Insolvency and Bankruptcy Code Cannot Dilute Section 16(2)(c): No ITC Where the Insolvent Supplier Never Paid Tax to the Government
Summary: The Rajasthan High Court, Jodhpur Bench, in M/s Shree Karni Electrovision v. Union of India & Ors. , D.B. Civil Writ Petition No. 4266/2023, decided on August 17, 2026, dismissed a writ petition challenging the constitutional validity of Section 16(2)(c) of the CGST Act and the recovery of Input Tax Credit claimed on purchases from an insolvent supplier. The petitioner purchased electronic goods from Techno Kart India Limited during December 2017 and January 2018 and availed ITC of Rs. 13 lakh, although the supplier had not deposited the corresponding tax with the Government. The petitioner argued that the supplier’s insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 , and the Revenue’s failure to lodge its claim therein prevented recovery from the purchaser. The High Court rejected this contention, holding that actual payment of tax to the Government remains a mandatory condition for ITC and that insolvency proceedings against the supplier do not extinguish the recipient’s independent statutory obligations. The Court relied on the Gujarat High Court’s decision in Maruti Enterprise, which upheld Section 16(2)(c) of the CGST Act, and distinguished the Supreme Court’s ruling in Ghanashyam Mishra concerning extinguishment of claims under approved insolvency resolution plans. The ruling highlights the consequences of supplier default, the burden of establishing ITC eligibility, and the limitations of the IBC clean-slate doctrine. It also raises unresolved issues concerning Section 74 fraud allegations, natural justice, legacy-period transactions, practical impossibility of verifying supplier payments and the limited effectiveness of reversal and re-availment mechanisms where the supplier is insolvent. Businesses should strengthen supplier compliance verification, contractual indemnities, GST return reconciliation and monitoring of insolvency proceedings.
Facts:
M/s Shree Karni Electrovision (“the Petitioner”) is registered under the CGST Act read with the Rajasthan Goods and Services Tax Act, 2017 (“the RGST Act”) and is engaged in the business of supplying electronic goods. During the period December 2017 to January 2018, the Petitioner procured electronic goods valued at Rs. 59,42,860.91 from M/s Techno Kart India Limited (“the Supplier”), a retail arm of the Videocon Group, on which tax of Rs. 13,00,000 (Rs. 6,50,000 towards CGST and Rs. 6,50,000 towards RGST) was charged. The Petitioner availed ITC of the said amount on the premise that the Supplier had deposited the corresponding tax with the Government.
Subsequently, the Supplier became insolvent, and proceedings were initiated against it under the IBC. The tax collected by the Supplier from the Petitioner was never deposited with the Government, and the Revenue did not lodge its claim for the said tax in the insolvency proceedings. The Superintendent, CGST, Range-XXIV, Bikaner (“the Respondent”) thereafter passed an order dated November 24, 2022 under Section 74 of the CGST Act read with the RGST Act (“the Impugned Order”) disallowing and recovering the ITC availed by the Petitioner on the ground that the condition prescribed under Section 16(2)(c) of the CGST Act stood unfulfilled.
Aggrieved, the Petitioner filed a writ petition before the Hon’ble Rajasthan High Court seeking (i) a declaration that Section 16(2)(c) of the CGST Act is ultra vires in the absence of any mechanism enabling the recipient to verify payment of tax by the supplier or, in the alternative, that the provision be read down on the principle of lex non cogit ad impossibilia (the law does not compel a person to do the impossible); and (ii) quashing of the Impugned Order as manifestly arbitrary, violative of the principles of natural justice, passed by the Respondent as a judge in his own cause, and in derogation of the Petitioner’s vested right to property under Article 300A of the Constitution of India.
The Petitioner contended that the liability to deposit the tax was that of the Supplier alone; that once insolvency proceedings had been initiated, the Supplier’s tax liability was required to be dealt with under the IBC; and that the Revenue, having failed to lodge its claim in those proceedings, could not fasten the unpaid liability upon the Petitioner by invoking Section 16(2)(c) of the CGST Act. Reliance was placed on the judgment of the Hon’ble Supreme Court in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. [Civil Appeal No. 8129 of 2019 dated April 13, 2021] (“Ghanashyam Mishra”), wherein it was held that once a resolution plan is approved under Section 31(1) of the IBC, all claims not forming part of the plan, including those of the Central Government and State Governments, stand extinguished and no proceedings can be initiated or continued in respect thereof.
