Section 16(2)(c) Valid but Cannot Be Mechanically Invoked: P&H HC in Shaurya Alloys

Summary: The Punjab & Haryana High Court in Shaurya Alloys Pvt. Ltd. & Ors. v. Union of India & Ors., while deciding a batch of 424 writ petitions, upheld the constitutional validity of Section 16(2)(c) of the CGST Act and declined to read it down, but held that the provision cannot be mechanically invoked against a purchasing dealer merely because the supplier failed to deposit tax or its registration was subsequently cancelled. Reading Section 16(2)(c) as part of the integrated statutory scheme, the Court required proper officers to examine the genuineness of the transaction, circumstances of the supplier’s default and statutory recovery mechanism applicable to the relevant period. It laid down fourteen guidelines governing notices, burden of proof under Section 155, retrospective cancellation, proceedings against suppliers, personal hearing, cross-examination, Section 74/74A allegations, deposits during investigation and reasoned orders. The Court further held that where Section 74 is invoked, foundational facts connecting the purchasing dealer with fraud, wilful misstatement or suppression must appear in the notice itself; the supplier’s fraud does not automatically become the purchaser’s fraud. The article by Vipin Jain examines the ruling alongside Bhandari Scrap Traders, Maruti Enterprise, Shanti Kiran, G.R. Infra Projects and Tata Steel and explains the practical compliance implications for businesses.

Synopsis

The Punjab & Haryana High Court, deciding a bunch of 424 writ petitions on 1 October 2026, has upheld the constitutional validity of Sec. 16(2)(c) of the Central Goods and Services Tax Act, 2017 and declined to read it down. It has, at the same time, held that the provision cannot be invoked mechanically against a purchasing dealer merely because the supplier has defaulted, and has laid down fourteen guidelines for proper officers. This article examines the judgment against the five rulings on which it principally rests.

1. Introduction

Sec. 16(2)(c) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) makes a recipient’s input tax credit (ITC) conditional on the tax charged on the supply having been actually paid to the Government. The recipient pays that tax to the supplier. Whether it then reaches the Government depends on an act that lies wholly in the supplier’s hands.

The constitutional question was answered by the Supreme Court on 24 July 2026 in Bhandari Scrap Traders v. Union of India, which affirmed the Gujarat High Court’s judgment in Maruti Enterprises v. Union of India. The provision is valid and is not to be read down. A more practical question remained. How is a valid provision to be applied to a purchaser who holds a tax invoice, has received the goods and has paid the supplier in full?

The Punjab & Haryana High Court has now addressed that question in Shaurya Alloys Pvt. Ltd. & Ors. v. Union of India & Ors. The judgment does three things:

• it upholds Sec. 16(2)(c) and declines to read it down;
• it holds that the provision is part of an integrated statutory scheme and cannot be applied as a standalone provision, in a routine or mechanical manner; and
• it lays down fourteen guidelines for proper officers, and applies the Supreme Court’s recent rulings on Sec. 74 to cases founded on a supplier’s default.

PARTICULARS	DETAILS
Case	Shaurya Alloys Pvt. Ltd. & Ors. v. Union of India & Ors.
Citation	2026 (10) TMI 296 (Punjab & Haryana High Court)
Petitions	CWP-34296-2024 and connected matters, a bunch of 424 writ petitions
Bench	Hon’ble Chief Justice Ashwani Kumar Mishra and Hon’ble Mr. Justice Rohit Kapoor; judgment by the Chief Justice
Date of judgment	1 October 2026

2. The statutory setting

2.1 The four conditions of Sec. 16(2)

Sec. 16(2) opens with a non-obstante clause. No registered person is entitled to ITC on a supply unless four conditions are met (Paras 9–10): he holds a tax invoice or debit note issued by a registered supplier; he has received the goods or services; the tax charged has been actually paid to the Government; and he has furnished the return under Sec. 39.

The third condition is clause (c). It is expressed to be subject to Sec. 41 and requires that “the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply”. Two connected provisions complete the picture. Sec. 155 places on the claimant the burden of proving eligibility to ITC. The second proviso to Sec. 16(2) requires the recipient to pay the supplier within 180 days, failing which the credit is reversed with interest (Paras 93–94).

2.2 The scheme as enacted and as implemented

The judgment rests on a fact which the Department did not dispute (Para 20). The mechanism that was meant to make clause (c) workable was never implemented.

As enacted, the Act told the purchaser when a supplier had defaulted. Outward supplies declared in GSTR-1 were communicated to the purchaser in GSTR-2A, validated in GSTR-2 and settled in GSTR-3. Sec. 41 allowed credit provisionally. Sec. 42 provided for matching, reversal and reclaim, with every mismatch communicated to both parties and an opportunity to rectify it (Paras 13–17).

