Supreme Court upholds Section 16(2)(c) of CGST Act: Input Tax Credit restricted where supplier defaults on GST payment

The Hon’ble Supreme Court, in Bhandari Scrap Traders v. Union of India & Ors., has finally settled a long‑running controversy on the validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. By dismissing the Special Leave Petitions and approving the judgment of the Hon’ble Gujarat High Court in Maruti Enterprise v. Union of India & Ors., the Court has categorically held that Section 16(2)(c) is constitutionally valid and cannot be diluted or read down.

Under this provision, an assessee purchasing goods or services cannot avail Input Tax Credit (ITC) unless the tax charged by the supplier has actually been deposited with the Government. The ruling directly impacts purchasing dealers who, despite having paid GST to suppliers and fulfilling all other statutory conditions, may still face denial or reversal of ITC if the supplier fails to discharge its tax liability.

Background of the dispute

Facts of the case: Bhandari Scrap Traders

M/s. Bhandari Scrap Traders (“the Petitioners”) had purchased goods and claimed ITC on the strength of tax invoices reflecting GST. The only reason for denial of ITC by the Revenue authorities was that the corresponding suppliers did not deposit the tax with the Government.

The Petitioners had:

  • Possessed valid tax invoices issued by registered suppliers
  • Received the supplies in question
  • Ensured that the transactions were recorded in their books
  • Reflected the ITC claims in their GST returns

Despite these, ITC was rejected solely on the ground that suppliers had not remitted the tax to the exchequer.

Aggrieved by this denial, the Petitioners approached the Hon’ble Gujarat High Court. When the High Court upheld the constitutional validity of Section 16(2)(c) and refused to read it down, the Petitioners carried the matter to the Hon’ble Supreme Court through Special Leave Petitions.

Petitioners’ principal arguments

The Petitioners essentially contended that:

  1. Compliance with other clauses of Section 16(2) establishes bona fide
    They argued that once the conditions in clauses (a), (aa), (b) and (ba) of Section 16(2) of the CGST Act are satisfied—namely possession of a tax invoice, actual receipt of goods or services, reflection in returns and so on—the genuineness of the underlying transaction stands proved.

  2. Requirement in clause (c) is impossible to ensure
    Clause (c) of Section 16(2) links ITC eligibility to actual payment of tax by the supplier to the Government. According to the Petitioners, this is a condition entirely outside the control and knowledge of the recipient, because:

    • The supplier’s Form GSTR-3B is not accessible to the recipient
    • The recipient cannot compel the supplier to pay tax
      They invoked the legal maxim lex non cogit ad impossibilia (the law does not compel a person to do the impossible).

  3. Reliance on Delhi VAT and Tripura High Court rulings
    To support their stance, reliance was placed on:

    • On Quest Merchandising India (P) Ltd. v. Government of NCT of Delhi [(2017) 87 taxmann.com 179 (Delhi)]
    • Commissioner of Trade & Tax Delhi v. Arise India Ltd. [2022 (60) GSTL 215 (SC)]
    • Commissioner Trade & Tax Delhi v. Shanti Kiran India (P) Ltd. [(2025) 179 taxmann.com 665 (SC)]

    Under the pari materia Section 9(2)(g) of the Delhi VAT Act, 2004, the Delhi High Court had read down the provision so that bona fide purchasing dealers were not denied ITC due to default by selling dealers. The Supreme Court had later refused to interfere with this view.

    Additionally, the Petitioners heavily relied on the Hon’ble Tripura High Court decision in Sahil Enterprises v. Union of India & Ors. [(2026) 154 GSTR 108 (Tri.)], where Section 16(2)(c) itself was read down in favour of genuine purchasers.

Revenue’s submissions

The Revenue strongly opposed the challenge and argued that:

  1. ITC is not a fundamental right but a statutory concession
    ITC is a benefit granted by statute, not an inherent or vested right. Therefore, it is open to the legislature to impose conditions such as those contained in Section 16(2)(c).

  2. Section 16(2)(c) must be read with other provisions
    The Revenue pointed out that Section 16(2)(c) operates in tandem with:

    • Section 41(2) of the CGST Act
    • Section 53 and Section 155 of the CGST Act
    • Rule 37A of the CGST Rules, 2017

    Under this scheme:

    • The assessee is required to reverse ITC where the supplier defaults
    • Once the supplier finally pays the tax, the assessee may re‑avail the reversed credit

    Accordingly, it was argued that the GST framework contains an in‑built corrective mechanism and, therefore, there is no need to import the Delhi VAT logic to GST. As such, the Delhi VAT Act and CGST Act cannot be treated as equivalent.