Bona Fide Purchaser Cannot Escape ITC Reversal as GST Law Requires Actual Tax Deposit

The Hon’ble Gujarat High Court in Maruti Enterprise vs. Union of India upheld the constitutional validity of Section 16(2)(c) of the CGST Act and refused to read it down for bona fide purchasers. The Court held that actual payment of tax to the Government by the supplier is an intrinsic statutory condition for availing Input Tax Credit (ITC), and that the recipient bears the burden of proving eligibility under Section 155. Rejecting the argument that purchasers cannot verify supplier tax payment, the Court observed that GST has a distinct statutory framework, including Sections 41 and Rule 37A, which provide for reversal and re-availment mechanisms. The judgment directly conflicts with pro-taxpayer rulings of the Tripura High Court in Sahil Enterprises v. Union of India [W.P.(C) No. 688 of 2022 dated January 06, 2026], the Gauhati High Court in National Plasto Moulding v. State of Assam [(2024) 8 TMI 836 = 2024 (89) G.S.T.L. 82 (Gau.)], and the Karnataka High Court in Instakart Services Private Limited v. Union of India [W.P. No. 4917 of 2021 dated February 09, 2026], which had protected bona fide recipients from ITC denial in supplier-default cases. The article analyses divergent judicial interpretations under GST, VAT, and CENVAT regimes and highlights the growing constitutional debate on balancing revenue protection with fairness to genuine taxpayers, making Supreme Court intervention increasingly likely.

This article examines the historical, statutory and constitutional framework of Section 16(2)(c), traces the foundation principles under VAT and CENVAT jurisprudence, analyses the chronological development of landmark rulings, contrasts the pro-taxpayer and pro-revenue lines, and concludes with practical guidance for taxpayers and a likely path of Supreme Court resolution.

[1] Legislative background and object of Input Tax Credit

Input Tax Credit (ITC) is the central design feature of any value added tax. The economic object is to tax only the value addition at each stage and to avoid cascading. GST adopted this architecture by treating tax paid on inward supplies as creditable against output tax, provided the recipient satisfies the statutory conditions. Section 16(1) of the CGST Act embodies the eligibility principle: every registered person is subject to prescribed conditions and restrictions and in the manner specified in Section 49, entitled to take credit of input tax charged on supplies used or intended to be used in the course or furtherance of business.

Section 16(2), however, converts this general eligibility into a set of cumulative conditions. The provision opens with a non obstante clause and then requires possession of a tax invoice or debit note, furnishing of invoice details by the supplier and communication to the recipient, actual receipt of goods or services, restriction under Section 38, actual payment of tax to the Government, and furnishing of return under Section 39. Clause (c) is the focus of the controversy because the recipient can control  invoice of supplier, receipt of goods or services, payment of taxes to supplier and return compliance, but cannot directly control whether the supplier ultimately deposits tax through cash or eligible credit.

The statutory formulation therefore produces what several articles and judgments describe as the bona fide buyer’s dilemma: a registered recipient may have received goods or services, made payment including GST through banking channels, availed credit on the strength of returns and GSTR-2A/2B reflection, and yet face reversal months or years later because the supplier filed nil GSTR-3B, failed to discharge liability, or had registration retrospectively cancelled, etc.. The dispute is not merely procedural; it tests the boundary between revenue protection and constitutional fairness.

[2] Text and operating mechanism of Section 16(2)(c)

“Subject to the provisions of section 41, 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.”

The words ‘actually paid to the Government’ are crucial. A literal interpretation treats payment by the supplier to the exchequer as a condition precedent to the recipient’s final credit entitlement. A purposive or constitutional interpretation asks whether, in the case of a bona fide recipient, the phrase should be applied only after the department first examines genuineness, collusion, recovery from the supplier and the practical impossibility of recipient-side verification.

The Finance Act, 2021 inserted Section 16(2)(aa), requiring supplier-furnished invoice details to be communicated to the recipient. Section 38 and GSTR-2B then became central to credit communication. Section 41, substituted by the Finance Act, 2022 (w.e.f 01-10-2022), recognizes availment of self-assessed ITC but mandates reversal where tax payable by the supplier has not been paid. Rule 37A, inserted with effect from December 26, 2022, operationalizes temporary reversal where the supplier reports outward supply in GSTR-1 but does not furnish GSTR-3B by September 30 following the financial year; the recipient must reverse by November 30 following the financial year and may re-avail when the supplier pays tax. This mechanism is the backbone of the pro-revenue reasoning, particularly in the Gujarat decision.

[3] Foundation principles from VAT and CENVAT jurisprudence

Before GST, courts dealt with similar issues under VAT provisions that denied set-off where the selling dealer did not deposit tax. The jurisprudence did not develop uniformly. Some courts treated set-off as a statutory concession dependent on actual deposit; others protected bona fide purchasers who had no access to the seller’s tax-payment details. These cases supply the interpretative vocabulary now used in GST litigation: concession versus entitlement, burden of proof, impossibility of compliance, reading down, proportionality and the distinction between genuine and collusive transactions.

