The Karnataka High Court has granted interim relief to a taxpayer in a Goods and Services Tax (GST) dispute, raising an important question on whether the tax authorities can recover Input Tax Credit (ITC) from a bona fide recipient without first initiating proceedings against the defaulting supplier.
The bench of Justice B. M. Shyam Prasad stayed the operation of the impugned adjudication order until further orders while allowing the tax department to complete its pleadings and seek vacation of the interim relief.
The adjudication proceedings arose from an alleged mismatch between the petitioner’s GSTR-2A and GSTR-3B returns. According to the department, the supplier from whom the petitioner had procured goods or services had failed to file GST returns, resulting in the denial of ITC to the recipient.
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The adjudicating authority had concluded that although the petitioner had made payments to its supplier, the supplier had defaulted in filing GST returns and was already facing insolvency-related proceedings before the National Company Law Tribunal (NCLT). Taking note of these circumstances, the authority held that the department could not effectively recover dues from the supplier and therefore directed the petitioner to discharge the tax liability. The petitioner was advised to recover the amount from the supplier through appropriate proceedings before the NCLT.
Aggrieved by this approach, the petitioner approached the High Court contending that it had fulfilled all its contractual obligations by paying the supplier, including the GST component, and therefore could not be saddled with tax liability solely because of the supplier’s subsequent default.
Before the High Court, the petitioner argued that the authorities ought to have initiated recovery proceedings against the defaulting supplier before proceeding against the recipient who had already discharged the invoice value and applicable GST.
The petitioner relied heavily on the Calcutta High Court’s landmark decision in Suncraft Energy (P.) Ltd. v. Assistant Commissioner, State Tax, wherein the Court held that the tax department acted arbitrarily by ignoring tax invoices and banking records demonstrating that the purchaser had paid both the consideration and the GST to the supplier without first taking action against the selling dealer. The petitioner also pointed out that the Supreme Court had declined to interfere with the Calcutta High Court’s decision in that matter because of the limited extent of the tax demand.
Additionally, reliance was placed on the Karnataka High Court’s earlier decision in Instakart Services (P.) Ltd. v. Union of India, where a coordinate Bench had read down Section 16(2)(c) of the CGST Act and the corresponding Rules to protect bona fide recipients from losing ITC merely because of the supplier’s default. The petitioner acknowledged that the said judgment is presently under challenge in an intra-court appeal and awaits final adjudication.
The court noted that another coordinate Bench of the Karnataka High Court had already granted interim protection in a similar matter involving the question of whether proceedings could be initiated against a recipient without first proceeding against the defaulting supplier.
Observing that the issue required detailed examination, the Court found it appropriate to extend similar interim protection in the present case. Accordingly, it granted an interim stay of the impugned adjudication order, which will continue until further orders. At the same time, the respondents were granted liberty to file their pleadings and seek vacation of the interim order. The Court also directed that the matter be listed for further hearing on September 22, 2026.
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