There is a particular kind of frustration that hits a tax consultant when a client walks in with a stack of invoices, proof of payment, goods receipt notes, and a clean GSTR-2A ,and the GST officer still denies their Input Tax Credit. Not because of anything the client did wrong. But because their supplier, somewhere down the line, forgot to press “file” on their GSTR-3B.
If you have been in GST practice for any length of time, you have seen this scenario play out more times than you would like to count. And for years, the legal landscape on this question ,whether a bonafide purchaser can lose ITC simply because of a supplier’s default ,has been unsettled, contested, and frankly, a bit of a mess. The Gujarat High Court’s judgment in Maruti Enterprise v. Union of India & Ors. (R/Special Civil Application No. 18080 of 2023, decided on 1 May 2026) has now added a fresh, and somewhat uncomfortable, chapter to this saga. The judgment does not just resolve a dispute between a trader and the tax department. It represents a significant doctrinal intervention on the constitutional validity of Section 16(2)(c) of the CGST Act ,and it lands squarely against the taxpayer.
Setting the Stage: What Does Section 16(2)(c) Actually Say?
Before diving into the case, it is worth stepping back and understanding why Section 16(2)(c) became a flashpoint to begin with. Under the GST regime, a recipient is entitled to claim Input Tax Credit subject to satisfaction of four conditions under Section 16(2): (a) possession of a tax invoice; (b) receipt of goods or services; (c) the tax charged in respect of such supply has actually been paid to the government; and (d) the recipient has furnished the return.
Conditions (a), (b), and (d) are entirely within the control of the recipient. Condition (c), however, is not. It depends entirely on what the supplier does ,or does not do ,with the tax collected from the buyer.
This is the rub. A purchaser can do everything right ,verify the supplier’s GSTIN, obtain a proper invoice, pay the full consideration including tax, receive the goods, and file their own returns ,and still lose their ITC if the supplier pockets the tax and defaults on depositing it. The law makes no distinction between a buyer who colluded with a fraudulent supplier and one who was simply unlucky enough to have dealt with a non-compliant one.
It is this structural inequity that has been the subject of litigation across nearly every High Court in the country.
The Maruti Enterprises Case: What Happened and What Was Decided
The Gujarat High Court in Maruti Enterprises was not dealing with a single aggrieved taxpayer. The Division Bench, comprising Justice A.S. Supehia and Justice Pranav Trivedi, took up a consolidated batch of 42 writ petitions, all raising the same fundamental challenge: that Section 16(2)(c) is constitutionally infirm insofar as it denies ITC to bonafide purchasers who had no role in, and no control over, the supplier’s failure to remit tax.
The petitioners’ arguments were well-structured and drew from a strong line of precedent. They invoked the Latin maxim Lex non cogit ad impossibilia ,the law does not compel the impossible. They argued that a buyer has no statutory mechanism to audit a seller’s internal GST filings, verify their GSTR-3B, or compel them to remit tax. To condition the buyer’s right on an act they cannot perform or enforce is, on their case, arbitrary and violative of Article 14. They also contended that allowing the government to recover tax from the supplier while simultaneously denying ITC to the buyer results in a double recovery ,the Revenue gets paid twice for the same transaction.
They relied heavily on the Delhi High Court’s decision in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi, where a near-identical provision under the Delhi VAT Act had been read down in favour of bonafide purchasers. That precedent had been cited approvingly across multiple forums.
The Revenue’s response, however, was pointed. Under the GST architecture, tax is destination-based. For inter-state supplies, the originating state is required under Section 53 to transfer ITC to the destination state. If the originating supplier defaults and the government nevertheless allows the recipient’s ITC claim, the originating state must transfer funds it never collected in the first place. The consequence, as the Revenue put it, would be a revenue leakage running into crores per tax period ,and a fundamental breakdown of the cross-state transfer mechanism that holds the GST system together.
The Court agreed with the Revenue.
The bench held that Section 16(2)(c) is neither arbitrary nor unconstitutional. It distinguished the GST regime from VAT: the Delhi High Court’s reading-down exercise in On Quest Merchandising was premised on the absence of protective mechanisms in the DVAT law. The CGST Act, by contrast, contains Section 41(2) ,which mandates reversal of credit on supplier default ,and Rule 37A ,which allows re-availment once the supplier eventually pays. These safeguards, the Court found, mean that the denial is not permanent or irreversible. The buyer’s loss is tied to the supplier’s delinquency and can be cured. On the question of reading down the statute, the Court was firm. Relying on the Supreme Court’s judgment in Authorized Officer, CBI v. Shanmugavelu, it held that a court cannot read down a provision merely because its application causes hardship. Reading down is a doctrine of constitutional interpretation ,a tool to save a provision from invalidity ,not a judicial remedy for commercial inconvenience. Since the Court found the provision valid, there was nothing to read down.
The petitions were dismissed on the point of law. The Court did, however, leave the matters listed for hearing on merits, keeping the individual petitioners’ factual contentions open.
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