[1] Mahalaxmi Cotton Ginning Pressing and Oil Industries v. State of Maharashtra [2012 SCC OnLine Bom 733 dated May 11, 2012] – Bombay High Court

Facts: The challenge concerned the Maharashtra VAT mechanism under which set-off depended on tax being actually paid into the Government treasury by the selling dealer. The purchasing dealer argued that denial of set-off for seller default was unfair and excessive.

Issue: Whether the expression “actually paid” could be read to include tax that ought to have been paid by the selling dealer, though not in fact deposited.

Held: The Bombay High Court adopted a revenue-protective approach. It held that “actually paid” meant factual deposit into the treasury and that the court could not rewrite the legislative condition. This decision is frequently cited by the Revenue to argue that ITC is conditional and that fiscal statutes may impose strict set-off conditions.

Ratio decidendi: Where the statutory text expressly makes credit contingent upon actual deposit, the court cannot convert the requirement into deemed payment merely because the purchaser has paid the seller. The case, however, turned on the particular MVAT framework and was later distinguished by the Delhi High Court in the DVAT context.

[2] Commissioner of Central Excise Jalandhar v. Kay Kay Industries [2013 (8) TMI 772 (SC) dated August 26, 2013] – Supreme Court

Facts: The assessee had availed CENVAT credit on inputs received under duty-paid documents. The dispute arose because the supplier was alleged not to have deposited duty properly.

Issue: Whether credit validly taken by the buyer could be denied merely because the supplier defaulted, absent evidence that the buyer knew of or participated in the default.

Held: The Supreme Court protected the recipient where the goods were received, and duty-paid documents existed. The decision is often invoked for the proposition that an innocent recipient should not be punished for defaults committed at the supplier end.

Ratio decidendi: In a credit chain, once receipt and duty-paid documents are established and no collusion is shown, the department’s remedy normally lies against the defaulting supplier, not by mechanically denying credit to the buyer.

[3] On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi [(2018) 56 GSTR 177 (Delhi); 2017 SCC OnLine Del 11286 dated October 26, 2017] – Delhi High Court

Facts: A batch of writ petitions challenged Section 9(2)(g) of the DVAT Act. Purchasing dealers had bought goods from registered selling dealers, obtained tax invoices, paid VAT, and claimed ITC. The department denied credit because the selling dealers either failed to deposit tax or mismatches occurred.

Issue: Whether Section 9(2)(g), to the extent it denied ITC to bona fide purchasing dealers because of the selling dealer’s default, violated Articles 14 and 19(1)(g) of the Constitution.

Observed that, the purchasing dealer could verify registration and tax invoice details but could not be expected to monitor whether the selling dealer actually deposited tax or lawfully adjusted it against output liability.

“As long as the purchasing dealer has taken all these steps, he cannot be expected to keep track of whether the selling dealer has in fact deposited the tax collected with the Government.”

Held that, the expression “dealer or class of dealers” in Section 9(2)(g) had to be read down so as not to include bona fide purchasing dealers who purchased from validly registered dealers under proper tax invoices and where no mismatch existed. The remedy against a defaulting seller was recovery from the seller, while collusive cases could be proceeded against separately.

Ratio decidendi: A provision that treats bona fide purchasers and collusive purchasers alike suffers from hostile discrimination. Reading down was necessary to save the provision from Article 14 invalidity.

[4] Commissioner of Trade and Taxes Delhi v. Arise India Limited [SLP (Civil) No. 36750 of 2017; 2022 (60) G.S.T.L. 215 (SC) dated January 10, 2018] – Supreme Court

Facts: The Revenue challenged the Delhi High Court judgment reading down Section 9(2)(g) of the DVAT Act, which had denied input tax credit to purchasing dealers for default committed by the selling dealer.

Held: The Supreme Court dismissed the SLP without interfering with the Delhi High Court judgment. Though later GST-era decisions debated whether such dismissal amounted to a binding declaration of law under Article 141, the principles underlying Arise India subsequently received reinforcement in later Supreme Court consideration, including Commissioner, Trade and Tax, Delhi v. Shanti Kiran India (P) Ltd. [Civil Appeal No. 9902 of 2017, decided on October 9, 2025], thereby strengthening the persuasive value of the Delhi High Court’s approach in GST/VAT jurisprudence.

Case history / subsequent development of Shanti Kiran: In Commissioner, Trade and Tax, Delhi v. Shanti Kiran India (P) Ltd. [Civil Appeal Nos. 2042–2047 of 2015 and Civil Appeal No. 9902 of 2017, decided on October 9, 2025], the Supreme Court upheld the grant of ITC to bona fide purchasing dealers where the selling dealer was registered at the time of transaction and the genuineness of invoices/transactions was not disputed. The Court reiterated that the Department’s remedy lies against the defaulting seller and not against an innocent purchaser absent collusion or fraud. The decision expressly relied upon the Delhi High Court approach adopted in On Quest Merchandising/Arise India, thereby lending stronger precedential support to similar arguments under Section 16(2)(c) of the CGST Act.