That design did not survive implementation. GSTR-2 and GSTR-3 were deferred and eventually kept in abeyance, and GSTR-3B took their place. In the Court’s words, the matching concept “remained only on paper and was never implemented” (Para 21). The law was thereafter amended in stages, which the Court treats as three distinct phases.

PERIOD	POSITION IN LAW	RE-AVAILMENT OF REVERSED CREDIT
Before 01.10.2022	Original Sec. 41 in force. Sec. 42 and 43 on the statute book but never operationalised.	No statutory mechanism, even where the supplier later paid the tax (Paras 28, 97).
From 01.10.2022	Sec. 41 substituted, Sec. 42 and 43 omitted, and clause (ba) inserted in Sec. 16(2). Credit on self-assessment, to be reversed with interest where the supplier has not paid the tax (Paras 24–25).	The Court directs that the absence of a re-availment mechanism before 26.12.2022 be borne in mind (guideline (ix)).
From 26.12.2022	Rule 37A inserted. Credit to be reversed if the supplier’s GSTR-3B is not furnished by 30 September following the financial year (Para 26).	Under Rule 37A, once the supplier furnishes the return.

The Court records that most of the petitions before it relate to the period before Rule 37A (Para 28). It also observes that verifying the correctness of a supplier’s return is neither contemplated by the statutory scheme nor possible for a purchaser in the absence of automated matching (Para 29).

3. The controversy

3.1 The question framed

The Court framed a single question for the entire bunch (Para 1). What exactly is the obligation cast on a purchasing dealer, who has already paid tax to the supplier, to ensure that the supplier deposits it with the Government, when the purchaser has no means to access or ascertain whether that deposit has been made?

The Court did not examine the facts of individual cases (Paras 3–4). It did, however, record what the batch disclosed. In a large number of cases Sec. 16(2)(c) had been invoked “in a routine and mechanical manner only because the registration of selling dealer has been cancelled” (Para 88). In many, the purchaser’s own registration had been cancelled retrospectively on that footing, without even a notice under Sec. 74 (Para 89).

3.2 The petitioners’ case

The petitioners challenged the vires of the provision on the maxim lex non cogit ad impossibilia, the law does not compel the impossible, and invoked Arts. 14, 19(1)(g), 21, 265 and 300A of the Constitution. In the alternative, they sought a reading down that would fasten liability on the purchaser only in exceptional circumstances such as a non-existent supplier or fraud (Para 2). Their principal submissions were as follows (Paras 40–51):

• The scheme of Sec. 16(2), 37, 38, 39, 41, 42 and 155 was only partly implemented. Without matching, it was impossible for a purchaser to ensure the supplier’s compliance, and Sec. 16(2)(c) could not be enforced in isolation.
• A substantive provision without statutory machinery is vulnerable under Arts. 14 and 19, on the authority of CCE v. Larsen & Toubro Ltd., (2016) 1 SCC 170.
• The statute gives the Revenue direct remedies against the defaulting supplier under Sec. 75(12), Rule 88C and Sec. 76. A purchaser cannot be made a guarantor of the supplier.
• A retrospective cancellation of registration cannot affect a person who acted on a registration that was current, as held in State of Maharashtra v. Suresh Trading Company, (1997) 11 SCC 378.

The petitioners confined their grievance to genuine transactions. They did not claim credit where goods had not been supplied, or where there was fraud or collusion (Paras 42, 48).

3.3 The Revenue’s case

The Revenue’s response rested on the nature of ITC and on recent authority (Paras 52–66):

• ITC is a statutory benefit and not a vested right. A tax invoice and payment to the supplier do not confer an indefeasible right to credit where clause (c) remains unfulfilled.
• Investigations had shown that several transactions were not genuine despite invoices and banking entries. Where a supplier discharges its liability through fraudulent or ineligible credit, there is no “actual payment” within the meaning of the clause.
• Maruti Enterprises, affirmed in Bhandari Scrap Traders, had held actual payment to be an indispensable condition.
• Once the Department forms a prima facie opinion, Sec. 155 places the burden on the claimant. The proceedings are civil in nature, and cross-examination is not an invariable requirement.
• A writ petition at the stage of a show cause notice is premature, and the appellate remedy under Sec. 107 is efficacious.

4. The law before Shaurya Alloys

The Court had before it two lines of authority. The first, which began under the State VAT laws, protected the bona fide purchaser by reading down provisions similar to clause (c). The second, specific to GST, upheld clause (c) as enacted (Paras 30–38).

