Bona Fide Purchasers and ITC Denial: Gujarat High Court Upholds Section 16(2)(c) of CGST Act in Maruti Enterprise Ruling
The Persistent Pain Point in GST Practice
Any GST practitioner with reasonable field experience will recognise a deeply familiar scenario: an assessee walks into the office armed with valid tax invoices, confirmed bank payment records, goods receipt documentation, and a spotless GSTR-2A — yet the department proceeds to deny their Input Tax Credit claim. The reason has nothing to do with the assessee's own conduct or compliance. The disallowance traces back solely to the assessee's supplier having failed to file their GSTR-3B or remit the collected tax to the government.
This is not a rare edge case. It is a recurring structural problem that GST practitioners across India have encountered repeatedly since the regime came into force. For years, the legal position on whether a genuinely innocent purchaser can be stripped of ITC purely on account of a supplier's default has remained contested, litigated, and unresolved across multiple forums. The Gujarat High Court's decision in Maruti Enterprise v. Union of India & Ors. (R/Special Civil Application No. 18080 of 2023, decided on 1 May 2026) has now delivered a significant and, for many assessees, deeply uncomfortable answer to this question. This ruling is not merely a dispute resolution between one trader and the tax department — it constitutes a substantive constitutional adjudication on Section 16(2)(c) of the CGST Act, and the verdict falls firmly in favour of the Revenue.
Understanding the Core Problem: What Does Section 16(2)(c) Actually Require?
To appreciate the weight of this judgment, one must first understand why Section 16(2)(c) became a lightning rod for litigation in the first place.
The Four Conditions Under Section 16(2)
Under the GST framework, a recipient's entitlement to Input Tax Credit is contingent upon fulfilling four cumulative conditions prescribed under Section 16(2) of the CGST Act:
- (a) The assessee must be in possession of a valid tax invoice or prescribed tax-paying document
- (b) The assessee must have actually received the goods or services in question
- (c) The tax charged on such supply must have been actually paid to the government — either in cash or through utilisation of ITC by the supplier
- (d) The assessee must have filed the relevant return under
Section 39
The Fundamental Asymmetry
Conditions (a), (b), and (d) are squarely within the assessee-recipient's own control. An assessee can independently verify the supplier's GSTIN, obtain a proper invoice, pay the full invoice value including the GST component, receive the goods at their premises, and file their own returns on time — and still find themselves in violation of condition (c), which is entirely contingent on the supplier's behaviour, not theirs.
This structural asymmetry is the crux of the controversy. The law, as written, draws no distinction between:
- An assessee who knowingly participated in a fraudulent arrangement with a non-compliant supplier, and
- An assessee who acted in complete good faith but happened to transact with a supplier who subsequently defaulted on GST remittance
It is precisely this absence of differentiation — this apparent penalisation of blameless conduct — that has fuelled litigation across virtually every High Court in the country for several years.