Ratio decidendi: The operative effect of Arise India is that the Delhi High Court’s reading down attained finality for DVAT purposes and became the principal doctrinal foundation for pro-taxpayer arguments under GST. The subsequent ruling in Shanti Kiran India (P) Ltd. further reinforced the proposition that ITC cannot ordinarily be denied to a bona fide purchaser merely because the supplier failed to deposit tax with the Government.

[5] State of Karnataka v. Ecom Gill Coffee Trading Private Limited [(2023) 18 SCC 809; 2023 (3) TMI 533 (SC) dated March 13, 2023] – Supreme Court

Facts: The issue arose under the Karnataka VAT Act regarding the purchaser’s burden to establish genuineness of ITC claims.

Issue: Whether production of invoices and cheque payments alone discharged the statutory burden of proving the correctness and genuineness of ITC claims.

Held: The Supreme Court held that the burden remained on the dealer claiming ITC and that mere production of invoices or cheque payments was not enough. The purchaser must establish the actual movement and receipt of goods through supporting evidence such as supplier details, transport records, freight, delivery acknowledgements and payment particulars.

Ratio decidendi: The burden of proving genuine entitlement to credit lies on the claimant. Pro-revenue judgments under Section 16(2)(c) rely heavily on this principle, while pro-taxpayer judgments distinguish between proving genuineness and guaranteeing supplier remittance.

[4] Evolution of Section 16(2)(c) under GST

GST was introduced on July 01, 2017, with the promise of seamless ITC and technology-enabled matching. In the early period, the statutory return architecture was not fully operational; GSTR-2 and GSTR-3 were suspended, and GSTR-3B became the practical monthly return. CBIC press releases clarified that GSTR-2A was a facilitative statement and that ITC was claimed on self-assessment. Over time, the system moved from self-assessed claim to invoice communication and restriction: first through Rule 36(4), then Section 16(2)(aa), Section 38 communication, Section 41 reversal and Rule 37A. The constitutional tension intensified because the system gives the recipient greater visibility over supplier reporting but still does not give complete visibility or control over supplier payment through GSTR-3B, cash ledger or eligible credit utilization.

The core legal question is therefore not whether fake invoicing and fraudulent credit must be curbed. They must be. The real question is whether Section 16(2)(c) can be used against recipients who have proved genuine receipt of goods or services and who are not alleged to be collusive, merely because the supplier failed to pay tax.

[5] Analysis of GST-era pro-taxpayer judgments

[1] D.Y. Beathel Enterprises v. State Tax Officer Data Cell [2022 (58) G.S.T.L. 269 (Mad.) dated February 24, 2021] – Madras High Court

Facts: The petitioners purchased goods, paid consideration including tax to sellers, and claimed ITC. The department sought reversal from the buyers on the grounds that sellers had not paid tax.

Issue: Whether the department could proceed first against the recipient without examining or proceeding against the defaulting supplier.

Held: The Hon’ble Madras High Court held that the department should first examine the sellers and recover tax from them where the sellers had collected tax but failed to remit it. The matter was remanded because the sellers had not been examined and the purchasers were denied effective enquiry into the supplier default.

Ratio decidendi: When supplier default is the basis of ITC denial, natural justice and fair administration require inquiry against the supplier and examination of the recipient’s bona fides before recovery is fastened on the buyer.

[2] Suncraft Energy Private Limited v. Assistant Commissioner State Tax Ballygunge Charge [MAT 1218 of 2023 dated August 02, 2023, dated August 02, 2023] – Calcutta High Court

Facts: ITC was reversed due to mismatch/non-reflection of certain invoices in GSTR-2A for FY 2017-18 despite the assessee claiming to have paid tax to suppliers.

Issue: Whether credit could be denied solely because supplier invoices did not appear in GSTR-2A, without first taking action against the supplier or proving collusion.

Observed that, GSTR-2A was a facilitative mechanism during the relevant period and the statutory dispensation contemplated self-assessment through GSTR-3B.

Held: The Hon’ble Calcutta High Court held that before reversing ITC from the recipient, the authority should take action against the selling dealer if the selling dealer had not deposited tax. Unless collusion between recipient and supplier is proved, ITC should not be denied where the recipient genuinely paid tax.

Ratio decidendi: Mismatch alone is not conclusive. Supplier-side default must be investigated at the supplier end and bona fide recipients cannot be punished without proof of collusion or non-genuineness.

[3] National Plasto Moulding v. State of Assam [2024) 8 TMI 836; 2024 (89) G.S.T.L. 82 (Gau.) dated August 2024] – Gauhati High Court

Facts: A batch of petitions challenged Section 16(2)(c) and related demands/show-cause notices denying ITC to purchasing dealers for supplier defaults.

Issue: Whether the controversy was governed by the Delhi High Court reasoning in On Quest and Arise India and whether Section 16(2)(c) should be read down for bona fide transactions.