4.1 The VAT-era decisions

In Gheru Lal Bal Chand v. State of Haryana (2011), a Division Bench of the Punjab & Haryana High Court read down Sec. 8(3) of the Haryana VAT Act. It held that no liability could be fastened on a purchasing dealer for the selling dealer’s non-payment unless fraud, collusion or connivance was established (Para 31).

The Delhi High Court took the same course in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi (2017). It read down Sec. 9(2)(g) of the Delhi VAT Act so as to exclude a purchaser who had transacted bona fide with a validly registered seller. The Department’s remedy, it held, lay against the defaulting seller. The Supreme Court declined to interfere in Arise India (Paras 32–33).

4.2 Shanti Kiran: reliance on a current registration

Shanti Kiran India (P.) Ltd. v. Commissioner, Trade and Tax Department was decided by the Delhi High Court on 4 January 2013. The appellant traded in electrical goods. Credit was disallowed on purchases from two selling dealers during 2007 and 2008. One had paid about ₹25,000 as tax on a turnover of ₹9.48 crore, and the other about ₹24,000 on ₹9.6 crore. Both registrations were cancelled after the transactions. From these facts the VAT authorities inferred sham transactions and collusion.

The High Court allowed the appeals. Its reasoning has four limbs:

• Sec. 9(2) of the Delhi VAT Act was a restrictive list of exceptions. Clause (g), which made credit conditional on actual deposit by the seller, was inserted only with effect from 1 April 2010 and was not clarificatory.
• The purchaser had no mechanism to verify the seller’s deposit of tax, and Sec. 28 of that Act made returns confidential.
• Following Suresh Trading Company, a purchasing dealer “is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it”.
• Collusion could not be presumed from the sellers’ meagre deposits. Such “a priori conclusions are based on no material, or without inquiry, and accordingly unworthy of acceptance”.

The Supreme Court dismissed the Revenue’s appeals on 9 October 2025. It noted that the sellers were registered on the date of the transactions and that “neither the transactions nor invoices in questions have been doubted, based on any inquiry into their veracity”. Credit was to be allowed after due verification.

One feature of Shanti Kiran deserves emphasis. The High Court was concerned with a period when the Delhi VAT Act contained no condition of actual deposit at all. The decision is therefore an authority on reliance, verification and proof of collusion. It is not an authority on the validity of a statutory condition of actual payment.

4.3 The GST decisions

Some High Courts carried the VAT-era reasoning into GST. The Court noticed the decisions of the Gauhati High Court in National Plasto Moulding, the Tripura High Court in Sahil Enterprises and the Karnataka High Court in Instakart Services (Para 36).

The Gujarat High Court took the contrary view in Maruti Enterprises v. Union of India (2026). It held that Sec. 16(2)(c) is not ultra vires. The purchaser, it reasoned, is not left remediless. The Revenue can proceed against the supplier under Sec. 73 and 74, and the credit is restored under Rule 37A once the supplier pays. ITC, it held, is a statutory concession and not a constitutional or vested right (Para 37).

4.4 Bhandari Scrap Traders: validity settled

On 24 July 2026 the Supreme Court dismissed three special leave petitions against Maruti Enterprises. The order is brief but reasoned, and proceeds in three steps:

1. The Tripura High Court in Sahil Enterprises had not undertaken the exercise which the Gujarat High Court had. The Court noted that a special leave petition against that decision had been entertained.

2. The Gujarat High Court’s analysis of the differences between the Delhi VAT Act and the CGST Act showed that there is “no possibility of drawing parity” between the two. A purchasing dealer under the CGST Act cannot be treated on par with a “purported bona fide purchasing dealer” under the Delhi VAT Act where the supplier fails to pay the tax.

3. The Gujarat High Court had also referred to Sec. 41 and to Sec. 73 and 74, in the context of the purchaser being entitled to re-avail the reversed credit after the supplier is made to discharge the liability.

The Supreme Court concluded that the High Court was “fully justified” in holding that no grounds were made out to declare Sec. 16(2)(c) unconstitutional or to read it down, and affirmed the judgment.

The Punjab & Haryana High Court read this order with precision. It affirms the Gujarat High Court’s reasoning “with reference to the statutory scheme considered therein”. Its application to the periods involved in the batch had still to be examined against the provisions that governed those periods (Para 38.1).

5. The decision

5.1 Validity upheld, reading down declined

The Court held that Sec. 16(2)(c) “does not suffer from any constitutional infirmity warranting its invalidation” (Para 98). Four strands of reasoning support that conclusion.

First, the requirement that tax be actually paid to the Government “is not a condition extraneous to the concept of ITC, it constitutes its very foundation”. Credit of input tax is a statutory concession, available only on fulfilment of the conditions subject to which it is conferred.

