Delhi High Court affirms constitutional validity of Section 16(2)(c) and directs assessee to file GST appeal against ITC demand

Overview

The Delhi High Court in Jain Cement Udyog Vs Union of India & Anr. (Delhi High Court) examined a challenge to a GST demand of Rs. 7,26,59,252/- raised on account of alleged wrongful availment of Input Tax Credit (ITC), along with a constitutional challenge to Section 16(2)(c) of the Central Goods and Services Tax Act 2017.

The High Court declined to exercise jurisdiction under Article 226 of the Constitution to interfere with the Show Cause Notice (SCN) dated 22.11.2024 and the consequent Order-in-Original (OIO) dated 27.02.2025. Instead, it directed the assessee to pursue the statutory appellate remedy under Section 107 of the CGST Act.

Further, relying on the Supreme Court judgment in Bhandari Scrap Traders Vs Union of India & Ors., (2026) 161 GSTR 150 (Supreme Court of India), the Court held that the constitutional controversy around Section 16(2)(c) is already settled, and the provision is constitutionally valid.

Factual matrix

Business and registration

  • The Petitioner, Jain Cement Udyog, is engaged in trading of cement and related products.
  • It is registered under the GST regime with GSTIN 07AAGPJ3860K2ZI.

Investigation by DGGI

  • Based on information about alleged fraudulent availment of ITC on the strength of fake, goods-less invoices, the Directorate General of Goods and Services Tax Intelligence (DGGI) conducted search operations at the residential and business premises of the Petitioner on 02.12.2020.
  • During the investigation, the DGGI allegedly detected:
    • Six non-existent entities purportedly controlled or used by Mr. Sanjay Jain, proprietor of the Petitioner.
    • These six entities were allegedly used as fronts to route fake supplies into seven other entities said to be created and managed either by Mr. Sanjay Jain directly or indirectly through his family members or employees.
  • Summons were issued to Mr. Sanjay Jain in the course of the said investigation.

DGGI penalty proceedings under Section 122

  • Following investigation, DGGI issued a SCN dated 05.04.2023, proposing penalties under:
    • Section 122(1)(ii)
    • Section 122(1)(vii)
    • Section 122(1)(x)
    • Section 122(1)(xvi)
    • Section 122(1)(xvii)
    • Section 122(2)(b)
      of the CGST Act 2017.
  • These proceedings culminated in an Order-in-Original dated 29.01.2025, whereby the proposed demand and penalties under Section 122 were confirmed.
  • The Petitioner has already filed an appeal against this OIO, and that appeal is presently pending before the Appellate Authority.

Separate Section 73 proceedings and impugned demand

While the appeal against the DGGI order was pending:

  • Respondent No. 2 issued another SCN dated 22.11.2024 under Section 73 of the CGST Act (Impugned SCN).

  • This SCN was stated to be based on the Petitioner’s own returns and records, including:

    • GSTR-3B
    • GSTR-1
    • GSTR-2A
    • e-way bills and associated documents.

  • On examination of this data, the department alleged:

    • The Petitioner misreported its tax liability.
    • ITC was wrongly availed in respect of supplies from suppliers whose GST registrations had already been cancelled prior to the invoice dates.

  • The SCN quantified the alleged tax liability at Rs. 7,26,59,252/-, comprising:

    • SGST: Rs. 3,60,93,588/-
    • CGST: Rs. 3,60,93,588/-
    • IGST: Rs. 4,72,076/-

  • The SCN culminated in the Impugned OIO dated 27.02.2025, which confirmed the entire proposed demand.

  • Aggrieved by the SCN and OIO, as well as by denial of ITC with reference to Section 16(2)(c), the Petitioner invoked the writ jurisdiction of the Delhi High Court.

Reliefs sought in the writ petition

The Petitioner approached the High Court seeking:

  1. A writ of certiorari to quash:

    • The SCN dated 22.11.2024 (Impugned SCN); and
    • The OIO dated 27.02.2025 (Impugned OIO).

  2. A declaration that Section 16(2)(c) of the CGST Act 2017 is unconstitutional to the extent it denies ITC to a bona fide recipient merely because the supplier has not deposited the tax, being alleged to violate:

    • Article 14
    • Article 19(1)(g)
      of the Constitution of India.

Petitioner’s contentions

1. Challenge to denial of ITC under Section 16(2)(c)