Held: The Hon’ble Gauhati High Court treated the issue as squarely covered by the Delhi VAT precedent as approved by the Supreme Court and read down the provision so that it could not be applied to bona fide purchasers. The notices and consequential orders were set aside, while liberty was preserved for the department to proceed where transactions were not bona fide.

Ratio decidendi: The department may pursue fraudulent or non-genuine transactions but cannot deny credit to a bona fide purchaser merely because the registered supplier defaulted.

[4] R.T. Infotech v. Additional Commissioner Grade 2 [Writ Tax No. 928 of 2024 dated December 16, 2024, dated December 16, 2024] – Allahabad High Court

Facts: The recipient had purchased through tax invoices and made payment through banking channels, but ITC was questioned because of supplier-side non-compliance.

Issue: Whether a purchasing dealer can be left at the mercy of a selling dealer who fails to file returns or deposit collected tax.

Held: The Hon’ble Allahabad High Court emphasized that the purchasing dealer cannot compel the selling dealer to file returns within time or deposit tax. The authority ought to communicate and verify the recipient’s documents and proceed in accordance with law rather than mechanically burdening the buyer.

Ratio decidendi: A diligent recipient who holds tax invoices and has paid through banking channels should not be denied benefit without proper enquiry and action against the defaulting supplier.

[5] Sahil Enterprises v. Union of India [W.P.(C) No. 688 of 2022 dated January 06, 2026, dated January 06, 2026] – Tripura High Court

Facts: The petitioner, a trader in rubber products, purchased goods from M/s Sentu Dey during July 2017 to January 2019 and paid GST of Rs. 1,11,60,830 to the supplier. The supplier filed GSTR-1 reflecting sales but filed nil GSTR-3B and did not deposit tax. The department blocked credit and confirmed demand under Section 73 against the recipient.

Issue: Whether Section 16(2)(c) is unconstitutional or must be read down where a bona fide recipient has paid GST to the supplier and no fraud, willful misstatement or suppression is alleged against the recipient.

Observed that, it was not disputed that the recipient had no mechanism to verify whether the supplier discharged tax liability to the Government and that the supplier was not normally under the control of the purchaser.

“The purchasing dealer cannot be asked to do the impossible, i.e., to identify a selling dealer who will not deposit with the Government, the tax collected by him from purchasing dealers, and avoid transacting with such selling dealers.”

Held: The Hon’ble Tripura High Court held Section 16(2)(c) constitutionally valid but read it down. It held that the provision should not be interpreted to deny ITC in bona fide transactions and should apply only where the transaction is not bona fide or is collusive or fraudulent to defraud revenue. The demand order was set aside, and ITC was directed to be allowed.

Ratio decidendi: A fiscal condition that imposes disproportionate consequences on a bona fide purchaser for supplier default becomes vulnerable under Article 14 unless read down. The department’s remedy lies against the defaulting supplier in genuine cases.

[6] Instakart Services Private Limited v. Union of India [W.P. No. 4917 of 2021 dated February 09, 2026, dated February 09, 2026] – Karnataka High Court

Facts: The petitioner challenged denial/reversal of ITC under Section 16(2)(c) and Rule 36(4), relying on bona fide receipt of supplies and compliance with statutory conditions other than supplier payment.

Issue: Whether Section 16(2)(c) and Rule 36(4) should be read down for bona fide recipients whose suppliers defaulted in tax payment or return compliance.

Held: The Hon’ble Karnataka High Court followed the Gauhati and Tripura approach and read down Section 16(2)(c) and Rule 36(4) to allow ITC to bona fide recipients that had complied with all other conditions under Section 16(2), despite fault, lapse or non-payment by suppliers.

Ratio decidendi: ITC denial is justified in actual fraud, collusion or non-genuine transactions, but not where the recipient establishes bona fides and the lapse is solely attributable to the supplier.

[6] Analysis of divergent and pro-revenue judgments

[1] Thirumalakonda Plywoods v. Assistant Commissioner [2023 SCC OnLine AP 1476 dated July 18, 2023] – Andhra Pradesh High Court

Facts: The assessee challenged denial of ITC under Section 16(2)(c) where tax charged by the supplier was allegedly not paid to the Government.

Issue: Whether Section 16(2)(c) is unconstitutional or arbitrary because it makes recipient credit dependent on supplier payment.

Held: The Hon’ble Andhra Pradesh High Court upheld the validity of Section 16(2)(c), treating ITC as a statutory benefit subject to conditions imposed by the legislature.

Ratio decidendi: A registered person claiming ITC must satisfy all statutory conditions. Courts should be slow to invalidate fiscal conditions that are designed to protect revenue and ensure integrity of the credit chain.

[2] Aastha Enterprises v. State of Bihar [2023 SCC OnLine Pat 4395 dated August 18, 2023] – Patna High Court

Facts: The petitioner sought ITC despite the supplier not having deposited the tax collected. The challenge invoked constitutional fairness and impossibility.

