Bhandari Scrap Traders Vs Union of India & Ors. (Supreme Court of India)
The matter arose from a batch of writ petitions before the Gujarat High Court challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act). The petitioners contended that the provision, which conditions entitlement to Input Tax Credit (ITC) upon actual payment of tax by the supplier to the Government, was arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution. Alternatively, they sought that the provision be read down so that it would apply only to fraudulent, collusive, or conniving transactions, and not to bona fide purchasers. Their grievance was that ITC was denied solely because suppliers failed to deposit tax collected from purchasers.
Read HC Judgment in this case: Gujarat HC Upholds Section 16(2)(c) Denial of ITC on Supplier Tax Default
Before the High Court, the petitioners relied on the statutory scheme under Sections 16 to 21, 41, 49 and 53 of the CGST Act and the CGST Rules, 2017, arguing that recipients had no statutory or practical means to verify whether suppliers had actually paid tax through Form GSTR-3B. They submitted that clauses (a), (aa), (b), and (ba) of Section 16(2) already established the genuineness of transactions, whereas clause (c) introduced a condition entirely outside the purchaser’s control. They further contended that bona fide purchasers and fraudulent purchasers were treated alike, that denial of ITC resulted in double taxation, shifted the supplier’s tax burden to the recipient, retrospectively deprived recipients of reflected ITC, and compelled performance of an impossibility. Reliance was placed on decisions including On Quest Merchandising India (P.) Ltd., Arise India Ltd., Shanti Kiran India (P.) Ltd., Tallam Apparels, Sahil Enterprises, and the European Court of Justice decision in Axel Kittel.
The Revenue argued that GST operates under a distinct statutory framework in which ITC is a statutory entitlement subject to prescribed conditions. It relied on Sections 16, 41, 53 and 155 of the CGST Act, Rule 37A of the CGST Rules, and the Finance Act, 2022 amendments. It submitted that Section 41(2) requires reversal of ITC where the supplier fails to pay tax while permitting re-availment once payment is made, thereby preventing permanent prejudice to recipients. It further contended that the GST regime differs fundamentally from the Delhi VAT Act because of provisions relating to reversal, re-availment, burden of proof, and inter-State tax settlement, making precedents under the Delhi VAT Act inapplicable.
The Gujarat High Court examined the Statement of Objects and Reasons, Section 16(2)(c), the statutory scheme governing ITC, and the decisions relied upon by both sides. It distinguished Section 16(2)(c) of the CGST Act from Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, observing that the GST framework includes Sections 41, 53 and 155 of the CGST Act and Rule 37A of the CGST Rules, which were absent under the Delhi VAT regime. The Court analysed the GST mechanism involving GSTR-1, GSTR-2A, GSTR-2B and GSTR-3B, Section 41(2) permitting reversal and subsequent re-availment of ITC, the inter-State fiscal implications under Section 53, recovery provisions under Sections 73 and 74, and the burden of proof under Section 155.
The High Court held that Section 16(2)(c) was clear and unambiguous, that the conditions under Section 16(2)(a) to (d) were cumulative and had to be satisfied together, and that ITC was a statutory concession subject to statutory conditions. It concluded that the provision neither required reading down nor suffered from constitutional infirmity. The Court declined to declare Section 16(2)(c) unconstitutional or to read it down, while observing that the Government should consider legislative amendments or technological mechanisms to protect genuine purchasers and recover tax promptly from defaulting suppliers. The writ petitions were directed to be listed for decision on their individual merits.
The High Court judgment was challenged before the Supreme Court through Special Leave Petitions. The Supreme Court noted that although a Special Leave Petition arising from the Tripura High Court decision in Sahil Enterprises v. Union of India & Ors. had been entertained, the Tripura High Court had not undertaken the detailed analysis carried out by the Gujarat High Court. The Supreme Court specifically referred to the Gujarat High Court’s analysis from paragraph 42 onwards distinguishing the Delhi VAT Act from the CGST Act and to paragraph 56 explaining the statutory scheme governing ITC under the GST regime.
The Supreme Court observed that the Gujarat High Court had clearly demonstrated that no parity could be drawn between the provisions of the Delhi VAT Act and the CGST Act so as to equate a purchasing dealer under the CGST Act with a purported bona fide purchasing dealer under the Delhi VAT Act where the supplier failed to pay tax. The Supreme Court also noted the High Court’s consideration of Section 41 and Sections 73 and 74 of the CGST Act, including the mechanism permitting a purchasing dealer to re-avail reversed ITC after the supplier discharges the tax liability.
Agreeing completely with the Gujarat High Court, the Supreme Court held that the High Court was fully justified in concluding that no grounds existed either to declare Section 16(2)(c) of the CGST Act unconstitutional or to read down the provision. The Supreme Court expressed complete and respectful agreement with the High Court’s reasoning, affirmed and upheld the impugned judgment, and dismissed the Special Leave Petitions. Pending applications, if any, were also disposed of.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
Though we are informed that a special leave petition has been entertained in relation to the decision of the Tripura High Court
in Sahil Enterprises vs. Union of India & Ors.1, we find from the judgment passed by the High Court of Tripura that the exercise undertaken by the High Court of Gujarat in the judgment, presently under challenge, was not undertaken by it.
The distinction and differences between the provisions of the Delhi Value Added Tax Act, 20042, and the Central Goods and Services Tax Act, 20173, brought out by way of a detailed analysis from paragraph 42 onwards in the impugned judgment along with the scheme of availing Input Tax Credit (ITC) under the GST regime, as set out in paragraph 56 of the impugned judgment, clearly demonstrate that there is no possibility of drawing parity between the provisions of the two enactments, so as to treat a purchasing dealer under the CGST Act on par with a purported bonafide purchasing dealer under the Delhi VAT Act in relation to ITC, when the supplier-dealer fails to pay the requisite tax.
Further, the High Court of Gujarat has also referred to the provisions of Section 41 of the CGST Act and also Sections 73 and 74 thereof in the context of the purchasing dealer under the CGST regime being entitled to re-avail the reversed ITC after the supplier-dealer is made to discharge the tax liability.
In that view of the matter, the High Court was fully justified in holding that no grounds were made out to declare Section 16(2) (c) of the CGST Act as unconstitutional or read down the provisions thereof. We find ourselves in complete and respectful agreement with the views expressed by the High Court of Gujarat and affirm and uphold the impugned judgment.
The special leave petitions are, accordingly, dismissed. Pending application(s), if any, shall stand disposed of.
Notes:
1 [(2026) 154 GSTR 108 (Tri.)]
2 “Delhi VAT Act”, for short
3 “CGST Act”, for short
