition of Section 16(2); and
• where Section 74 is invoked, specifically establish the fraud, wilful misstatement or suppression attributable to the noticee.

Guideline XIII: DRC-03 payment is not an admission of fraud

A further practical clarification concerns payments made during investigation. A deposit through FORM GST DRC-03, or otherwise, does not relieve the Department of the duty to issue a legally sustainable notice containing foundational facts. The nature and effect of the deposit are to be determined on the facts of each case.

Guideline XIV: Pending and future proceedings

This is perhaps the most consequential direction. The guidelines govern all proceedings pending before proper officers as well as those initiated afterwards.

The principles are therefore not confined to the petitioners in the batch. At least within the territorial jurisdiction of the Punjab & Haryana High Court, pending proceedings under Section 16(2)(c) must be approached within the framework this judgment prescribes.

5. Relief Granted in the Connected Petitions

Interestingly, the High Court did not simply quash every notice and order. It devised a remedial mechanism instead.

A noteworthy feature is that the Court did not decide the genuineness of each transaction itself. It sent that exercise back to the statutory proper officer, while imposing a structured discipline on how the decision is to be reached.

6. Systemic Reforms Suggested by the Court

The judgment looks beyond individual adjudication and identifies several measures that the Government and the GST Council may wish to consider.

The Court was careful to describe these as policy matters within the domain of the Government and the GST Council, and it issued no mandamus for their implementation. That restraint is itself legally significant.

7. A Practical Framework After Shaurya Alloys

For the Department

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For the Taxpayer

8. The Larger Significance

The judgment tries to reconcile two competing considerations.

On one side, ITC is a statutory entitlement subject to conditions. The purchasing dealer continues to carry the burden under Section 155, and bogus transactions remain exposed to the full consequences.

On the other, Section 16(2)(c) cannot serve as a shortcut by which every supplier-side default is passed mechanically to the recipient, without any inquiry into the transaction or the purchaser’s own conduct.

The approach can be put in three propositions:

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Conclusion

Shaurya Alloys is likely to become an important authority in GST litigation on supplier default and ITC reversal.

Its main contribution is procedural, but a profound one: the Department is required to move from database-driven conclusions to evidence-driven adjudication.

The judgment does not give a purchasing dealer unconditional ITC. Section 16(2)(c), Section 155 and the Department’s power to investigate fraudulent transactions all survive. What the Court insists on is that, before credit is denied, the proper officer must identify the supplier’s default, examine its relevance to the specific transaction, disclose the evidence, weigh the purchaser’s proof, look at recovery against the supplier, apply the law as it stood for the relevant period, and finally pass a reasoned order.

For genuine purchasers, then, the judgment is not an exemption from Section 16(2)(c). It is something more basic: a judicially structured right to have Section 16(2)(c) administered in accordance with the statute and not through presumption alone.