Issue: Whether a recipient can claim ITC when the supplier has not paid tax to the Government and whether the buyer’s payment to the seller is sufficient for Section 16(2)(c).

Held: The Hon’ble Patna High Court adopted a strict view and held that the recipient cannot claim credit unless the statutory requirement of payment to the Government is satisfied. Payment to the supplier is a private contractual act and not equivalent to payment to the exchequer.

Ratio decidendi: The statutory entitlement to ITC crystallizes only on fulfilment of conditions; hardship cannot override express legislative language.

[3] Nahasshukoor v. Assistant Commissioner [2023 SCC OnLine Ker 11369 dated September 2023] – Kerala High Court

Facts: The petitioners challenged Section 16(2)(c) and related action denying ITC due to supplier default and return mismatch.

Issue: Whether Section 16(2)(c) violates Articles 14 and 19(1)(g) or is unworkable because the recipient cannot ensure supplier payment.

Held: The Hon’ble Kerala High Court upheld the provision, stressing that ITC is a statutory entitlement subject to conditions and that the legislature may prescribe restrictions in a fiscal statute.

Ratio decidendi: The recipient’s inability to control supplier conduct does not by itself invalidate the statutory condition; the credit chain depends on actual tax reaching the Government.

[4] M. Trade Links v. Union of India [2024 SCC OnLine Ker 2744 dated June 04, 2024] – Kerala High Court

Facts: A group of writ petitions challenged Section 16(2)(c) and Section 16(4), alleging that the provisions were arbitrary, unreasonable and inconsistent with the purpose of seamless credit.

Issue: Whether Section 16(2)(c) and time limits/restrictions on ITC infringe Articles 14 and 19(1)(g).

Held: The Hon’ble Kerala High Court upheld the provisions. It emphasized that Section 16(1) is an enabling provision subject to statutory restrictions and that ITC is not an absolute right. The court also noted CBIC circulars dealing with initial GST implementation difficulties and mismatch issues.

Ratio decidendi: The legislature may impose conditions and time limits for availing ITC. Section 16(2)(c) is part of the statutory machinery and cannot be severed from the obligation that tax must actually reach the Government.

[5] Shree Krishna Chemicals v. Union of India [2025 SCC OnLine MP 1301 dated February 2025] – Madhya Pradesh High Court

Facts: The petitioner challenged denial of ITC based on supplier default and alleged invalidity of Section 16(2)(c).

Issue: Whether Section 16(2)(c) should be invalidated or read down in favour of a recipient who asserts bona fides.

Held: The Hon’ble Madhya Pradesh High Court followed the strict statutory approach and upheld the condition. It treated ITC as a statutory benefit subject to satisfaction of all legislative requirements.

Ratio decidendi: The court cannot dispense with a condition expressly imposed by Parliament for the availment of a fiscal benefit.

[6] Baby Marine Eastern Exports v. Union of India [2025 SCC OnLine Mad 15588 dated 2025] – Madras High Court

Facts: The challenge concerned ITC eligibility where supplier-side compliance was deficient.

Issue: Whether the recipient could retain ITC despite non-satisfaction of Section 16(2)(c).

Held: The Hon’ble Madras High Court followed the pro-revenue line and upheld the statutory condition of actual payment to the Government.

Ratio decidendi: Even if ITC is integral to GST, it remains governed by the conditions Parliament has chosen to impose.

[7] Maruti Enterprise through its Authorised Partner Jigneshbhai Bharatbhai Tarpara v. Union of India [R/Special Civil Application No. 18080 of 2023 and batch dated May 01, 2026, dated May 01, 2026] – Gujarat High Court

Facts: A large batch of writ petitions challenged the vires of Section 16(2)(c). The petitioners argued that bona fide recipients had no statutory, contractual or factual means of verifying the supplier’s GSTR-3B, actual tax payment or ITC utilization, and that the provision violated Articles 14, 19(1)(g), 265 and 300A.

Issue: Whether Section 16(2)(c) is arbitrary, ultra vires or required to be read down to exclude bona fide purchasers who had no collusion with defaulting suppliers.

Noted that Section 16(2)(c) is clear, self-explanatory and unambiguous; the GST scheme cannot be equated mechanically with the DVAT scheme; and the interplay of Sections 41 and 53 with Rule 37A provides a framework for reversal and re-availment.

Held: The Hon’ble Gujarat High Court upheld Section 16(2)(c) and declined to read it down. It held that the Government cannot be deprived of revenue due to illegal or defaulting supplier conduct; the recipient must discharge the burden of proving eligibility under Section 155; and clauses (a), (b), (c) and (d) of Section 16(2) must be satisfied together.

Ratio decidendi: Actual payment of tax by the supplier is an intrinsic statutory condition for ITC. The reading down adopted under DVAT and followed by some High Courts under GST was not accepted because GST has a distinct statutory architecture, including Section 41 and Rule 37A.

