Section 16(2)(c) CGST Act Valid but READ DOWN: Tripura HC

The Tripura High Court has held that while upholding the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, “read down” the provision to ensure that genuine buyers are not penalised for the default of sellers. The bench of Chief Justice M.S. Ramachandra Rao and Justice S. Datta Purkayastha has observed that the Input Tax Credit (ITC) cannot be denied to a bona fide purchaser merely because the supplier failed to deposit the tax with the government. The petitioner, M/s Sahil Enterprises, a proprietary firm engaged in the trading of rubber products in Tripura, had purchased goods from its supplier, M/s Sentu Dey, between July 2017 and January 2019, paying GST amounting to ₹1,11,60,830. The supplier, though issuing invoices and filing GSTR-1 returns, failed to deposit the collected tax with the government and filed ‘Nil’ GSTR-3B returns. Following an investigation by the CGST Enforcement Branch, the department blocked Sahil Enterprises’ electronic credit ledger and later issued a show cause notice under Section 73 of the CGST Act, proposing reversal of the ITC along with interest and penalty. An order confirming the demand was passed on 17 May 2022, prompting the petitioner to approach the High Court challenging both the order and the constitutional validity of Section 16(2)(c). At the heart of the case was Section 16(2)(c) of the CGST Act, which allows ITC only if the tax charged on a supply has actually been paid to the government by the supplier. The petitioner argued that the provision, if applied strictly, unfairly penalises a bona fide purchaser for the supplier’s default, despite the purchaser having paid the tax and complied with all statutory requirements. The petitioner contended that such denial of ITC violates Articles 14, 19(1)(g), 265 and 300-A of the Constitution, and results in double taxation, as the buyer is forced to pay tax again even after paying it to the supplier. The court acknowledged that there is no mechanism available to a purchaser to verify whether the supplier has actually deposited the GST with the government. The Court noted that it is practically impossible for a buyer to control or monitor the compliance behaviour of the seller. The Bench observed, “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 court held that penalising a bona fide buyer for the wrongdoing of the seller is arbitrary and disproportionate, and would render the law vulnerable to challenge under Article 14. The Tripura High Court extensively relied on the landmark Delhi High Court judgment in Quest Merchandising India Pvt. Ltd. v. GNCTD, which had read down a similar provision under the Delhi VAT Act. That view was subsequently approved by the Supreme Court in Arise India Ltd. and Shanti Kiran India (P) Ltd. The Court also noted that the Gauhati High Court had recently taken the same approach in National Plasto Moulding v. State of Assam and McLeod Russel India Ltd. v. Union of India, and that the SLP against National Plasto Moulding was dismissed. While acknowledging that some High Courts—such as Kerala, Patna, Madhya Pradesh, Madras and Andhra Pradesh—have upheld the strict application of Section 16(2)(c), the Tripura High Court observed that those judgments failed to consider the practical impossibility for buyers to ensure supplier compliance and also did not take into account the Delhi High Court rulings approved by the Supreme Court. The Bench emphasised that the very purpose of ITC is to avoid cascading and double taxation, and that Parliament could not have intended to punish genuine taxpayers for the fraud of others. Crucially, the department had invoked Section 73 (non-fraud cases) and not Section 74 (fraud, wilful misstatement or suppression), indicating that no allegation of collusion or fraud was made against Sahil Enterprises. The Court also took note that proceedings had already been initiated against the defaulting supplier, whose GST registration had been cancelled and criminal cases filed. The High Court held that section 16(2)(c) is constitutionally valid, but it must be read down and cannot be applied to deny ITC in bona fide transactions. The order dated 17 May 2022 was set aside. The court directed the department to restore ITC of Rs. 1,11,60,830 to Sahil Enterprises. Case Details Case Title: M/S. Sahil Enterprises Versus UOI Case No.: WP(C) No.688 of 2022 Date: 06.01.2026 Counsel For Petitioner: Naveen Bindal, Advocate Counsel For Respondent: Bidyut Majumder, Deputy S.G.I. Click Here To Read Order

Section 16(2)(c) CGST Act Valid but READ DOWN; ITC Can’t Be Denied to Bona Fide Buyers Says Tripura High Court

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