The Supreme Court has upheld the validity of Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, confirming that Input Tax Credit (ITC) cannot be claimed if the supplier has not deposited the tax. This decision follows a challenge by Bhandari Scrap Traders against a Gujarat High Court ruling, which deemed the provision constitutional. The petitioner argued that denying ITC due to a supplier's default was unconstitutional, citing a Tripura High Court decision that supported bona fide purchasers retaining ITC despite supplier defaults.
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The Gujarat High Court had previously differentiated between the GST framework and the Delhi VAT regime, maintaining that Section 16(2)(c) validly requires tax payment by the supplier for ITC eligibility. The Supreme Court, upon review, agreed with this assessment, stating that the statutory schemes of the Delhi VAT Act and the CGST Act are fundamentally different, and precedents from the former cannot be applied to GST cases.
The Supreme Court emphasized that the CGST Act provides mechanisms through Section 41, Section 73, and Section 74 for purchasing dealers to reclaim reversed ITC once the supplier rectifies their tax default. Thus, the Court found no basis to declare Section 16(2)(c) unconstitutional, affirming the Gujarat High Court's ruling and dismissing the Special Leave Petitions.
Order Date - 24 July 2026
Parties: Bhandari Scrap Traders Vs Union of India & Others
Facts -
- Petitioner Bhandari Scrap Traders challenged the Gujarat High Court judgment that upheld the validity of Section 16(2)(c) of the CGST Act, arguing that denial of Input Tax Credit (ITC) due to the supplier's default was unconstitutional.
- The petitioner relied on the Tripura High Court's decision in Sahil Enterprises to contend that a bona fide purchaser should not lose ITC merely because the supplier failed to pay GST.
- The Gujarat High Court had distinguished the GST framework from the Delhi VAT regime and held that Section 16(2)(c) validly makes payment of tax by the supplier a condition for availing ITC.
- Aggrieved by this decision, the petitioner approached the Supreme Court through Special Leave Petitions seeking to overturn the High Court's ruling.
Issue -
- Whether Section 16(2)(c) of the CGST Act is unconstitutional for denying Input Tax Credit to a purchasing dealer when the supplier fails to deposit the tax with the Government.
Order -
- The Supreme Court observed that the Gujarat High Court had undertaken a detailed comparison of the Delhi VAT Act and the CGST Act, demonstrating that the two legislations operate under fundamentally different statutory schemes. Therefore, precedents under the Delhi VAT regime could not automatically be applied to GST matters.
- The Court held that a purchasing dealer under the CGST Act cannot be equated with a bona fide purchaser under the Delhi VAT Act for claiming ITC where the supplier has defaulted in payment of tax. The statutory conditions governing ITC under GST are distinct and must be complied with.
- The Supreme Court further noted that the CGST Act itself provides relief through Section 41 read with Sections 73 and 74, enabling the purchasing dealer to re-avail the reversed ITC once the supplier subsequently discharges the tax liability. This statutory mechanism adequately addresses such situations.
- Agreeing completely with the Gujarat High Court, the Supreme Court held that there was no basis to declare Section 16(2)(c) unconstitutional or to read down its provisions. Consequently, the Court affirmed the High Court's judgment and dismissed the Special Leave Petitions.