Second, the competence of Parliament to prescribe such a condition was not in question. The Court described the challenge to the vires as “at best, feeble” (Paras 91, 98).

Third, the vice complained of does not inhere in the text of the provision. It arises when the provision “is torn out of the statutory scheme of which it is an integral part and is applied in a routine and mechanical manner”. The possibility that a provision may be applied improperly in individual cases is not a ground to invalidate it.

Fourth, the Court had regard to judicial discipline. The Gujarat High Court had upheld the provision, and the Supreme Court had dismissed the special leave petition in Bhandari Scrap Traders. That counselled against reading the provision down on the lines of Gheru Lal Bal Chand and On Quest so as to confine it to cases of fraud, collusion or non-existent transactions.

The challenge to Sec. 16(2)(c), read with Sec. 155, was accordingly repelled. In doing so, the Court declined to follow the course taken by a coordinate Bench of the same High Court in Gheru Lal Bal Chand, in deference to the Supreme Court’s later order.

5.2 The provision read within its scheme

Having upheld the provision, the Court observed that this “does not conclude the matter” (Para 99). Sec. 16(2)(c), it held, “cannot be construed as standalone provision bereft of other provisions which contained the mechanism for its implementation” (Para 74). Three lines of reasoning lead to that result.

The machinery principle. If clause (c) were treated as a standalone provision, with no mechanism by which the purchaser could ascertain or secure the supplier’s deposit, the maxim lex non cogit ad impossibilia would be attracted. The provision would then be exposed to challenge under Arts. 14 and 19 (Para 75). The Court relied on CCE v. Larsen & Toubro Ltd. and the line of authority beginning with K.T. Moopil Nair v. State of Kerala, which requires a taxing statute to carry its own machinery. To enforce the liability without the mechanism which the statute contemplated “would be rendering the statute vulnerable to challenge as being ultra vires” (Para 77). It also drew support from the Constitution Bench decision in Bhawani Cotton Mills Ltd. v. State of Punjab (1967), where a liability depended on an event in another person’s hands which the dealer had no means of ascertaining (Para 78).

The statutory remedy against the supplier. Sec. 76 deals specifically with tax collected but not paid to the Government. It provides for notice, determination, interest and penalty against the person who collected the tax. The Court held that Sec. 76 “cannot be rendered otiose in the GST scheme” by indiscriminate invocation of Sec. 16(2)(c) (Para 82). It noted, in addition, the recovery of self-assessed tax under Sec. 75(12) read with Sec. 79, the intimation under Rule 88C, and the restrictions on a defaulting supplier under Sec. 37(4), Sec. 39(10), Rule 59, Rule 138E and Sec. 29(2)(c) (Para 85).

The incidence of tax. Where credit is reversed although the purchaser has already paid the tax to the supplier, the purchaser is exposed to “a further tax burden in respect of the same transaction” (Para 86). Rule 37A does not meet this difficulty for all periods. It operates within its own period and circumstances. It cannot be invoked as a general justification for denying credit retrospectively merely because the supplier’s registration was later cancelled (Para 89).

5.3 The rule that emerges

The Court’s conclusion is stated in Para 99. Sec. 16(2)(c), read with Sec. 155, cannot be used to saddle the purchasing dealer mechanically with reversal of credit on the supplier’s failure to deposit the tax. The proper officer must first examine, after affording a hearing:

• the circumstances in which the selling dealer failed to deposit the tax;
• the genuineness of the transaction; and
• the statutory mechanism available for recovery of that tax in the relevant period.

The remedy against the supplier, including under Sec. 76, “cannot be rendered toothless”. Clause (c) is to be applied in harmony with the rest of the scheme, “so that each is given effect and none is rendered otiose”.

The Court was equally clear about the limits of this protection. Where the transaction involves collusion or fraud, where there has been no actual receipt of goods or services, or where the purchaser otherwise fails to establish entitlement, the consequences of Sec. 16(2)(c) follow in accordance with law (Paras 87, 99).

The Court also explained how its approach sits with Maruti Enterprises. That judgment sustained the provision on the premise that the purchaser is not left remediless, because the Revenue can proceed against the supplier and the credit is restored on payment. That premise, the Court held, can hold good only if Sec. 16(2)(c) is invoked with due regard to that mechanism (Para 99).

6. Sec. 74 and the foundational facts of fraud

A considerable number of the notices before the Court had been issued under Sec. 74, which provides an extended period where tax is not paid, or credit is wrongly availed, by reason of fraud, wilful misstatement or suppression of facts. The Court therefore turned to two rulings of the Supreme Court delivered in August 2026 by the same Bench (Paras 100–101).

