Punjab & Haryana High Court Bars Mechanical ITC Reversal in Cases of Supplier GST Default: Key Guidelines Under Section 16(2)(c)

Overview of the Judgment

In a landmark ruling disposing of a consolidated batch of 424 writ petitions, the Punjab and Haryana High Court has laid down detailed procedural guidelines governing the reversal of Input Tax Credit (Section 16(2)(c) of the Goods and Services Tax Act, 2017) in cases where a supplier has failed to deposit GST with the Government. The Court examined the constitutional validity of Section 16(2)(c) read with Section 155 of the Act, the statutory history of the ITC framework, and the obligations imposed on purchasing dealers who have no practical means of verifying whether their suppliers have remitted tax to the exchequer.

Case Details:

Core Legal Questions Before the Court

The batch of petitions raised two intertwined legal questions:

1. Whether a purchasing dealer — having already paid GST to its supplier — can be legally compelled to ensure that the supplier deposits such tax with the Government, particularly when no statutory mechanism exists for the purchaser to verify or monitor such payment.

2. In the alternative, whether Section 16(2)(c) of the Goods and Services Tax Act, 2017 should be read down so as to restrict ITC reversal only to situations involving fraud, collusion, or fictitious transactions.

The petitioners argued that the provision, as literally applied, violates the constitutional maxim lex non cogit ad impossibilia — the law cannot compel a person to perform an impossible act — and is consequently in breach of Articles 14, 19(1)(g), 21, 265, and 300A of the Constitution of India.

Statutory Framework: Section 16(2)(c) and the ITC Eligibility Conditions

Section 16(2) of the Goods and Services Tax Act, 2017 opens with a non-obstante clause and prescribes conditions that every registered person must satisfy before availing ITC:

**Section 16(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—
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
(c) subject to the provisions of section 41 or section 43A, 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
(d) he has furnished the return under section 39."

The condition embedded in Section 16(2)(c) — that tax must have been actually paid to the Government — forms the crux of the dispute. The purchasing assessee has no independent window to confirm whether this condition has been satisfied by the supplier.

Legislative History: The Return-Matching Architecture and Its Collapse

The Original GST Framework

The Court undertook a detailed examination of the GST return-filing architecture as originally conceived. The scheme envisaged a comprehensive automated system of reconciliation:

• Section 37(1) read with Rule 59(1) of the Central Goods and Services Tax Rules, 2017: Suppliers were required to file outward supply details in Form GSTR-1 by the 10th of each succeeding month.
• Details uploaded by the supplier were automatically reflected to the purchaser through Form GSTR-2A under Rule 59(3).
• Under Section 38(1) read with Rule 60(1), the purchasing assessee was required to verify, modify or delete these details and file Form GSTR-2 between the 10th and 15th of the succeeding month.
• A consolidated monthly return in Form GSTR-3 under Section 39(1) read with Rule 61 was then to be filed, with Part A auto-populated from Forms GSTR-1 and GSTR-2.

The Matching Mechanism Under Section 42

Section 42 of the Goods and Services Tax Act, 2017 — since omitted — provided a robust statutory mechanism for matching, reversal, and reclaim of ITC:

**Section 42(3)😗* "Where the input tax credit claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed."

**Section 42(5)😗* Discrepancies not rectified by the supplier were to be added to the output tax liability of the recipient in the succeeding month.

**Section 42(7)😗* The recipient was entitled to reclaim the reversed amount once the supplier subsequently corrected the mismatch.

This architecture — had it been implemented — would have protected purchasing assessees by providing automated, system-generated alerts rather than placing the entire burden of verification upon them.

Non-Implementation and the Practical Vacuum

The Court noted — and the Revenue did not dispute — that this matching architecture was never operationalized due to technical difficulties. GSTR-2 and GSTR-3 were repeatedly deferred through a series of notifications:

• Notification No. 20/2017-Central Tax, dated 08.08.2017 — Extended time limit for GSTR-3 for July–August 2017
• Notification No. 29/2017-Central Tax, dated 05.09.2017 — Extended due dates for GSTR-1, GSTR-2 and GSTR-3 for July and August 2017
• Notification No. 54/2017-Central Tax, dated 30.10.2017 — Further extension for GSTR-3 for July 2017
• Notification No. 56/2017-Central Tax, dated 15.11.2017 — GSTR-3B mandated till March 2018
• Notification No. 44/2018-Central Tax, dated 10.09.2021 — GSTR-2 and GSTR-3 deferred indefinitely for FY 2017–18 and 2018–19

The result was that assessees were required to self-assess and rely on their own books of accounts, with no system-driven verification of whether the supplier had discharged its tax liability.

Amendments Effective 01.10.2022 and Introduction of Rule 37A

Recognising these limitations, Parliament amended the Goods and Services Tax Act, 2017 with effect from 01.10.2022, omitting Sections 42 and 43 and substituting Section 41. The amended Section 41 replaced provisional ITC with a self-assessment-based final availment mechanism.