Per contra, the Revenue contended that Section 16(2)(c) of the CGST Act imposes an absolute condition that the tax charged in respect of the supply must actually be paid to the Government; where the purchaser is not diligent and the supplier has not paid the tax, the purchaser is liable in respect of the ITC so availed, which is liable to be recovered. Reliance was placed on the judgment of the Hon’ble Gujarat High Court in Maruti Enterprise v. Union of India & Ors. [R/Special Civil Application No. 18080 of 2023 dated May 01, 2026] (“Maruti Enterprise”), which upheld the constitutional validity of Section 16(2)(c) of the CGST Act.
Issue:
Whether the initiation of insolvency proceedings against the supplier under the IBC, coupled with the Revenue’s failure to lodge its claim therein, dispenses with the condition prescribed under Section 16(2)(c) of the CGST Act so as to entitle the purchaser to retain ITC of the tax which was never paid to the Government by the supplier?
Held:
The Hon’ble Rajasthan High Court in D.B. Civil Writ Petition No. 4266/2023 held as under:
Observed that, Section 16(2)(c) of the CGST Act is a mandatory condition, subject to Section 41 of the CGST Act, requiring that the tax charged in respect of the supply be actually paid to the Government and, unless the same is paid, the availing of ITC is prohibited.
Noted that, the purchaser, without ascertaining whether the supplier has paid such tax, should not have availed the ITC and, once the ITC has been availed without the supplier having discharged the liability, recovery of the same becomes permissible in accordance with law.
Noted that, the Hon’ble Gujarat High Court in Maruti Enterprise has considered the challenge to the constitutional validity of Section 16(2)(c) of the CGST Act, the plea for reading down the provision on the ground of lex non cogit ad impossibilia, and the interplay of Sections 16(2)(c), 41 and 155 of the CGST Act read with Rule 37A of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), and has held that the conditions contained in Section 16(2) of the CGST Act are to be read conjointly, that the burden lies upon the person claiming ITC to establish his eligibility, and that Section 16(2)(c) of the CGST Act does not give rise to any constitutional or legal infirmity.
Held that, the judgment in Ghanashyam Mishra deals with the consequences flowing from an approved resolution plan under the IBC and does not dispense with the statutory condition governing the Petitioner’s entitlement to ITC under Section 16(2)(c) of the CGST Act.
Held that, there is no ground to interfere with the Impugned Order dated November 24, 2022 and, accordingly, the writ petition was dismissed.
Our Comments:
Relevant provisions
Section 16(2)(c) of the CGST Act reads as under:
“(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,—
(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; and”
Section 41(2) of the CGST Act, as substituted by the Finance Act, 2022 with effect from October 01, 2022, requires the recipient to reverse, along with applicable interest, the ITC availed in respect of supplies on which the tax payable has not been paid by the supplier, and the proviso thereto permits re-availment of such credit once the supplier makes payment of the tax. Rule 37A of the CGST Rules, inserted vide Notification No. 26/2022-Central Tax dated December 26, 2022, operationalises this reversal: where the supplier has not furnished FORM GSTR-3B for the relevant tax period by September 30 following the end of the financial year, the recipient must reverse the ITC on or before November 30 of that year, with interest becoming payable only if the reversal is made beyond that date, and with re-availment permitted upon the supplier subsequently furnishing the return. Section 155 of the CGST Act places the burden of proving eligibility to ITC squarely on the person claiming it.
The settled position on Section 16(2)(c)
The present ruling follows what is now the authoritative line on Section 16(2)(c) of the CGST Act. The Hon’ble Gujarat High Court in Maruti Enterprise undertook a comprehensive examination of the ITC scheme and held that the clauses of Section 16(2) are cumulative, that the condition of actual payment is clear and unambiguous, that the maxim lex non cogit ad impossibilia is not attracted because the purchaser can protect himself through due care and contractual indemnity, and that the VAT-era precedents such as On Quest Merchandising cannot be transposed to the GST regime. That judgment has since been affirmed by the Hon’ble Supreme Court in Bhandari Scrap Traders v. Union of India & Ors. [SLP (C) No. 23931 of 2026 dated July 24, 2026], which dismissed the Special Leave Petitions and held that no ground existed either to strike down Section 16(2)(c) or to read down its operation. Although the Hon’ble Rajasthan High Court does not refer to the Supreme Court’s order, the outcome is entirely consistent with it. With the constitutional challenge now effectively foreclosed, the battleground shifts from validity of the provision to fact-specific defences in adjudication and appeal.
