GST UPDATE

Hon’ble Court: HIGH COURT OF GUJARAT AT AHMEDABAD
Case Title: MARUTI ENTERPRISE VS UNION OF INDIA & ORS.
Petition No. & Citation: Special Civil Application No.18080 of 2023

Hon’ble Judge(s)	MR. JUSTICE A.S. SUPEHIA & MR.JUSTICE PRANAV TRIVEDI
Date of Order	01/05/2026
Outcome	In favour of Respondent

Brief Facts of the Case

Various writ petitions were filed by numerous registered dealers across Gujarat challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The petitioners had availed Input Tax Credit (ITC) on purchases made from duly registered suppliers against valid tax invoices, where such invoices were duly reflected in GSTR-2A/GSTR-2B. However, subsequently the Department denied such ITC solely on the ground that the supplier had failed to deposit the tax collected from the petitioners into the Government treasury. This issue gave rise to a direct constitutional challenge to Section 16(2)(c), which makes actual payment of tax by supplier a condition precedent for recipient’s ITC entitlement.

Relevant Section / Rule

Section 16(2)(c) of the Central Goods and Services Tax Act
Section 41 of the CGST Act
Section 155 of the CGST Act
Rule 37A of the CGST Rules, 2017

Question before Hon’ble Court

Whether provisions of Section 16(2)(c) is ultra vires and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India?
Whether provisions of Section 16(2)(c) should be read down to apply only in cases involving collusion/fraud and not genuine transactions?

Brief Arguments by Petitioner / Appellant

1. Purchaser has no control over supplier’s tax payment
The purchaser can only verify whether the supplier has uploaded invoice details in GSTR-1 and whether the same is reflected in GSTR-2A/GSTR-2B. However, the purchaser has no access to the supplier’s GSTR-3B or to the actual tax payment made by the supplier. Therefore, the law expects the purchaser to ensure something which is not capable of being verified by him.
2. Section 16(2) Itself Confirms the Genuineness of Transaction under clauses (a), (aa), (b), (ba)
It was argued that Section 16(2) already provides multiple conditions such as possession of invoice, reflection of invoice in returns, receipt of goods/services and non-restriction of credit. Once these conditions are fulfilled, the transaction stands established as genuine. Therefore, denying ITC thereafter only because supplier failed to pay tax defeats the very statutory checks already prescribed under the Act.
3. Supplier’s Default Is Beyond Purchaser’s Control
The petitioners contended that after making payment to a registered supplier along with GST, the purchaser has no legal authority to compel the supplier to deposit such tax with the Government. Since the supplier’s compliance is an independent statutory obligation, the recipient cannot be penalized for the failure committed by another taxable person.
4. Bona Fide Purchasers and Fraudulent Purchasers Are Treated in the Same Manner - Violation of Article 14
It was submitted that Section 16(2)(c) does not distinguish between an honest purchaser who has made a genuine purchase and a collusive purchaser involved in tax fraud. Both are visited with the same consequence of denial of ITC. According to the petitioners, treating two unequal classes alike amounts to Violation of Article 14.
5. Law Cannot Compel a Person to Do the Impossible - Doctrine of Lex Non Cogit ad Impossibilia
The petitioners argued that the purchaser cannot verify the internal tax compliance of the supplier nor can he force the supplier to file returns or deposit tax. Therefore, insisting upon actual tax payment by supplier as a pre-condition for recipient’s ITC amounts to asking the recipient to perform an impossible act, which is against settled legal principles.
6. Denial of ITC Leads to Double Tax Burden
It was contended that the purchaser has already paid GST amount to the supplier at the time of purchase. If ITC is denied again due to supplier’s non-payment, the same tax burden effectively falls once more upon the purchaser. This results in double taxation and also the GST objective of avoiding cascading effect is defeated.
7. Tax Liability of Supplier Is Shifted Upon Recipient
The petitioners pointed out that under Section 9 of the CGST Act, the liability to pay output tax is on the supplier and not on the recipient, except in reverse charge situations. However, by denying ITC to the purchaser because of supplier’s failure, the department indirectly transfers the supplier’s tax burden upon the recipient, which is contrary to the charging scheme of the Act.
8. International Practice Also Protects Genuine Purchasers
The petitioners lastly submitted that even international VAT jurisprudence recognizes that input tax credit should be denied only where the purchaser knew or ought to have known about fraud. An innocent purchaser acting in good faith is generally protected. Therefore, similar protection should be incorporated into Section 16(2)(c).
Case Laws Relied Upon