[7]Comparative table of judicial interpretation

Case	Court and date	Approach	Held portion	Practical impact
On Quest Merchandising	Delhi HC, October 26, 2017	Pro-taxpayer, VAT foundation	Section 9(2)(g) read down for bona fide purchasers	Basis for GST reading-down arguments
Ecom Gill Coffee	Supreme Court, March 13, 2023	Burden of proof	Invoices and cheque payment alone not sufficient	Revenue cites it to require proof of genuineness
Suncraft Energy	Calcutta HC, August 02, 2023	Pro-taxpayer	Action should first be taken against supplier; no denial absent collusion	Supports mismatch-defence cases
Aastha Enterprises	Patna HC, August 18, 2023	Pro-revenue	Payment to supplier is not payment to Government	Strict condition approach
M. Trade Links	Kerala HC, June 04, 2024	Pro-revenue	ITC is subject to statutory restrictions	Upholds Section 16(2)(c)
National Plasto Moulding	Gauhati HC, August 2024	Pro-taxpayer	Section 16(2)(c) read down for bona fide purchasers	Direct GST support for recipients
Sahil Enterprises	Tripura HC, January 06, 2026	Pro-taxpayer	Provision valid but read down; bona fide purchaser protected	Landmark GST reading down
Instakart Services	Karnataka HC, February 09, 2026	Pro-taxpayer	Section 16(2)(c) and Rule 36(4) read down	Important relief for genuine recipients
Maruti Enterprise	Gujarat HC, May 01, 2026	Pro-revenue	Section 16(2)(c) valid; no reading down	Creating direct conflict for Supreme Court

[8] Constitutional challenges and competing principles

[8.1] Article 14 and hostile discrimination

The pro-taxpayer argument is that Section 16(2)(c), if applied literally, treats two unequal classes equally: bona fide recipients who have acted diligently and collusive recipients who participate in fraud. Article 14 is violated not only when equals are treated unequally, but also when unequals are treated alike. The Delhi, Gauhati, Tripura and Karnataka line accept this concern and saves the provision by reading it down. The pro-revenue response is that the classification is not between bona fide and fraudulent purchasers but between claimants whose supply-chain tax has reached the Government and those whose tax has not. On that classification, actual payment is rationally connected to revenue protection and credit-chain integrity.

[8.2] Article 19(1)(g) and proportionality

Recipients contend that denial of ITC for supplier default imposes a disproportionate business burden, making ordinary trade with registered suppliers commercially risky. It may compel taxpayers to police supplier GSTR-3B filings, working capital and credit utilization, which they cannot practically do. Revenue contends that reasonable restrictions are permissible in fiscal legislation and that Section 41/Rule 37A reduce disproportionality by allowing re-availment once the supplier pays tax.

[8.3] Article 265 and double taxation

The recipient argues that if it has paid GST to the supplier and is then asked to reverse ITC and pay output tax in cash, the same tax burden is effectively collected twice. Pro-taxpayer judgments use this as part of the fairness analysis. Pro-revenue judgments reject the double-taxation characterization: unless tax reaches the Government, there is no Government collection of the tax component paid privately to the supplier. The buyer’s remedy against the supplier, according to this view, is contractual or civil unless the statute provides otherwise.

[8.4] Article 300A and vested credit

Once ITC is reflected in the electronic credit ledger and used in business, taxpayers argue that credit assumes the character of property and cannot be taken away arbitrarily. Revenue replies that ITC is statutory and remains defeasible until all conditions are satisfied. The outcome depends on whether courts characterize credit as a vested right after bona fide compliance, or as a conditional benefit until supplier payment is verified.

[8.5] Lex Non Cogit Ad Impossibilia

The maxim means that the law does not compel the impossible. It is the moral centre of the recipient-side argument. A buyer can verify GST registration, obtain tax invoices, receive goods or services, check GSTR-2A/2B, pay through banking channels and maintain stock/transport records. But it cannot access the supplier’s complete GSTR-3B payment particulars, electronic cash ledger, credit ledger or internal tax utilization. Tripura and Karnataka accept that literal application of Section 16(2)(c) compels the impossible. Gujarat responds that the statutory framework itself allocates the risk and gives a re-availment mechanism; therefore, impossibility does not justify rewriting an unambiguous condition.

[9] Pari materia and contrary judgments

Pari materia authorities favouring recipients include On Quest/Arise India under DVAT, Kay Kay Industries under CENVAT, D.Y. Beathel and Suncraft under GST administration, and the direct GST reading-down decisions in National Plasto Moulding, Sahil Enterprises and Instakart. The unifying principle is that bona fide credit should not be denied for supplier default unless the buyer is shown to be collusive, fraudulent or unable to prove genuine receipt and payment.

Contrary authorities include Mahalaxmi Cotton under MVAT, Ecom Gill Coffee on burden of proof, Thirumalakonda Plywoods, Aastha Enterprises, Nahasshukoor, M. Trade Links, Shree Krishna Chemicals, Baby Marine and Maruti Enterprise. The unifying principle is that ITC is a statutory construct and all conditions, including actual payment to the Government, must be met. Courts following this line emphasize fiscal deference, Section 155 burden, Section 41 reversal and Rule 37A re-availment.

