The Bombay High Court has quashed an adjudication order that was passed by the SGST Officer despite an earlier interim protection granted by the Court.

The Bench of Justice G.S. Kulkarni and Justice Aarti Sathe clarified that the constitutional challenge to Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017, remains open for adjudication in appropriate proceedings.

The petitioner questioned multiple aspects of the proceedings initiated by the GST department, including the legality of the show cause notices. Alleged bias and pre-determined conduct by the authorities. Denial of cross-examination despite specific requests. The constitutional validity of Section 16(2)(c), which links a purchaser’s entitlement to Input Tax Credit (ITC) with the supplier’s payment of tax to the Government. Interim protection against recovery of the disputed ITC, interest and penalty.

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The petition also sought a declaration that Section 16(2)(c) was arbitrary, violative of Article 14 of the Constitution, contrary to Section 16(1) of the CGST Act, and inconsistent with the legal maxim Lex Non Cogit Ad Impossibilia (the law does not compel a person to do the impossible).

During the hearing, the Court was informed that although a coordinate Bench had granted an interim order on December 18, 2023, the jurisdictional GST officer proceeded to adjudicate the show cause notice on December 19, 2023.

The petitioner argued that passing the adjudication order despite the subsisting interim protection amounted to a violation of the High Court’s directions.

Appearing for the State, the Additional Government Pleader informed the Court that the adjudicating officer had passed the order immediately after the interim order because he was unaware of the Court’s directions.

On instructions, the State fairly submitted that the adjudication order could be withdrawn.

Accepting this statement, the High Court permitted withdrawal of the order and formally quashed and set aside the adjudication order dated December 19, 2023.

Rather than terminating the proceedings altogether, the Court directed that the show cause notice be adjudicated afresh strictly in accordance with law.

The Bench also directed that the petitioner must be granted an adequate opportunity of hearing. The adjudication proceedings should be completed within six weeks from the date of the order. All rights and contentions of both parties shall remain open.

One of the most significant aspects of the judgment concerns the constitutional challenge to Section 16(2)(c) of the CGST Act.

The Division Bench observed that similar constitutional questions are already under consideration in a batch of petitions, including Lajwab Fabrics v. Union of India. Accordingly, it expressly kept the issue regarding the validity of Section 16(2)(c) open instead of deciding it in the present case.

This means that while the present adjudication will proceed afresh, the larger constitutional issue concerning denial of ITC due to supplier default remains alive before the Court.

Section 16(2)(c) provides that a registered purchaser can claim Input Tax Credit only if the tax charged on the supply has actually been paid to the Government by the supplier.

The provision has generated widespread litigation because purchasers often contend that they cannot control whether their suppliers deposit GST after collecting it. Several taxpayers have argued that denying ITC despite genuine purchases places an impossible burden on compliant buyers.

The constitutional validity of this provision continues to be one of the most closely watched issues in GST jurisprudence.

The order is important for two reasons.

First, it reiterates that adjudicating authorities must strictly respect interim orders passed by constitutional courts, and proceedings undertaken in disregard of such protection are liable to be withdrawn or set aside.

Second, by keeping the constitutional challenge to Section 16(2)(c) open, the Bombay High Court has ensured that taxpayers challenging the provision will continue to have an opportunity to seek judicial determination on one of the most contentious aspects of the GST framework.

Bombay High Court quashed the GST adjudication order passed despite an existing interim stay. The State acknowledged that the officer acted without knowledge of the Court’s interim order. Fresh adjudication has been directed after granting the taxpayer a proper hearing. Proceedings must be completed within six weeks.

The constitutional validity of Section 16(2)(c) of the CGST and MGST Acts has been expressly kept open.

All rights and legal contentions of both parties remain available for future proceedings.

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