The Supreme Court has upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, ruling that a purchasing dealer cannot claim Input Tax Credit (ITC) if the supplier has failed to deposit the tax with the Government.
Dismissing a batch of Special Leave Petitions, the bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva affirmed the Gujarat High Court’s judgment rejecting the challenge to the provision and held that there was no basis to either declare the provision unconstitutional or read it down.
The petitioners had challenged the Gujarat High Court’s ruling upholding Section 16(2)(c) of the CGST Act. The provision makes entitlement to Input Tax Credit conditional upon the tax charged on the supply actually being paid to the Government by the supplier.
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The petitioners argued that bona fide purchasing dealers should not be denied ITC merely because the supplier defaults in depositing tax, relying upon principles evolved under the Delhi Value Added Tax (VAT) regime. They sought to have Section 16(2)(c) declared unconstitutional or interpreted in a manner that protected innocent purchasers from the consequences of supplier defaults.
Rejecting the challenge, the Supreme Court noted that although another Special Leave Petition arising from the Tripura High Court’s decision in Sahil Enterprises v. Union of India had been entertained, the issues examined by the Gujarat High Court were materially different.
The Bench observed that the Gujarat High Court had undertaken a detailed examination of the statutory framework, particularly comparing the Delhi Value Added Tax Act, 2004 with the CGST Act, 2017, and had demonstrated that the two enactments operate on fundamentally different legal schemes. Consequently, precedents developed under the Delhi VAT regime could not automatically be imported into the GST framework.
The Court emphasized that the Gujarat High Court’s analysis clearly established that there was no possibility of drawing parity between the provisions governing ITC under the Delhi VAT Act and those under the CGST Act.
According to the Supreme Court, the GST regime contains a distinct statutory mechanism governing availment and reversal of ITC. Therefore, a purchasing dealer under the CGST Act cannot claim the same treatment that had been accorded to bona fide purchasing dealers under the Delhi VAT law when the supplier fails to discharge the tax liability.
The Bench further noted that the Gujarat High Court had examined Section 41 of the CGST Act along with Sections 73 and 74, which together provide a statutory mechanism enabling a purchasing dealer to re-avail reversed Input Tax Credit after the supplier subsequently discharges the outstanding tax liability.
This statutory framework, according to the Supreme Court, adequately addresses the position of purchasing dealers within the GST regime and reinforces the legislative scheme governing ITC.
Finding no infirmity in the Gujarat High Court’s reasoning, the Supreme Court held that the High Court was fully justified in refusing to strike down or read down Section 16(2)(c) of the CGST Act.
Expressing complete agreement with the High Court’s analysis, the Bench stated that it was in “complete and respectful agreement” with the views expressed by the Gujarat High Court and affirmed the impugned judgment in its entirety. Consequently, all the Special Leave Petitions were dismissed, and the pending applications were also disposed of.
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