6.1 G.R. Infra Projects

G.R. Infra Projects Ltd. v. State of Madhya Pradesh was decided on 19 August 2026. The show cause notice, dated 13 June 2025, related to 2018-19. The limitation under Sec. 73 had expired, and the notice could be sustained only under Sec. 74. The State sought to support it by reference to its counter affidavit.

The Supreme Court declined to look at the affidavit. The requirements that make a notice valid must be contained in the notice itself and “cannot be supplanted by a counter affidavit in Court”. The notice contained no more than a “bland statement” of fraud or concealment of facts. The Court observed that the use of the word “or” showed that the officer was himself not sure on which of the two grounds he was proceeding. The notice was set aside and the State was directed to desist from further proceedings under it.

6.2 Tata Steel

Tata Steel Ltd. v. Union of India, 2026 INSC 920, followed on 25 August 2026. The case concerned ITC directly. A notice for 2018-19 to 2020-21 alleged a mismatch of ITC for all three years and short payment of tax for 2019-20. It was founded on an audit objection raised by the office of the Comptroller and Auditor General, and was issued after the Sec. 73 limitation had expired on 28 February 2025.

Two circumstances told against the Department. It had itself contested the audit objection before the Public Accounts Committee. It had also transferred the notice to the “call book”, that is, kept it in abeyance, and then revived it as a protective demand, a measure for which the GST law makes no provision.

The Supreme Court laid down the following propositions (paragraph references in this part are to that judgment):

• Proceedings under Sec. 73 or Sec. 74 can be initiated only on the satisfaction of the officer. Where an objection is raised in audit, the officer must still record his own satisfaction before a notice is issued (Para 11).
• For Sec. 74, the officer must be satisfied not merely that a mismatch or short payment has occurred, but that fraud, wilful misrepresentation or suppression has led to it (Para 11).
• The foundational facts supporting that inference “should be evident from the notice itself”. The statutory words “are not to be mechanically recited in the notice” to enable recovery beyond the normal period of limitation (Para 14).

The notice and the consequential Order-in-Original were set aside. The Department was left at liberty to initiate fresh proceedings under Sec. 74, on a notice disclosing the foundational facts, with the order to be passed before 28 February 2027 (Para 15).

6.3 Application to supplier-default cases

The Punjab & Haryana High Court distilled these rulings into a rule for ITC disputes (Para 102). Where the Department invokes Sec. 74 against a purchasing dealer, the foundational facts leading to the inference of fraud, wilful misstatement or suppression on the part of the noticee must emanate from the notice itself. The deficiency cannot be made good later by affidavit. The Court then added:

“The fraud of the selling dealer does not, by itself, become the fraud of the purchasing dealer, unless the notice discloses the facts connecting the purchasing dealer with such fraud.”

The same requirement is extended to Sec. 74A, for the period to which that provision applies.

7. The fourteen guidelines

In Para 103 the Court held that Sec. 16(2)(c) “shall be read and invoked in consonance with the statutory scheme”, in accordance with fourteen guidelines. They are framed for proper officers of the Central Government, the States of Punjab and Haryana and the Union Territory of Chandigarh. The Court was careful to state that they “do not dilute or add to the conditions” contained in Sec. 16(2), and only ensure that those conditions are enforced in the manner the statute contemplates (Para 99).