The IBC dimension – what makes this case distinctive
What distinguishes this matter from the routine “bona fide purchaser” challenge is the invocation of the IBC “clean slate” doctrine. The Petitioner’s argument was that the Supplier’s tax liability, having become subject to the IBC, stood extinguished under Ghanashyam Mishra, and that the Revenue, having slept over its rights in the insolvency proceedings, could not recover the very same tax from the purchaser through the back door of Section 16(2)(c). The Court’s answer is doctrinally sound in a narrow sense. The extinguishment under Section 31 of the IBC operates upon claims against the corporate debtor; it neither creates nor preserves any entitlement to ITC in the hands of the recipient. ITC being a statutory concession, the condition of actual payment of tax is a condition attached to the recipient’s own claim and is not a “claim” against the corporate debtor at all. Section 238 of the IBC, which gives the Code overriding effect, is not attracted because recovery from the purchaser is not a proceeding against the corporate debtor.
The judgment, however, leaves an important hardship unaddressed. The Gujarat High Court’s justification for upholding Section 16(2)(c) rested substantially on two safety valves: that the Revenue retains the authority to recover the unpaid tax from the defaulting supplier, and that the recipient can re-avail the reversed credit under the proviso to Section 41(2) once the supplier pays. In an insolvency scenario both safety valves are illusory. The Revenue’s claim against the corporate debtor stands extinguished or is recoverable only to the extent provided in the resolution plan, and the supplier will never pay, so re-availment can never occur. The result is that the entire loss of a supplier’s default – compounded here by the Revenue’s own failure to lodge its claim in the insolvency proceedings, despite the Hon’ble Supreme Court in State Tax Officer v. Rainbow Papers Ltd. [Civil Appeal No. 1661 of 2020 dated September 06, 2022] having treated statutory tax dues as secured debts for the purposes of the IBC – is shifted to the purchaser. The Court did not examine whether the Revenue’s omission to pursue the supplier’s estate has any bearing on the equities of recovery from the purchaser. This aspect may warrant consideration by the Hon’ble Supreme Court in an appropriate case.
Grounds not adjudicated
The Impugned Order was passed under Section 74 of the CGST Act, which is attracted only where the wrongful availment of ITC is by reason of fraud, wilful misstatement or suppression of facts. There was no allegation of collusion between the Petitioner and the Supplier; the non-payment arose from the Supplier’s insolvency. The Court did not examine whether the ingredients of Section 74 were satisfied or whether the demand ought to have been confined to Section 73 with its consequent implications on limitation and penalty. Nor did the Court deal with the Petitioner’s pleas on violation of natural justice and on the Respondent having acted as a judge in his own cause. These grounds remain open for agitation in appropriate proceedings. It is relevant to note that the Hon’ble Supreme Court in Prime Metals v. Central Board of Indirect Taxes and Customs & Ors. [SLP (C) No. 18577 of 2026 dated May 29, 2026] declined to interfere with a similar dismissal by the Hon’ble Rajasthan High Court but expressly left all remedies open to the taxpayer, including the statutory appellate remedy.
The legacy-period dimension
The transactions in this case pertain to December 2017 to January 2018. During this period, Section 16(2)(aa) of the CGST Act (effective January 01, 2022), the substituted Section 41(2) (effective October 01, 2022) and Rule 37A of the CGST Rules (effective December 26, 2022) were not on the statute book, and FORM GSTR-2A was neither auto-populated reliably nor legally determinative. The Gujarat High Court’s reasoning that the “balance” between the interest of revenue and the purchaser is maintained through the framework of Section 41(2) read with Rule 37A therefore has limited application to legacy periods. Taxpayers facing demands for FY 2017-18 to FY 2021-22 may legitimately contend that the statutory architecture relied upon to sustain Section 16(2)(c) did not exist during the relevant period. It is also pertinent that Circular No. 183/15/2022-GST dated December 27, 2022 and Circular No. 193/05/2023-GST dated July 17, 2023 provide relief only in cases of mismatch between FORM GSTR-2A and FORM GSTR-3B where the supplier has in fact discharged the tax; they offer no relief where, as here, the tax was never paid at all.
