The Rajasthan High Court has dismissed a writ petition challenging the recovery of Input Tax Credit (ITC) where the supplier had allegedly failed to deposit the corresponding GST with the Government. 

The Bench of Dr. Justice Pushpendra Singh Bhati and Justice Praveer Bhatnagar has observed that actual payment of tax by the supplier is a mandatory statutory condition for the recipient to avail ITC under Section 16(2)(c) of the CGST Act, 2017, subject to the mechanism provided under Section 41.

The petitioner/assessee is a registered dealer engaged in the business of supplying electronic goods, had procured electronic goods from Techno Kart India Limited, described in the judgment as a retail arm of the Videocon Group.

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The purchases were made between December 2017 and January 2018. The value of the goods was approximately Rs. 59.42 lakh, while the tax involved was Rs. 13 lakh, comprising Rs. 6.50 lakh CGST and Rs. 6.50 lakh RGST. The purchaser availed ITC on the understanding that the supplier had discharged the corresponding tax liability.

Subsequently, the supplier became insolvent and insolvency proceedings were initiated under the Insolvency and Bankruptcy Code, 2016. According to the petitioner, the tax authorities did not claim the outstanding tax liability against the supplier in the insolvency proceedings.

The petitioner argued that it could not be made to refund ITC merely because the supplier subsequently failed to discharge its tax liability, particularly when the purchaser itself had paid the supplier the tax component and had claimed credit in accordance with the prevailing statutory framework.

One of the principal issues before the High Court was the petitioner’s challenge to Section 16(2)(c) of the CGST Act read with the Rajasthan GST Act.

The petitioner contended that the provision was ultra vires because there was no effective mechanism through which a purchaser could independently ensure that the supplier had actually deposited the tax with the Government.

It was argued that a purchaser could verify the invoice and receipt of goods, but could not compel the supplier to pay the tax or obtain direct access to the supplier’s payment records. Therefore, according to the petitioner, imposing such a condition would effectively require the purchaser to perform something that was beyond its control.

The petitioner relied upon the legal maxim lex non cogit ad impossibilia, meaning that the law does not compel a person to do something impossible.

The department opposed the petition and argued that Section 16(2)(c) expressly makes actual payment of the tax to the Government a condition for entitlement to ITC.

According to the respondents, where a purchaser fails to exercise due diligence and the supplier does not deposit the tax, the purchaser cannot retain the ITC merely because the tax amount was charged on the invoice.

The department therefore contended that the wrongly availed ITC was recoverable under the CGST Act.

The Rajasthan High Court also considered the Gujarat High Court’s judgment in Maruti Enterprise through its authorized partner, Jigneshbhai Bharatbhai Tarpara v. Union of India & Ors., decided on May 1, 2026.

The Gujarat High Court had rejected a challenge to the constitutional validity of Section 16(2)(c), holding that the provision itself did not suffer from constitutional or legal infirmity.

It had observed that ITC entitlement is linked to the statutory requirement that the tax collected by the supplier must ultimately be deposited with the Government. The purchaser, therefore, cannot claim ITC as an absolute right where the corresponding tax has not been paid.

The Gujarat High Court had further held that the purchaser and supplier form integral parts of the GST tax chain and that purchasers are expected to exercise due diligence when entering into commercial transactions.

The Court noted that Section 16(2)(c) requires the tax charged on a supply to have actually been paid to the Government. However, the GST framework also contains a mechanism dealing with situations where the supplier has failed to deposit the tax.

The judgment referred to Section 41(2), which requires the recipient to reverse ITC where the supplier has not deposited the corresponding tax, while permitting the recipient to re-avail the credit subsequently when the supplier pays the tax.

Rule 37A provides the operational mechanism for such reversal and subsequent re-availment. The Court noted that this framework recognises the recipient’s position while simultaneously protecting Government revenue.

It noted that the recipient can verify the relevant information through GSTR-2B and temporarily reverse ITC in Table 4(B)(2) of GSTR-3B where the supplier has not deposited the tax.

The Court also clarified that merely filing GSTR-3B by the supplier does not, by itself, establish that the corresponding tax has actually been paid in full.

The Court further noted that Rule 37A provides a framework under which recipients can retain ITC for a specified period and subsequently reverse it if the supplier fails to deposit the tax within the prescribed timeline. The recipient may thereafter re-avail the credit when the supplier eventually pays the tax.

The petitioner had argued that it was practically impossible for a purchaser to ensure that the supplier deposited the tax.

The High Court, however, declined to accept that argument as a basis for invalidating or reading down Section 16(2)(c).

The Court held that although a purchaser cannot compel a supplier to deposit tax, the GST framework contains safeguards that prevent the purchaser from being unfairly penalised in every situation.

The Bench also observed that purchasers can protect themselves contractually. Commercial agreements can contain indemnity clauses making suppliers responsible for losses suffered by purchasers because of the supplier’s failure to remit GST collected from them.

The Court rejected the argument that compliance with the requirements in Section 16(2)(a) and (b) was sufficient for claiming ITC.

According to the Bench, the conditions contained in clauses (a) to (d) of Section 16(2) have to be read conjointly.

Possession of a valid tax invoice and receipt of goods or services are not, by themselves, enough. The statutory requirement concerning payment of the corresponding tax to the Government must also be fulfilled.

The Court specifically held that the Revenue cannot be directed to stop its examination after determining that goods or services have been received. Eligibility for ITC extends to the requirement under Section 16(2)(c) concerning actual payment of tax.

The Court also relied upon Section 155 of the CGST Act, which places the burden of proving eligibility for ITC on the person claiming the credit.

The Gujarat High Court’s reasoning, which the Rajasthan High Court considered, emphasised that the purchasing dealer must establish entitlement to ITC, including compliance with the statutory requirement concerning payment of tax by the supplier.

This aspect assumes particular importance because the Court rejected the proposition that a purchaser can establish ITC entitlement merely by demonstrating the existence of a genuine commercial transaction and receipt of goods.

The petitioner had also relied upon the Supreme Court’s landmark judgment in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., concerning the effect of an approved resolution plan under the IBC.

The Supreme Court had held that claims not forming part of an approved resolution plan stand extinguished and that such resolution plans are binding on, among others, the Central Government and State Governments.

The Rajasthan High Court, however, held that the Supreme Court ruling did not assist the petitioner on the question of ITC eligibility.

The Bench specifically distinguished the IBC consequences of an approved resolution plan from the independent statutory conditions governing entitlement to ITC under Section 16(2)(c) of the CGST Act.

After considering the rival submissions, the Court held that Section 16(2)(c) is a mandatory condition for claiming ITC, subject to Section 41 of the CGST/RGST framework.

The Court categorically observed that where the supplier has not paid the tax to the Government, the purchaser cannot claim entitlement to the corresponding ITC. If ITC has nevertheless been availed without fulfilment of this statutory condition, recovery of the credit is permissible in accordance with law.

The Court further noted that the Gujarat High Court had already examined the constitutional challenge to Section 16(2)(c), the plea based on lex non cogit ad impossibilia, and the interplay between Sections 16(2)(c), 41 and 155 and Rule 37A.

Finding no reason to take a different view, the Rajasthan High Court held that there was no ground to interfere with the impugned order dated November 24, 2022.

The writ petition was accordingly dismissed, and pending applications, if any, were disposed of.

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