[10] Practical implications for bona fide purchasers and taxpayers

Until the Supreme Court settles the conflict, taxpayers should prepare for both lines of argument. The safest litigation posture is not merely to assert bona fides, but to prove them with documentary evidence capable of satisfying Ecom Gill while invoking the constitutional protection recognized in Quest, Suncraft, National Plasto, Sahil Enterprises and Instakart.

• Preserve valid tax invoices containing supplier GSTIN, invoice number, date, place of supply, tax rate, taxable value and tax amount.
• Maintain e-way bills, lorry receipts, delivery challans, weighment slips, gate-entry records, stock registers, consumption records and onward-sale records to prove actual movement and receipt.
• Preserve bank payment proofs showing payment of value plus GST to the supplier within statutory timelines.
• Download and archive GSTR-2A/2B, supplier registration status screenshots and correspondence with suppliers at the time of transaction.
• Issue supplier confirmations and contractual indemnities requiring timely GSTR-1 and GSTR-3B compliance.
• Where notices are issued, demand that the department disclose whether proceedings have been initiated against the supplier and whether any recovery has been made.
• Argue that Section 73 proceedings, as opposed to Section 74, are significant where the department itself does not allege fraud, suppression or collusion against the recipient.
• If reversal is demanded under Rule 37A, preserve the right of re-availment and contest permanent denial where supplier default alone is alleged.

[11] Future outlook and probable Supreme Court interpretation

The present state of law is unsettled. The conflict is now sharp: Tripura, Gauhati and Karnataka have adopted reading down for bona fide recipients, whereas Gujarat has expressly disagreed with Tripura and refused to equate GST with the DVAT framework. Kerala, Patna, Andhra Pradesh, Madhya Pradesh and Madras have also upheld a stricter statutory approach. This is precisely the kind of inter-High Court conflict that requires authoritative Supreme Court resolution.

A likely Supreme Court formulation may attempt to reconcile both sides rather than adopt an absolute rule. The Court may uphold Section 16(2)(c) as constitutionally valid, because Parliament can impose conditions on ITC and protect revenue. At the same time, it may require procedural safeguards before credit is denied to a recipient: proof of non-payment by supplier, notice to recipient, examination of recipient bona fides, action against supplier, opportunity to prove genuineness, and protection against permanent denial where the transaction is genuine and tax is later recovered from the supplier. Such a middle path would preserve revenue integrity without turning bona fide recipients into guarantors of supplier compliance.

The most important issue will be how the Court treats Section 155. If the burden is confined to proving genuineness of transaction, receipt and payment, the pro-taxpayer line may prevail. If the burden is extended to proving supplier deposit, the pro-revenue line will dominate. In constitutional terms, the decisive question will be whether requiring proof of supplier deposit is a reasonable credit condition or an impossible burden.

Our conclusion and comments:

Section 16(2)(c) stands at the intersection of two legitimate objectives: preserving revenue against fake invoicing and protecting honest businesses from supplier default. The provision is not objectionable when applied to bogus invoices, circular trading, accommodation entries, non-existent suppliers, retrospective registration frauds known to the buyer, or collusive tax evasion. It becomes controversial when applied mechanically to a genuine recipient who has done everything commercially and statutorily possible.

Our considered view is that the better constitutional interpretation is to uphold Section 16(2)(c) but apply it with a bona fide purchaser exception. This does not dilute anti-fraud enforcement. It merely prevents the State from recovering the same economic tax burden from an innocent recipient before exhausting statutory remedies against the defaulting supplier and before proving collusion or lack of genuineness. The doctrine of lex non cogit ad impossibilia, Article 14 fairness, and the GST objective of seamless credit support such a reading.

At the same time, bona fide status cannot be presumed lightly. After Ecom Gill, taxpayers must maintain robust evidence of actual supply, payment and business use. The defence of impossibility is strongest only after the recipient proves what was within its control. The future Supreme Court decision should therefore draw a clear line: strict denial for fraudulent or unproved transactions, but protection or at least non-permanent reversal for proved bona fide transactions where the default is exclusively supplier-side.

Held portion in summary: Section 16(2)(c) should not operate as a punishment on genuine taxpayers. It should operate as an anti-abuse condition against fraudulent chains and as a temporary recovery mechanism where supplier payment is pending, subject to re-availment and fair enquiry. A bona fide purchaser should not be made the insurer of the supplier’s tax conduct.