Pari materia judgments
The Hon’ble Patna High Court in Aastha Enterprises v. State of Bihar [CWJC No. 10395 of 2023 dated August 18, 2023] held that ITC is in the nature of a concession and the purchaser cannot claim it unless the supplier has actually paid the tax to the Government; mere payment of tax to the supplier is not sufficient.
The Hon’ble Kerala High Court in Nahasshukoor v. Assistant Commissioner [WP(C) No. 29788 of 2023 dated November 03, 2023] held that Section 16(2)(c) of the CGST Act is not violative of Articles 14 and 19(1)(g) of the Constitution, ITC being a conditional statutory benefit.
The Hon’ble Kerala High Court in M. Trade Links v. Union of India [WP(C) No. 31559 of 2019 dated June 04, 2024] upheld the constitutional validity of Sections 16(2)(c) and 16(4) of the CGST Act.
The Hon’ble Supreme Court in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. [Civil Appeal No. 230 of 2023 dated March 13, 2023], under the Karnataka VAT Act, held that the burden lies on the purchasing dealer to prove the genuineness of the transaction and the actual payment of tax by the seller, and that production of invoices and payment through banking channels is not by itself sufficient.
Contrary judgments
The Hon’ble Calcutta High Court in Suncraft Energy Pvt. Ltd. v. Assistant Commissioner of State Tax [MAT 1218 of 2023 dated August 02, 2023] held that the Department must first proceed against the defaulting supplier and recovery from a bona fide purchaser can be resorted to only in exceptional circumstances such as a missing dealer, closure of the supplier’s business or absence of assets; the Special Leave Petition against this judgment was dismissed by the Hon’ble Supreme Court on December 14, 2023.
The Hon’ble Madras High Court in D.Y. Beathel Enterprises v. State Tax Officer [W.P.(MD) Nos. 2127 of 2021 dated February 24, 2021] held that where the purchaser has paid the tax to the supplier, recovery must first be initiated against the supplier and the supplier must be examined in the proceedings.
The Hon’ble Delhi High Court in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi [W.P.(C) 6093/2017 dated October 26, 2017] read down Section 9(2)(g) of the Delhi VAT Act, 2004 to exclude bona fide purchasers who had paid tax to the seller, and the Special Leave Petition was dismissed by the Hon’ble Supreme Court on January 10, 2018. The Gujarat High Court in Maruti Enterprise, as affirmed in Bhandari Scrap Traders, has, however, held that the DVAT and CGST schemes are fundamentally different and that this line of authority cannot be applied to GST.
The Hon’ble Tripura High Court in Sahil Enterprises v. Union of India & Ors. [W.P.(C) No. 688 of 2022 dated January 06, 2026] upheld the validity of Section 16(2)(c) of the CGST Act but read it down, following On Quest Merchandising, so as to apply only to transactions that are not bona fide. The Special Leave Petition against this judgment is pending, though the Hon’ble Supreme Court in Bhandari Scrap Traders observed that the Tripura High Court had not undertaken the detailed analysis of the statutory scheme carried out by the Gujarat High Court.
Practical takeaways
With the Hon’ble Supreme Court having affirmed Section 16(2)(c) in Bhandari Scrap Traders [SLP (C) No. 23931 of 2026 dated July 24, 2026] and the present ruling extending its rigour even to cases of supplier insolvency, recipients must treat vendor compliance as their own compliance. Businesses should verify the GSTR-3B filing status of suppliers at the time of onboarding and periodically thereafter, reconcile FORM GSTR-2B every month, and track suppliers against public announcements of insolvency proceedings before the National Company Law Tribunal. Contracts should carry a GST indemnity clause and, where commercially feasible, a right to withhold the tax component until the supplier’s return for the relevant period is filed – a safeguard the Gujarat High Court itself commended. Where a supplier enters insolvency, the recipient should promptly reverse the ITC to arrest interest and lodge a claim as an operational creditor for the indemnity amount. Finally, a contemporaneous record of due diligence should be maintained, since the absence of fraud or collusion remains the strongest defence against invocation of Section 74 and its enhanced penalty.
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(Author can be reached at [email protected])
