Supreme Court Validates Section 16(2)(c): Assessee’s Input Tax Credit Strictly Contingent on Supplier’s Tax Remittance
The intersection of commercial reality and statutory compliance has long been a battlefield in indirect taxation. One of the most contentious issues under the current indirect tax regime is whether an honest buyer should be penalized for the defaults of their vendor. This debate recently reached a definitive conclusion at the highest judicial level. In the landmark judgment of Bhandari Scrap Traders v. Union of India & Ors. (SLP(C) Nos. 23931/2026), delivered on 24 July 2026, the Supreme Court of India upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act).
The apex court firmly established that an assessee cannot claim Input Tax Credit (ITC) unless the supplier has actually deposited the corresponding tax with the government exchequer. This ruling clarifies that statutory conditions take precedence over the bona fide intentions of a purchasing dealer, fundamentally shaping how businesses must approach vendor compliance and risk management.
Decoding the Statutory Framework of Input Tax Credit
To fully grasp the magnitude of this Supreme Court ruling, one must first examine the legislative architecture governing the flow of credit. Section 16 of the CGST Act serves as the foundational pillar for ITC eligibility. While Section 16(1) broadly outlines the general entitlement of a registered person to take credit for tax paid on inward supplies used in the course of business, this entitlement is not absolute. It is heavily restricted by the stringent conditions laid out in Section 16(2).
At the heart of the constitutional challenge in Bhandari Scrap Traders v. Union of India & Ors. was Section 16(2)(c). This specific clause mandates that a recipient is eligible for ITC only if:
"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"
This legislative wording deliberately intertwines the assessee’s right to claim credit with the supplier’s obligation to remit taxes. For example, if Mr. Sharma (an assessee) purchases raw materials worth Rs. 1.25 lakh and pays the applicable GST to his vendor, Mr. Sharma’s commercial obligation is fulfilled. However, his statutory right to claim ITC remains suspended until the vendor actually transfers that GST amount to the government. The petitioners argued that making an assessee's ITC dependent on a third party's actions—over which the assessee exercises no legal control—is arbitrary and unconstitutional. The Supreme Court, however, rejected this premise, affirming that the legislature possesses the constitutional authority to impose such conditional safeguards to protect the revenue chain.