NO.	SUBJECT	REQUIREMENT
(i)	No mechanical invocation	Cancellation of the seller’s registration, including retrospective cancellation, a nil or short liability in the seller’s return, or an alert or complaint may furnish a legitimate starting point for an inquiry. By themselves they are not a basis for denial or reversal of ITC.
(ii)	Satisfaction before the notice	Before issuing a show cause notice, the officer must apply his mind and record satisfaction on: the seller, the invoices, the tax periods and the amount of ITC; the precise nature of the default, namely tax not paid at all, short paid, or discharged through inadmissible ITC; the circumstances of the default; and the proceedings taken against the seller under Sec. 73, 74, 75(12) read with Sec. 79, or Sec. 76, and their status.
(iii)	Direct link	The investigation leading to the notice should establish some direct link of the purchaser with the suppliers, so as to satisfy the violation of the conditions in Sec. 16(2).
(iv)	Contents of the notice	The notice must disclose those particulars, the material relied upon, the suppliers concerned and the manner in which credit is alleged to have been wrongly availed. Documents relied upon, such as alert notices, inspection reports, panchnamas, statements, and e-way bill, vehicle registration, toll and banking data, must be supplied, subject to any privilege lawfully claimed.
(v)	Sec. 74 and Sec. 74A	The notice must itself contain the foundational facts from which fraud, wilful misstatement or suppression on the part of the noticee is inferred. A bald or mechanical recital does not suffice, and the deficiency cannot be supplied by counter affidavit or later explanation.
(vi)	Burden under Sec. 155	The burden lies on the purchaser. It may be discharged by producing the tax invoice and proof of receipt, including e-way bills, transport receipts, weighbridge slips, and stock and consumption records. The officer must consider that material and deal with it in the order.
(vii)	Retrospective cancellation	The officer must examine the grounds on which, and the date from which, the seller’s registration was cancelled, and whether those grounds have any bearing on the genuineness of the particular supply.
(viii)	Remedy against the seller	The officer must ascertain and record the status of proceedings against the seller and, where the seller falls under another authority, communicate with the jurisdictional officer. Tax recovered from or deposited by the seller must be taken into account so that the same tax is not realised twice. The purchaser may avail or re-avail credit to the extent permissible under the proviso to Sec. 41(2) and Rule 37A, subject to Sec. 17(5)(i).
(ix)	Law of the relevant period	The officer must apply the framework as it stood in the tax period: before 01.10.2022, from 01.10.2022, and from 26.12.2022. A condition introduced by a later amendment, including Sec. 16(2)(aa) with effect from 01.01.2022, is not to be applied to an earlier period.
(x)	Purchaser’s registration	The purchaser’s registration is not to be cancelled, much less retrospectively, merely because credit was availed on purchases from a seller whose registration was later cancelled. Independent satisfaction of a ground under Sec. 29(2), and compliance with the prescribed procedure, are required.
(xi)	Hearing and cross-examination	A personal hearing must be afforded in terms of Sec. 75(4). A request to cross-examine persons whose statements are relied upon must be considered and decided by a reasoned order.
(xii)	The order	As mandated by Sec. 75(6), the order must set out the relevant facts and the basis of the decision, deal with the reply and the documents, and record a specific finding on each disputed condition of Sec. 16(2). Where Sec. 74 is invoked, it must also record a specific finding of fraud, wilful misstatement or suppression attributable to the noticee.
(xiii)	Deposits during investigation	A deposit made during investigation, through Form GST DRC-03 or otherwise, does not dispense with a notice disclosing the foundational facts. Its character and effect are to be determined on the facts of each case.
(xiv)	Reach	The guidelines govern all proceedings pending before proper officers and those initiated hereafter.

8. The operative directions

8.1 Directions issued

The Court did not decide any individual case. Many of the impugned notices and orders appeared to rest solely on the supplier’s default or on retrospective cancellation of its registration. The Revenue, for its part, asserted that several transactions were not genuine, which could not be rejected without examining the facts. Balancing the two, the Court disposed of the petitions with the following directions (Para 105):

• Where proceedings are at the stage of a show cause notice, the petitioner may file a reply or supplementary reply with supporting material within eight weeks. The proper officer shall then pass a reasoned and speaking order after hearing, keeping the guidelines in view.
• Where the notice does not disclose the particulars or material contemplated by the guidelines, the proper officer shall supply them.
• Where a supplementary notice or corrigendum introduces a new ground or provision, the noticee may object, and the objection shall be decided in the fresh order.
• Where orders have already been passed, the proper officer shall revisit the matter in the light of the guidelines, after a personal hearing, and pass a fresh reasoned order.
• The impugned orders “are not being interfered with”, but shall abide by the fresh orders.
• Amounts deposited or recovered, including by reversal of credit or debit to the electronic ledgers, shall abide by the fresh decision and be adjusted or refunded, with interest as admissible, wherever warranted.
• No fresh coercive action for recovery shall be taken under the impugned notices or orders until the proper officer decides.
• All pleas on merits, on fact and on law, are left open.
• Nothing in the judgment precludes the Department from proceeding against the defaulting selling dealers.

8.2 What the judgment does not decide

The judgment regulates the manner in which Sec. 16(2)(c) is invoked. It should not be read as holding that a purchaser’s credit survives every default by a supplier.

The provision stands as enacted. It has been neither struck down nor read down, and actual payment of tax remains a condition of ITC. No petitioner’s credit has been held admissible. The impugned orders have not been quashed. They are to be revisited and will abide by the fresh orders. Fraud, collusion, a non-existent seller, non-receipt of goods or services and failure to establish eligibility all remain grounds for denial.

The Court also declined to mandate changes of policy. It commended a number of suggestions to the Government and the GST Council without issuing a mandamus (Para 104). These include an immediate alert on the common portal when cancellation proceedings are initiated against a supplier, real-time verification by the recipient of the supplier’s payment of tax against specific invoices, and notification of supplies such as scrap from the unorganised sector under the reverse charge mechanism.