Sr. No.	Name of Case	Exact Citation	Ratio Derived
1	On Quest Merchandising India (P.) Ltd. vs Government of NCT of Delhi	[2017] 87 taxmann.com 179 / [2018] 10 GSTL 182 (Del.)	Bona fide purchasing dealer should not be denied ITC merely because the selling dealer failed to deposit tax, when purchaser had acted with due diligence.
2	Commissioner of Trade & Tax, Delhi vs Arise India Ltd.	2022 (60) GSTL 215 (SC)	Supreme Court affirmed the Delhi High Court view protecting genuine purchasers from seller’s default.
3	Commissioner Trade & Tax, Delhi vs Shanti Kiran India (P.) Ltd.	[2025] 179 taxmann.com 665 (SC)	Reapproved the principle that innocent purchasing dealers cannot automatically be burdened with tax default of the supplier.
4	M/s Sahil Enterprises vs Union of India & Ors.	WP(C) No. 688 of 2022 decided on 06.01.2026 (Tripura High Court) / 2026 TAXONATION 02 (TRIPURA)	Section 16(2)(c) was read down by holding that ITC cannot be denied in bona fide transactions merely because supplier failed to deposit tax. Provision can operate only in fraudulent or collusive cases.
5	State of Karnataka vs Tallam Apparels	2021 SCC OnLine Kar 15785	Genuine purchaser should not be denied tax benefit where purchases are real and duly supported by documents.
6	Arpit Pravinbhai Shah vs Assistant Commissioner of Income Tax	(2026) 182 taxmann.com 691 (Guj.)	Unequal persons cannot be treated equally; honest and dishonest taxpayers cannot be placed in the same category.
7	Axel Kittel vs Belgian State (C-439/04) & Belgian State vs Recolta Recycling SPRL (C-440/04)	Judgment dated 06.07.2006, Court of Justice of European Union (Third Chamber)	Input tax deduction can be denied only where purchaser knew or ought to have known about fraud; innocent recipient deserves protection.

Brief Arguments by Respondent

1. Section 16(2)(c) Cannot Be Read in Isolation and Has to Be Construed with Section 41(2), Rule 37A and Section 155
The Revenue specifically contended that Section 16(2)(c) is not a standalone or disconnected provision. The same forms part of a larger statutory framework where:

Section 41(2) mandates reversal of ITC in cases where supplier fails to pay tax,
Rule 37A provides the machinery for such reversal and subsequent re-availment upon supplier’s payment, and
Section 155 casts the burden of proving eligibility of ITC upon the claimant.

According to the Revenue, these provisions together disclose a consistent legislative intent that ITC can be finally retained only when the corresponding tax has actually reached the Government. Therefore, the constitutional challenge to Section 16(2)(c) by reading it in isolation is misconceived.
2. Distinction from DVAT regime
Delhi VAT judgments were under different statute which contained only Section 9(2)(g) of the Delhi Value Added Tax, 2004
CGST contains:

Section 41(2),
Section 53,
Section 155,
Rule 37A,

which materially change the statutory architecture. Hence DVAT precedents cannot be blindly imported.
3. Section 41(2) Statutorily Mandates Reversal of Credit in Case of Supplier’s Non-Payment
It was argued that after amendment by the Finance Act, 2022, the law expressly requires reversal of input tax credit where the supplier has failed to pay tax on the corresponding transaction. Thus, supplier’s actual remittance is no longer a procedural formality but a substantive legislative condition.
4. Rule 37A Eliminates the Plea of Permanent Prejudice to Bona Fide Purchasers
According to the Revenue, the recipient does not suffer any permanent loss because Rule 37A permits re-credit immediately upon subsequent payment of tax by the supplier. Simultaneously, proceedings are also initiated against the supplier. Therefore, the statutory scheme only postpones the benefit till actual tax realization and does not amount to double recovery.
5. Section 155 Places the Burden of Proving ITC Eligibility Entirely Upon the Claimant
The Revenue emphasized that under Section 155, the burden to establish admissibility of ITC lies upon the purchasing dealer himself. Therefore, mere production of invoices or proof of payment to supplier does not conclude the matter. The claimant must satisfy all statutory conditions, including actual tax payment contemplated under Section 16(2)(c).
6. On Quest Merchandising, Arise India, Shanti Kiran and Sahil Enterprises Are Inapplicable to the Present GST Scheme
The Revenue specifically argued that the petitioners’ reliance on the line of decisions beginning from On Quest Merchandising is misplaced because those judgments were rendered either under the DVAT regime or by merely following DVAT reasoning. The CGST Act contains materially different provisions such as Section 41(2), Section 155 and Rule 37A, which expressly link ITC retention with actual tax payment and reversal mechanism. Since these provisions were absent from the DVAT structure, parity of reasoning cannot be imported mechanically into the GST regime.
7. GST is a destination based tax
It was submitted that in inter-State supplies, utilized ITC triggers transfer of funds between the Centre and destination States. If credit is allowed despite supplier’s non-payment, Governments would transfer revenue never received. This would make GST settlement mechanism financially unworkable. Hence, Section 16(2)(c) is necessary to preserve the fiscal equilibrium of the GST settlement mechanism.
7. ITC Is a Conditional Statutory Entitlement and Not a Vested or Constitutional Right
It was contended that input tax credit is neither a fundamental right nor an absolute vested right. It is only a concession granted by statute subject to legislative restrictions. It is an "entitlement", subject to conditions and restrictions provided under the Act, which are to be interpreted literally.
8. Language of Section 16(2)(c) has no ambiguity and therefore leaves No Scope for Reading Down
The Revenue argued that Section 16(2)(c) clearly and unambiguously provides that the tax charged in respect of such supply must have been actually paid to the Government. Since the wording is explicit, the Court cannot rewrite the provision merely because taxpayers find compliance commercially difficult or are facing hardships. The Supreme Court in case of Authorized Officer, Central Bank of India vs. Shanmugavelu has held that "Harshness of a provision is no reason toread down the same, if its plain meaning is unambiguous and perfectly valid."
9. Ecom Gill Coffee Strengthens the Principle That Mere Invoices Do Not Discharge the Burden of ITC Claim
The Revenue further submitted that the Supreme Court in State of Karnataka vs Ecom Gill Coffee Trading Pvt. Ltd. has categorically held that production of tax invoices and banking payment alone is insufficient to establish entitlement to credit. Thus, the burden on the claimant is much wider than what is suggested in the petitioner’s bona fide purchaser argument.
10. Analogy of TDS Credit Under Section 205 of the Income Tax Act Is Misconceived
Lastly, the Revenue contended that the petitioners cannot draw support from TDS jurisprudence because Section 205 of the Income Tax Act specifically bars direct recovery from the assessee once tax is deducted at source. No comparable protective provision exists under the GST enactment. Therefore, GST recipient cannot claim immunity merely because tax component was paid to the supplier.
Case Laws Relied Upon

