Recently, the Allahabad High Court granted relief to a purchasing dealer in a GST Input Tax Credit (ITC) denial case, sparking debate across tax circles and legal forums. The judgment has been seen by many as a moral and emotional validation of the “honest recipient” narrative—but tax experts warn that the fundamental legal structure of GST, especially Section 16(2)(c) of the CGST/SGST Act, remains unchallenged, untouched, and very much enforceable.
The relief, though interim in nature and not a binding precedent, has caused considerable celebration among certain industry sections—what one expert sharply calls the “99% evaders.” But the victory may be premature, and the celebrations, misinformed.
From Arise India to GST: The Burden Has Shifted
Before GST, landmark decisions of the Supreme Court such as Arise India Ltd. placed the burden on tax authorities to prove collusion or fraud to deny ITC under Value Added Tax (VAT). That legal landscape has dramatically shifted under GST. Now, as per Section 16(2)(c) of the CGST Act and reinforced by Section 155, the burden lies squarely on the purchaser to prove that the supplier has paid tax to the government.
Section 155 of the CGST Act states that: “Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”
This means that the recipient availing Input Tax Credit (ITC) is liable to prove the genuineness of the transaction.
In the landmark case of State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. (Civil Appeal No. 230 of 2023), the Hon’ble Supreme Court examined the evidentiary requirements for claiming Input Tax Credit (ITC) under the Karnataka VAT Act. The Court clarified that the burden of proof lies squarely on the dealer claiming ITC. It is not enough to merely produce a tax invoice and payment details. The dealer must go a step further and establish the genuineness of the transaction beyond doubt.
To successfully claim ITC, the Supreme Court laid down a list of essential documents that must be furnished. These include the name and address of the selling dealer, details of the vehicle used to deliver the goods, proof of payment of freight charges, acknowledgment of receipt of goods, and a valid tax invoice along with payment particulars. The Court emphasized that these documents collectively help prove the actual physical movement of goods and the genuineness of the transaction. Without them, the ITC claim is incomplete and liable to be denied.
In line with this principle, the Allahabad High Court, in B. Shiv Trading v. State of Uttar Pradesh, reinforced the strict documentation standards expected under GST law. The petitioner in this case failed to demonstrate that the underlying transactions actually took place. There was no evidence of physical movement of goods, nor was the authenticity of the transaction established. Consequently, the High Court upheld the initiation of proceedings under Section 74 of the CGST Act, which deals with fraudulent ITC claims and suppression of facts.
These decisions underscore a consistent judicial approach: taxpayers must maintain comprehensive, verifiable documentation to support their ITC claims. The rulings make it clear that mere possession of an invoice is not enough. Dealers must be prepared to demonstrate the entire transaction trail, including delivery, receipt, and payment, in compliance with the conditions laid down under the CGST Act.
“Where is the question of holding the recipient accountable for the supplier’s default?” some critics of the current regime ask. The response from tax professionals is simple: the law already holds the recipient accountable—not for the supplier’s default, but for claiming a concession without satisfying the statutory conditions.
ITC: A Right or a Concession?
ITC is a benefit/concession… available only after fulfilling statutorily prescribed conditions. It’s not a vested right.” The Allahabad High Court ruling, it is lamented, “transgresses into the domain of equity,” overlooking the fact that equity in taxation is not a recognized legal norm unless the statute explicitly permits it.
This perspective is not isolated. Many experts echo that reams of court orders delivering sermons on fairness and honesty have missed the core constitutional question: Is Section 16(2)(c) valid?
Unless struck down or read down on constitutional grounds—say, for being arbitrary—Section 16(2)(c) stands as the pith and substance of the ITC framework, making the supplier’s tax payment a non-negotiable precondition for ITC entitlement.
The Kerala High Court in the case of Nahasshukoor Vs Assistant Commissioner has upheld the validity of Sections 16(2)(c), which allows credit after payment of tax by the supplier to the Government and Section 16(4) of the Central Goods and Services Tax Act (CGST Act), which provides time limit for availing the ITC. The HC emphasised that statutory conditions, restrictions and time limit form the fulcrum for balancing the grant of ITC and tax collection. It held that ITC is a benefit or concession extended under the statutory scheme which accrues only upon fulfilment of the attached conditions. Furthermore, the HC opined that amendment extending the due date till 30 November of the succeeding financial year is procedural in nature and should be given retrospective effect from FY 17-18 onwards. Consequently, the HC granted the liberty to avail ITC, taking benefit of the prescribed circulars, within one month of the order.
Press Releases and Practical Inaction
The GST Council, through a 2018 press release, declared that efforts would be made to recover tax dues from defaulting suppliers first. But as professionals rightly point out, a press release isn’t law, and no formal circular has followed to codify this approach. Questions remain: What qualifies as sufficient effort? How long should authorities wait before targeting the recipient?
The Burden of Proof and Compliance Headache
The Supreme Court’s Ecom Gill ruling reaffirmed that all six conditions of Section 16(2) must be satisfied for ITC to be admissible. The onus is on the recipient, per Section 155, to prove eligibility. This raises the question: Is it reasonable to expect buyers to ensure suppliers pay taxes?
Some suggest practical reforms, such as building a GST portal feature to verify whether tax has been paid on an invoice. Others float a “clearinghouse” model akin to stock exchanges for automatic matching and certification. But these are yet to move beyond discussion.
Judicial Avoidance of Constitutional Questions
Notably, the Kerala High Court upheld the constitutional validity of Sections 16(2)(c) and 16(4) in 2024. Despite that, other courts have hesitated to clearly affirm or reject these provisions’ constitutional footing, instead focusing on the honesty of recipients and departmental responsibility. The result? More litigation, more confusion, and more paperwork—but no finality.
Reality Exposed!
Further, JurisHour, in conversation with various advocates and tax experts, has uncovered a disturbing trend: nearly 99% of buyers claiming Input Tax Credit (ITC) are not even aware of the identity or business background of the sellers they routinely deal with. Many buyers admitted to initiating business transactions simply after seeing the dealer’s name listed on the GST portal, without any real due diligence or verification.
This raises serious concerns about the authenticity of such transactions. In many cases, it appears that both buyers and sellers may be acting in collusion to defraud the government. Buyers often rely solely on tax invoices to claim ITC, and when asked by professionals to provide proof of actual movement of goods, they are unable to do so—often responding with blank stares.
Practically speaking, in genuine commercial dealings, issues related to the quality or quantity of goods are common and usually prompt communication between the buyer and seller. However, the complete absence of such interactions in these cases casts serious doubt on whether any real transaction took place at all.
The Road Ahead
Unless Section 16(2)(c) is constitutionally challenged and read down—or unless a systematic verification mechanism is introduced—the law is clear: No tax payment by supplier, no ITC for buyer.
Until then, the illusion of relief granted by interim orders like the one from Allahabad HC may continue to mislead taxpayers—especially those looking for loopholes.
As experts agree: ITC is not an inherent right. It’s a statutory privilege, bound by conditions—and courts must stop evading the real legal battle at the heart of the dispute.
Read More: DIN Not Required On GST Portal Communications Already Bearing RFN: CBIC
