The Supreme Court has stayed the Tripura High Court judgment that had read down Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, and held that Input Tax Credit could not be denied to a bona fide purchaser merely because the supplier failed to deposit the collected tax with the government.
A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran passed the interim order in a Special Leave Petition filed by the Union of India and other authorities against the High Court’s decision in favour of M/s Sahil Enterprises.
The Supreme Court condoned the delay in filing and refiling the petition and issued notice to the respondents. It also permitted dasti service in addition to the ordinary mode of service.
“Meanwhile, the judgment and order(s) passed by the High Court shall remain stayed,” the Supreme Court ordered.
The matter has been directed to be listed on September 17, 2026, for final disposal.
The stay means that the relief granted by the Tripura High Court—including its direction to restore ITC of ₹1,11,60,830 to Sahil Enterprises—will remain in abeyance until further orders. The Supreme Court has not yet pronounced on the merits or finally decided the constitutional interpretation adopted by the High Court.
Buy Now: 150 + Judgments On GST – E-Compilation For August 2026
Tripura High Court had read down Section 16(2)(c)
The appeal arises from the Tripura High Court’s judgment dated January 6, 2026, in Sahil Enterprises’ writ petition.
A Division Bench comprising Chief Justice M.S. Ramachandra Rao and Justice S. Datta Purkayastha had upheld the constitutional validity of Section 16(2)(c) of the CGST Act but read down its application to protect genuine purchasing dealers from the consequences of a supplier’s tax default.
Section 16(2)(c) makes the availability of ITC conditional upon the tax charged on the underlying supply having actually been paid to the government, either in cash or through utilisation of admissible ITC.
The High Court held that the provision could not be applied in a manner that denied credit to a bona fide buyer who had paid the entire consideration and GST to the supplier and had no involvement in the supplier’s failure to remit the tax.
It observed that penalising an innocent purchaser for the wrongdoing of the selling dealer would be arbitrary and disproportionate and could expose the provision to a constitutional challenge under Article 14.
Supplier collected GST but filed ‘Nil’ GSTR-3B returns
Sahil Enterprises, a proprietary firm trading in rubber products in Tripura, had purchased goods from M/s Sentu Dey between July 2017 and January 2019.
According to the case, the purchasing firm paid GST of ₹1,11,60,830 to the supplier. The supplier issued tax invoices and disclosed the transactions in its GSTR-1 returns but allegedly failed to deposit the collected tax with the government and instead filed ‘Nil’ GSTR-3B returns.
Following an investigation by the CGST Enforcement Branch, the authorities blocked the electronic credit ledger of Sahil Enterprises. A show cause notice was subsequently issued under Section 73 of the CGST Act, proposing reversal of the ITC along with interest and penalty.
The proceedings culminated in an order dated May 17, 2022, confirming the demand. Sahil Enterprises then approached the Tripura High Court, challenging the demand as well as the constitutional validity of Section 16(2)(c).
Buyer cannot be required to perform an impossible task: High Court
The principal argument before the High Court was that a purchasing dealer has no effective mechanism to verify whether the supplier has actually deposited the GST collected from it.
The taxpayer argued that a strict application of Section 16(2)(c) would force a compliant purchaser to bear the tax twice—first by paying it to the supplier and again through the reversal of ITC—despite fulfilling all obligations within its control.
Accepting this argument, the High Court observed that “the purchasing dealer cannot be asked to do the impossible, i.e., to identify a selling dealer who will not deposit with the Government the tax collected by him.”
The High Court found that a purchaser could verify the supplier’s registration, obtain valid tax invoices, pay the consideration through banking channels and ensure receipt of the goods. However, the buyer could neither compel the supplier to deposit the tax nor independently access information conclusively establishing that such payment had been made to the government.
It held that Parliament could not have intended to punish genuine taxpayers for another person’s fraud or statutory default, particularly when the purpose of the ITC mechanism is to eliminate cascading and double taxation.
No allegation of fraud or collusion against buyer
The High Court also attached significance to the fact that the department had initiated proceedings against Sahil Enterprises under Section 73, which applies to cases not involving fraud, wilful misstatement or suppression of facts.
The authorities had not invoked Section 74 or alleged that Sahil Enterprises had colluded with the supplier to wrongfully claim ITC.
Proceedings had separately been initiated against the defaulting supplier. Its GST registration had reportedly been cancelled, and criminal proceedings had also been instituted.
In these circumstances, the High Court concluded that the department should proceed against the defaulting supplier rather than recover the tax from a bona fide purchaser that had already paid GST as part of the transaction.
Reliance on Delhi and Gauhati High Court decisions
The Tripura High Court relied extensively on the Delhi High Court’s ruling in Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, in which a similar provision under the Delhi Value Added Tax law was read down to protect genuine purchasing dealers.
It also referred to the decisions in Arise India Ltd. and Shanti Kiran India (P) Ltd., noting that the approach adopted by the Delhi High Court had subsequently received the Supreme Court’s approval.
The Tripura High Court further relied on the Gauhati High Court’s decisions in National Plasto Moulding v. State of Assam and McLeod Russel India Ltd. v. Union of India, which had adopted a similar approach concerning the denial of ITC due to supplier default.
At the same time, the Bench acknowledged that the High Courts of Kerala, Patna, Madhya Pradesh, Madras and Andhra Pradesh had upheld a stricter application of Section 16(2)(c). It, however, found that those decisions did not adequately address the practical impossibility faced by buyers in monitoring whether suppliers had deposited the tax.
High Court’s operative relief now stayed
The Tripura High Court ultimately upheld Section 16(2)(c) as constitutionally valid but read it down to exclude bona fide transactions in which the purchaser had complied with its statutory obligations and was not involved in fraud or collusion.
It set aside the May 17, 2022 demand order and directed the department to restore ITC of ₹1,11,60,830 to Sahil Enterprises.
That judgment and its operative directions have now been stayed by the Supreme Court.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