Sr. No.	Name of Case	Exact Citation	Ratio Derived
1	Director of Income Tax vs American Express Bank Ltd.	2025 SCC OnLine SC 2806	Taxing provisions must be interpreted strictly as per plain language when wording is unambiguous.
2	Authorized Officer, Central Bank of India vs Shanmugavelu	(2024) 6 SCC 641	Mere harshness of a statutory provision is not a ground to read it down if language is clear.
3	State of Karnataka vs Ecom Gill Coffee Trading Pvt. Ltd.	(2023) 18 SCC 809	Mere invoices/payment by cheque are insufficient; burden of proving genuine entitlement lies on ITC claimant.
4	R.V. Enterprises vs State of Gujarat	2025 SCC OnLine Guj 4780	ITC is conditional and subject to statutory compliance under GST provisions.
5	Mahalaxmi Cotton Ginning Pressing and Oil Industries vs State of Maharashtra	2012 SCC OnLine Bom 733	Input tax concession can be regulated by Legislature and taxpayer must satisfy statutory conditions.
6	Nahasshukoor & Anr. vs Assistant Commissioner	2023 SCC OnLine Ker 11369	Tax benefit cannot be claimed contrary to express statutory restrictions.
7	M. Trade Links vs Union of India	2024 SCC OnLine Ker 2744	Supplier compliance linked ITC restrictions under GST held valid.
8	Thirumalakonda Plywoods vs Assistant Commissioner, Sales Tax	2023 SCC OnLine AP 1476	Recipient cannot insist on unconditional ITC where statutory conditions remain unfulfilled.
9	Asha Enterprises vs State of Bihar	2023 SCC OnLine Pat 4395	ITC is not automatic and is always governed by legislative conditions.
10	Shree Krishna Chemicals vs Union of India	2025 SCC OnLine MP 1301	GST credit reversal provisions are mandatory in cases of supplier non-compliance.
11	Baby Marine (Eastern) Exports vs Union of India	2025 SCC OnLine Mad 15588	Claim of ITC cannot override explicit statutory restrictions contained in GST law.

Findings and Judgement

The Court carried out a detailed analysis of all the provisions and reliance placed on various judicial precedents by the Petitioners and Respondent and gave the following analysis:
1. Legislative Intent behind Input Tax Credit
The Court commenced its analysis by examining the legislative foundation of the CGST Act and specifically referred to Clause 5(b) of the Statement of Objects and Reasons, which provides that input tax credit is to be made available in respect of “taxes paid on any supply of goods or services or both” used in the course or furtherance of business. On this basis, the Court held that the very legislative intent of seamless credit is not founded merely upon issuance of invoice or movement of goods, but upon the more fundamental condition that such tax must actually paid into the Government account. Thus, availment of ITC is intrinsically linked with the existence of tax realization by the Government and not merely tax collection by the supplier from the purchaser.
2. Section 16(2)(a) to (d)] are a Mandatory Statutory Condition and not a Directory Procedural Requirement
Upon analysis of Section 16(2), the Court held that clauses (a), (b), (c) and (d) therein are cumulative pre-conditions governing entitlement to credit and not independent checkpoints from which the purchaser may choose partial compliance. The Court specifically rejected the contention that once tax invoice is available and goods are received under clauses (a) and (b), the recipient’s entitlement gets crystallized irrespective of supplier default. It held that clause (c), namely actual payment of tax to Government, is not an ancillary procedural stipulation but goes to the root of eligibility itself. Therefore, ITC does not become eligible merely on invoice possession and receipt of supply; it matures only when the tax has reached the government.
3.Misplaced Reliance on On Quest Merchandising / Arise India / Sahil Enterprises
The Court undertook a detailed scrutiny of the precedents heavily relied upon by the petitioners, namely the Delhi High Court decisions in On Quest Merchandising India (P) Ltd., Arise India Ltd. / Shanti Kiran India (P) Ltd., and the Tripura High Court decision in Sahil Enterprises. It observed that those decisions were rendered either under Section 9(2)(g) of the DVAT Act or by importing DVAT reasoning into GST, where the primary basis for reading down was:

absence of any statutory machinery enabling purchaser verification,
inability of purchaser to access supplier’s returns,
and unguided discretion of department to proceed against either dealer.

The Gujarat High Court held that such jurisprudence cannot be equally applied into GST because GST is not merely a local VAT credit mechanism but a nationwide destination-based tax settlement system involving inter-governmental fiscal transfers. Under DVAT, the tax credit remained confined within one State and denial or allowance of credit did not disturb a multi-state settlement matrix. But GST is a destination based tax, therefore, Accordingly, the Court expressly declined to adopt the reasoning of On Quest, Arise India and Sahil Enterprises as governing precedents for Section 16(2)(c).