Annexure A – Chronological list of important cases

Year/date	Case	Court	Principle
May 11, 2012	Mahalaxmi Cotton Ginning Pressing	Bombay HC	Actual payment condition under MVAT upheld
August 26, 2013	Kay Kay Industries	Supreme Court	Recipient protected absent collusion
October 26, 2017	On Quest Merchandising / Arise India	Delhi HC	DVAT provision read down for bona fide purchasers
January 10, 2018	Commissioner of Trade and Taxes v. Arise India	Supreme Court	SLP dismissed; Delhi approach attained finality
February 24, 2021	D.Y. Beathel Enterprises	Madras HC	Department should examine supplier first
March 13, 2023	Ecom Gill Coffee	Supreme Court	Burden of proof on ITC claimant
July 18, 2023	Thirumalakonda Plywoods	Andhra Pradesh HC	Section 16(2)(c) upheld
August 02, 2023	Suncraft Energy	Calcutta HC	No denial without supplier action/collusion
August 18, 2023	Aastha Enterprises	Patna HC	Strict Section 16(2)(c) approach
June 04, 2024	M. Trade Links	Kerala HC	ITC subject to restrictions
August 2024	National Plasto Moulding	Gauhati HC	Section 16(2)(c) read down
2025	Shree Krishna Chemicals / Baby Marine	MP HC / Madras HC	Pro-revenue approach
January 06, 2026	Sahil Enterprises	Tripura HC	Section 16(2)(c) valid but read down
February 09, 2026	Instakart Services	Karnataka HC	Section 16(2)(c) and Rule 36(4) read down
May 01, 2026	Maruti Enterprise	Gujarat HC	Reading down refused; provision upheld

Annexure B – Relevant provisions:

^*Section 16. Eligibility and conditions for taking input tax credit.-

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

¹[(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;]

(b) he has received the goods or services or both.

²[Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;]

³[(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;]

(c) subject to the provisions of ⁴[section 41 ⁵[***]], 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; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be ⁹[paid by him along with interest payable under section 50], in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him ¹⁰[to the supplier] of the amount towards the value of supply of goods or services or both along with tax payable thereon.

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the ⁶[thirtieth day of November] following the end of financial year to which such invoice or ⁷[****] debit note pertains or furnishing of the relevant annual return, whichever is earlier.

⁸[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.]

¹¹[(5) Notwithstanding anything contained in sub-section (4), in respect of an invoice or debit note for supply of goods or services or both pertaining to the Financial Years 2017-18, 2018-19, 2019-20 and 2020-21, the registered person shall be entitled to take input tax credit in any return under section 39 which is filed up to the thirtieth day of November, 2021.

(6) Where registration of a registered person is cancelled under section 29 and subsequently the cancellation of registration is revoked by any order, either under section 30 or pursuant to any order made by the Appellate Authority or the Appellate Tribunal or court and where availment of input tax credit in respect of an invoice or debit note was not restricted under sub-section (4) on the date of order of cancellation of registration, the said person shall be entitled to take the input tax credit in respect of such invoice or debit note for supply of goods or services or both, in a return under section 39,–

(i) filed up to thirtieth day of November following the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier; or

(ii) for the period from the date of cancellation of registration or the effective date of cancellation of registration, as the case may be, till the date of order of revocation of cancellation of registration, where such return is filed within thirty days from the date of order of revocation of cancellation of registration, whichever is later.]

​*Enforced w.e.f. 1st July, 2017.

​1. Inserted (w.e.f. 1st January, 2022 vide Notification No. 39/2021-C.T., dated 21st December, 2021) by s. 109 of The Finance Act, 2021 (No. 13 of 2021).

2. Substituted (w.e.f. 1st February, 2019) for “Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;” by s. 8 of The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018).

3. Inserted (w.e.f. 1st October, 2022 vide Notification No. 18/2022 – CT dated 28.09.2022.) by s. 100 of The Finance Act 2022 (No. 6 of 2022).

4. Substituted “section 41” (w.e.f. a date yet to be notified) by s. 8 of The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018).

5. Omitted “or section 43A” (w.e.f. 1st October, 2022 vide Notification No. 18/2022 – CT dated 28.09.2022.) by s. 100 of The Finance Act 2022 (No. 6 of 2022).

6. Substituted (w.e.f. 1st October, 2022 vide Notification No. 18/2022 – CT dated 28.09.2022.) by s. 100 of The Finance Act 2022 (No. 6 of 2022) for ”due date of furnishing of the return under section 39 for the month of September”.

7. Omitted “invoice relating to such” (w.e.f. 1st January, 2021 vide Notification No. 92/2020-C.T., dated 22nd December, 2020) by s. 120 of The Finance Act, 2020 (No. 12 of 2020) .

8. Inserted vide Order No. 02/2018 -Central Tax dated 31st December, 2018.

9. Substituted (w.e.f. 1st October, 2023 vide Notification No. 28/2023-C.T., dated 31st July, 2023) by s. 138 of The Finance Act 2023 (No. 8 of 2023) for “added to his output tax liability, along with interest thereon”.

10. Inserted (w.e.f. 1st October, 2023 vide Notification No. 28/2023-C.T., dated 31st July, 2023) by s. 138 of The Finance Act 2023 (No. 8 of 2023).

11. Inserted by section 118 of  The Finance Act (No. 2) Act, 2024 No. 15 of 2024 dated 16.08.2024.

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(Author can be reached at info@a2ztaxcorp.com)