Effect of Subsequent Supreme Court Judgments on Final High Court Decisions in ITC Denial Cases

1. Background: ITC denial where supplier defaults in tax payment

A recurring controversy under the GST regime concerns denial of Input Tax Credit (ITC) to purchasing dealers where the supplier has not actually deposited the tax with the Government, despite issuing a tax invoice and collecting GST. This issue is rooted in Section 16(2)(c) of the CGST Act 2017, which links ITC eligibility to actual payment of tax to the Government.

The debate intensified after the Gujarat High Court’s common judgment dated 01.05.2026 in a batch of approximately 50 writ petitions, including Bhandari Scrap Traders Vs Union of India, SCA No. 749/2025, where the constitutional validity of Section 16(2)(c) was challenged. The High Court declined to strike down or read down Section 16(2)(c), but simultaneously recorded serious concerns about hardships imposed on genuine purchasing dealers who had fulfilled all compliance obligations yet suffered ITC reversal solely because the supplier failed to remit tax.

Subsequently, the Supreme Court, in an appeal arising out of Bhandari Scrap Traders Vs Union of India, affirmed the Gujarat High Court’s interpretation of Section 16(2)(c) and its distinction between the GST framework and the earlier Delhi VAT legislation.

Parallel to GST disputes, the Supreme Court in Commissioner of CGST and Central Excise Vs Saraswati Agro Chemicals Pvt. Ltd. (04.07.2023) dealt with a different but conceptually related issue: whether concluded refund proceedings, finalized in accordance with then-prevailing Supreme Court precedent, could be reopened merely because a subsequent Supreme Court judgment overturned that earlier view of the law. The Court held that such reopening is impermissible as it would destroy the principle of finality in litigation.

This article examines:

  • The content and implications of the Gujarat High Court ruling and the Supreme Court’s affirmation in Bhandari Scrap Traders Vs Union of India.
  • How the principle of finality, as reiterated in Commissioner of CGST and Central Excise Vs Saraswati Agro Chemicals Pvt. Ltd., operates where earlier High Court decisions have already attained finality.
  • The scope and limits of binding precedent under Article 141, particularly in light of NBCC (India) Ltd. Vs State of West Bengal & Ors.
  • The practical question: does the Supreme Court’s ruling in Bhandari Scrap Traders Vs Union of India automatically unsettle earlier, concluded High Court decisions on ITC denial based on supplier default?

2. Gujarat High Court’s batch judgment on Section 16(2)(c) and ITC denial

(i) Nature of the batch decision

On 01.05.2026, the Gujarat High Court decided a batch of around 50 matters involving the constitutional validity and interpretation of Section 16(2)(c) of the CGST Act. One of the petitions in this batch was Bhandari Scrap Traders Vs Union of India, SCA No. 749/2025 (Serial No. 46), listed in between Maruti Enterprise Vs Union of India & Ors. and other connected matters.

The common grievance was that ITC was being denied or reversed for purchasing dealers who had:

  • Received invoices from registered suppliers,
  • Paid the invoice value including GST to those suppliers,
  • Reported such transactions in their returns,

but subsequently found that the suppliers had not deposited the corresponding tax with the Government, leading authorities to invoke Section 16(2)(c) and disallow ITC.

(ii) High Court’s findings on constitutional challenge

The Gujarat High Court undertook a detailed comparative analysis of:

  • The scheme of ITC under the Delhi Value Added Tax Act, 2004, and
  • The scheme of ITC under the CGST Act 2017.

While petitioners relied heavily on Delhi High Court jurisprudence under the Delhi VAT Act to argue that honest purchasing dealers should not bear the consequences of supplier default, the Gujarat High Court emphasized crucial structural differences between the two enactments.

On the constitutional challenge, the High Court concluded that Section 16(2)(c) could not be read down or declared unconstitutional under Article 14 or other provisions of Part III of the Constitution, observing:

"Since we are not inclined to read down Section 16(2)(c) of the CGST Act, the question of declaring it ultra vires Part III of the Constitution of India, including Article 14 of the Constitution of India does not arise. However, we expect the Government to address the issue of genuine purchasers at the earliest."

In essence, the provision was upheld; yet, the Court expressed strong reservations about its impact on bona fide purchasing dealers.

(iii) Observations urging legislative and systemic reforms

Although the High Court did not strike down Section 16(2)(c), it emphatically urged the legislature and the executive to revise the framework to protect bona fide recipients of supplies. The Court suggested that:

  • There is an urgent requirement for legislative amendments or official clarifications within the GST law to soften the disproportionate financial and administrative burden currently placed on genuine purchasers.
  • The Government should deploy a robust technology-backed system for real-time, invoice-level verification of supplier tax payments, enabling recipients to confirm whether GST collected by suppliers has been duly deposited.
  • Instead of forcing purchasers into complicated, alternate remedies, tax authorities should adopt swift and direct recovery measures against errant suppliers.
  • Without effective oversight, unscrupulous sellers might unjustly benefit at the expense of both the State revenue and genuine purchasers.