9. Comment

The observations in this part are the author’s reading of the judgment. They form no part of what the Court held.

9.1 From validity to method

After Bhandari Scrap Traders, little room remained for a constitutional challenge to Sec. 16(2)(c), and Shaurya Alloys does not attempt to reopen it. Its contribution lies elsewhere. It converts a question of validity into a question of method. The outcome of a supplier-default case will now turn on what the notice discloses, what the purchaser produces in discharge of the burden under Sec. 155, and what the order finds on each disputed condition of Sec. 16(2).

9.2 Reading the judgment with Bhandari Scrap Traders

The two decisions are not in conflict. The Supreme Court’s order rests in part on the purchaser’s ability to re-avail reversed credit once the supplier is made to pay. The High Court accepts that reasoning and gives effect to its premise. Where the mechanism of recovery and re-availment exists, it must be worked. Where it did not exist, as in the periods before 26 December 2022, that absence must be borne in mind in deciding the consequence of the supplier’s default.

The High Court has thus declined to read the provision down, while securing to the genuine purchaser much of the procedural protection that a reading down would have provided. Whether that approach is examined further in appeal remains to be seen.

9.3 The continuing value of Shanti Kiran

Shanti Kiran can no longer support a reading down of Sec. 16(2)(c), given the Supreme Court’s finding that the Delhi VAT Act and the CGST Act admit of no parity. Its reasoning nevertheless survives in a different form. The propositions that a purchaser may act on a registration current at the time, that a later cancellation does not by itself taint an earlier transaction, and that collusion must rest on material and inquiry, all find a place in guidelines (i), (iii) and (vii).

9.4 Sec. 74 as an independent threshold

G.R. Infra Projects and Tata Steel establish that Sec. 74 has its own threshold, distinct from the question of eligibility to credit. A failure of clause (c) may justify reversal of credit under the ordinary provision. It does not, without more, show fraud or suppression on the part of the purchaser. Tata Steel also shows the limits of the relief. Where the extended period is still running, a notice set aside for want of foundational facts may be followed by a fresh and properly reasoned notice.

9.5 Reach of the guidelines

The guidelines are addressed to proper officers of the Central Government, Punjab, Haryana and Chandigarh. Before authorities elsewhere the judgment would carry persuasive value. The rulings of the Supreme Court on which Part 6 rests apply throughout the country.

9.6 The burden remains

The judgment does not relieve the purchaser of the burden under Sec. 155. Guideline (vi) identifies the material by which it is discharged: the tax invoice, e-way bills, transport receipts, weighbridge slips, and stock and consumption records. What changes is that the officer is now bound to consider that material and to deal with it in the order.

10. The way forward for businesses

The judgment leaves the burden of proving eligibility on the purchaser, and tells the officer what proof he must consider. A business that claims ITC should therefore be able to establish each condition of Sec. 16(2) from its own records, transaction by transaction. The suggestions below are the author’s, drawn from the guidelines and from the rulings discussed above.

10.1 Documentation at the time of the transaction

• Record the supplier’s registration status on the date of purchase. Shanti Kiran and Suresh Trading Company turn on the supplier being registered when the transaction took place. A dated record of the GSTIN status from the common portal, kept with the supplier’s file, answers a later retrospective cancellation.
• Keep the tax invoice with proof that the goods or services were actually received. Guideline (vi) names the material: e-way bills, transport receipts, weighbridge slips, and stock and consumption records. For services, the contract, work orders, completion or delivery records and correspondence serve the same purpose.
• Make the movement of goods traceable. The Department relies on e-way bill, vehicle registration and toll data (guideline (iv)). The purchaser’s own records should match that data: vehicle number, transporter, date and place of delivery, and gate or inward entries.
• Pay the supplier through banking channels, within 180 days. Payment of the value and the tax through the bank, linked to specific invoices, establishes both the second proviso to Sec. 16(2) and the genuineness of the transaction.
• Link the purchase to its use. Stock registers and consumption or sales records that show what became of the goods are the strongest evidence that the supply was real.

10.2 Monitoring the supplier

• Reconcile ITC with GSTR-2B every month, and follow up invoices that the supplier has not reported.
• Check that the supplier has furnished GSTR-3B. Under Rule 37A, credit must be reversed if the supplier’s return for the period is not furnished by 30 September following the financial year, and may be re-availed once it is furnished. A calendar of such reversals and re-availments should be maintained.
• Provide for the supplier’s default in the contract. A clause requiring the supplier to file returns and pay the tax, with a right to withhold payment or recover the loss on default, gives the purchaser a remedy of its own against the supplier.
• Preserve supplier-wise files for the full period within which proceedings may be initiated, including the extended period under Sec. 74.