4. GST being a destination-based integrated tax
Section 53 of the CGST Act is highly relevant, as it mandates that the tax component utilized by an inter-state supplier must be transferred to the Destination State. Essentially, when an inter-State supply occurs, the credit availed by the recipient has fiscal implications across state boundaries. Consequently, if a supplier is permitted to pass on ITC merely on the strength of invoice despite non-payment of tax, the Government would be compelled to transfer revenue to another State which was never actually received in the first place. The Court therefore held that Section 16(2)(c) is not a anti-recipient provision, but intended to preserve the balance.
5. Section 16(2)(c) cannot be read in isolation but conjoint reading with Section 41(2), Rule 37A and Section 155
One of the central findings of the judgment is that Section 16(2)(c) is not a standalone disabling clause but part of a larger statutory framework that regulates availment, reversal, restoration and proof of ITC.
The Court held:

Section 16(2)(c)creates the substantive condition that tax charged must be actually paid to Government;
Section 41(2)mandates reversal of self-assessed ITC where supplier fails to pay such tax, while simultaneously permitting re-availment upon eventual payment;
Rule 37Aoperationalizes the timing and procedural mechanics of such reversal/re-credit;
Section 155places burden of proving eligibility squarely upon the claimant recipient.

Thus, according to the Court, the Act itself visualizes that ITC may initially be availed on self-assessment, may subsequently require reversal upon supplier default, and may again be restored once tax reaches Government treasury. This statutory continuum itself demonstrates that Section 16(2)(c) was never intended to be ignored merely because the purchaser acted bona fide.
6. Burden of proving eligibility lies upon recipient under Section 155
The Court gave independent emphasis to Section 155 and held that this provision had not been adequately examined in the contrary decisions relied upon by the petitioners. Section 155 expressly states that where any person claims eligibility for ITC, the burden of proving such claim lies upon such person. Thus, the Court held that Section 155 statutorily mandated that all the conditions stipulated in Section 16 (2) are complied with.

7. Applicability of maxim Lex Non Cogit Ad Impossibilia
The petitioners argued that law cannot compel the purchaser to perform the impossible, namely to ensure that the supplier deposits tax after collecting it. The Court, however, held that the said maxim has only limited application in the GST framework because the statute itself contains mitigating provisions in the form of Section 41(2) and Rule 37A. Since the recipient is not permanently deprived of ITC as the same can be reavailed when the supplier makes the payment to the Government. Therefore the bonafide purchaser is not left remediless.
8. ITC held to be a statutory concession and not an indefeasible constitutional right
Relying upon ALD Automotive Private Limited v. Commercial Tax Officer, Modi Sugar Mills and other Supreme Court precedents, the Court reiterated the settled proposition that input tax credit is not an inherent vested right but a concession extended by statute subject to strict fulfilment of legislative conditions. The Court held that Section 16(2)(c) being couched in plain and unambiguous language leaves no room for liberal dilution on grounds of purchaser hardship.

9. Proceedings against supplier does not extinguish recipient’s statutory non-compliance
The Court clarified that availability of departmental powers to recover unpaid tax from the supplier under Sections 73 and 74 does not dilute the independent statutory condition imposed upon the recipient under Section 16(2)(c). Therefore, merely because department can or should proceed against supplier, the recipient cannot claim automatic insulation from reversal of inadmissible credit.

11. Acknowledgement of genuine hardship for bonafide Purchasers
While upholding the constitutional validity and strict enforceability of Section 16(2)(c), the Court also acknowledged the genuine commercial hardship faced by bona fide purchasers who may suffer on account of supplier default despite having no fraudulent intent. The Court acknowledged that genuine purchasers are presently exposed to disproportionate financial and compliance hardships due to supplier defaults. It therefore emphasized the urgent need for legislative or procedural reforms within the GST framework to protect bona fide recipients, including creation of a real-time technology-based mechanism for invoice-wise verification of supplier tax payments and prompt recovery action against defaulting suppliers. The Court cautioned that unless such safeguards are introduced, dishonest vendors may unjustly benefit at the cost of both the revenue and honest taxpayers.

Consequently, the Court expressly declined to read down the provision on the basis of On Quest / Arise India / Sahil Enterprises but at the same time issued an expectation to the Government to evolve a technology-driven and purchaser-protective compliance framework for safeguarding genuine buyers from fraudulent suppliers.

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