Telangana High Court Declines Vires Challenge to Section 16(2)(c) in Excess ITC Dispute

1. Overview

Litigation around Input Tax Credit (ITC) under GST increasingly revolves around compliance by suppliers and the impact of their defaults on recipients. A recurring controversy concerns Section 16(2)(c) of the Telangana Goods and Services Tax Act, 2017 / Central Goods and Services Tax Act, 2017, which links ITC entitlement to actual tax payment by the supplier.

In a recent judgment dated 31.03.2026 in Inam Impex Private Limited Vs Assistant Commissioner (ST), the Telangana High Court refused to strike down or read down Section 16(2)(c) in a case alleging denial of ITC for Assessment Year 2021-22. Instead, the Court directed the assessee to pursue the statutory appeal mechanism under Section 107, reinforcing the doctrine that writ jurisdiction under Article 226 is not the primary route where factual disputes and statutory remedies exist.

The decision is especially relevant for assessees facing denial of ITC on grounds of mismatch between their ITC claims and supplier declarations in GST returns.

2. Factual Matrix of the Case

2.1 Parties and Assessment Year

  • Petitioner / Assessee: M/s. Inam Impex Private Limited
  • Respondent: Assistant Commissioner (ST)
  • Assessment Year: 2021-22

2.2 Impugned Proceedings

The assessee approached the High Court with the following grievances:

  1. Challenge to the Order-in-Original dated 30.12.2025, passed for AY 2021-22.
  2. Dispute against the demand of tax, interest, and penalty alleged to arise from excess ITC claim as compared to what was reported by suppliers in their returns.
  3. A constitutional challenge (vires challenge) to Section 16(2)(c) of the TGST Act/CGST Act.

2.3 Cancellation of GST Registration

  • The GST registration of the assessee was cancelled on 09.09.2024.
  • This cancellation had not been challenged in any proceedings as on the date of the writ.

Although registration cancellation was not the core issue in the writ petition, it formed part of the overall background of non-compliance concerns.

2.4 Grounds for ITC Denial

The department concluded, through the Order-in-Original and accompanying summary, that:

  • The assessee had allegedly claimed ITC in excess of what their suppliers had declared in their GST returns.
  • Based on this mismatch, tax, interest, and penalty were imposed.

The core departmental basis was quantitative discrepancy between ITC claimed by the assessee and outward supplies/tax declared by the suppliers, not a recorded finding of non-payment of tax by the suppliers.

3. Petitioner’s Submissions

3.1 Claim of Genuine ITC

The assessee contended that:

  • ITC had been availed against genuine tax invoices issued by suppliers.
  • Payments had been fully made to such suppliers against these invoices.
  • The goods were supplied and the transaction was not fictitious.

3.2 Supplier Default Argument

It was argued that:

  • Any discrepancy arose because the supplier did not deposit the tax with the Government, despite having collected it through invoices.
  • Therefore, denial of ITC on this ground effectively punishes the recipient/assessee for the default of a third party (supplier).

3.3 Constitutional Challenge to Section 16(2)(c)

On these premises, the assessee:

  • Challenged the constitutional validity (vires) of Section 16(2)(c) of the TGST Act/CGST Act.

  • Contended that when the assessee has:

    • Received taxable supplies,
    • Possesses valid tax invoices,
    • Paid consideration and tax to the supplier,

    the condition that tax must actually be paid to the Government by the supplier should not operate to deny ITC to the recipient.

3.4 Relief Sought Under Article 226

The assessee invoked Article 226 of the Constitution seeking:

  • Quashing of the Order-in-Original and consequential liability.
  • Declaration that Section 16(2)(c), to the extent it denies ITC due to supplier non-payment, is unconstitutional.