10.3 When a notice is received

• Identify the tax period first. The law differs before 01.10.2022, from 01.10.2022 and from 26.12.2022, and a later condition cannot be applied to an earlier period (guideline (ix)).
• Ask for the particulars and the documents relied upon where the notice does not disclose them: the supplier, the invoices, the precise nature of the supplier’s default and the material on which the allegation rests (guidelines (ii) and (iv)).
• Place the complete documentary record with the reply, indexed invoice by invoice, and ask that it be dealt with in the order (guidelines (vi) and (xii)).
• Where Sec. 74 is invoked, test the notice against its own contents. It must state the facts that connect the purchaser, and not merely the supplier, with the alleged fraud or suppression (guideline (v)).
• Ask for the status of proceedings against the supplier, and for any tax recovered from the supplier to be taken into account (guideline (viii)).
• Seek cross-examination where the case rests on statements of third persons (guideline (xi)).
• Record the circumstances of any deposit made during investigation. Its character and effect are to be decided on the facts (guideline (xiii)).

None of this assists where the transaction itself is not genuine. Where goods or services were not received, or where there is collusion with the supplier, the judgment affirms that credit is to be denied.

11. Conclusion

Shaurya Alloys holds a careful line. It respects the Supreme Court’s conclusion that Sec. 16(2)(c) is a valid condition of input tax credit, and it refuses the reading down that the petitioners sought. It then insists that the provision be applied as part of the scheme to which it belongs. A supplier’s default, or the later cancellation of its registration, is the point at which an inquiry may begin. It is not, by itself, the ground on which a purchaser’s credit may be reversed, and still less the ground on which fraud may be attributed to him.

Table of Cases

CASE	COURT	CITATION
Bhandari Scrap Traders v. Union of India	Supreme Court	SLP(C) No. 23931/2026 with SLP(C) Nos. 24088/2026 and 24103/2026, order dated 24.07.2026; 2026 (7) TMI 1839
G.R. Infra Projects Ltd. v. State of Madhya Pradesh	Supreme Court	Civil Appeal No. 11277 of 2026, decided 19.08.2026; 2026 (8) TMI 1497
Tata Steel Ltd. v. Union of India	Supreme Court	Civil Appeal No. 12020 of 2026, decided 25.08.2026; 2026 INSC 920; 2026 (8) TMI 1587
Commissioner, Trade and Tax, Delhi v. Shanti Kiran India (P) Ltd.	Supreme Court	Civil Appeal Nos. 2042–2047/2015, decided 09.10.2025; 2025 SCC OnLine SC 2389; 2025 (10) TMI 607
Commissioner of Trade and Taxes, Delhi v. Arise India Ltd.	Supreme Court	SLP (C) No. 36750 of 2017; 2018 SCC OnLine SC 3859; 2018 (1) TMI 555
CCE & Customs v. Larsen & Toubro Ltd.	Supreme Court	(2016) 1 SCC 170; 2015 (8) TMI 749
State of Maharashtra v. Suresh Trading Company	Supreme Court	(1997) 11 SCC 378; 1996 (2) TMI 451
Bhawani Cotton Mills Ltd. v. State of Punjab	Supreme Court (Constitution Bench)	1967 SCC OnLine SC 39; 1967 (4) TMI 110
K.T. Moopil Nair v. State of Kerala	Supreme Court (Constitution Bench)	AIR 1961 SC 552
Maruti Enterprises v. Union of India	Gujarat High Court	2026 SCC OnLine Guj 4013; 2026 (5) TMI 127
Instakart Services Pvt. Ltd. v. Union of India	Karnataka High Court	2026 SCC OnLine Kar 2469; 2026 (3) TMI 1674
Sahil Enterprises v. Union of India	Tripura High Court	2026 SCC OnLine Tri 4; 2026 (1) TMI 385
National Plasto Moulding v. State of Assam	Gauhati High Court	2024 (8) TMI 836
On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi	Delhi High Court	(2018) 56 GSTR 177 (Delhi); 2017 (10) TMI 1020
Shanti Kiran India (P.) Ltd. v. Commissioner, Trade and Tax Department	Delhi High Court	ST. APPL. 34–39/2012, decided 04.01.2013; [2013] 57 VST 405 (Del); 2013 (2) TMI 80
Gheru Lal Bal Chand v. State of Haryana	Punjab & Haryana High Court	2011 SCC OnLine P&H 13205; 2011 (9) TMI 492

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Author: Vipin Jain | FCA · LLB | [email protected]

Shared purely for academic and knowledge-sharing purposes. Does not constitute professional advice.