GST UPDATE.

Hon’ble Court: High Court of Punjab and Haryana at Chandigarh
Case Title: Shaurya Alloys Pvt. Ltd. v. State of Punjab & Ors.
Petition No. & Citation: CWP-34296-2024 (O&M) and 423 connected writ petition

Hon’ble Judge(s)	Ashwani Kumar Mishra, C.J. and Rohit Kapoor, J.
Date of Order	01.10.2026
Outcome	Appeal allowed in Part

Brief Facts of the Case

The judgment was delivered in a batch of 424 writ petitions concerning the scope and application of Section 16(2)(c) of the CGST Act, 2017, particularly the liability of a purchasing dealer where the supplier has collected GST but subsequently failed to deposit the tax with the Government. The vires of Section 16(2)(c) of the Act of 2017 is thus questioned on the ground that the provision is contrary to the legal maxim lex non cogit ad impossibilia, i.e., a person cannot be asked to perform an impossible act, and, thus, it contravenes Articles 14, 19(1)(g), 21, 265, and 300A of the Constitution of IndiaIn several cases, the suppliers’ GST registrations had subsequently been cancelled, including with retrospective effect, and the Department proceeded against the purchasing dealers by invoking Section 16(2)(c). The central concern before the Court was whether a bona fide purchasing dealer could be expected to ensure that the supplier ultimately deposits the tax collected from the purchaser with the Government. The Court noted that Section 16(2)(c) was being invoked in a number of cases merely because the registration of the selling dealer had subsequently been cancelled.

Relevant Section

Section 16(2)(c) of the CGST Act

Question before Hon’ble Court

Whether Section 16(2)(c) is constitutionally valid?
Whether a bona fide purchasing dealer can be denied on the ground that the Supplier has defaulted in tax payment to government?

SECTION 16(2)(C) AS SEEN BY DIFFERENT COURTS

The Court made the collective analysis of the Section 16(2) (aa), Section 16(2) (ba), the substituted Section 41 and its proviso, Sections 73, 74, 75(12), 76 and 79, Section 155 and Rules 36, 37A and 88C. Further, it categorically discussed various case laws discussing the applicability of Section 16(2)(c).

Case law	Citation	Crux / Brief description
Gheru Lal Bal Chand v. State of Haryana	2011 SCC OnLine P&H 13205	The Punjab & Haryana High Court read down the relevant VAT provision and held that where the selling dealer had collected tax, the purchasing dealer could not be saddled with liability merely because the selling dealer failed to deposit the tax with the Government, unless fraud, collusion or connivance between the purchasing and selling dealers was established.
On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi	2017 SCC OnLine Del 11286	The Delhi High Court read down Section 9(2)(g) of the DVAT Act and held that a bona fide purchasing dealer, who transacted with a validly registered selling dealer and received proper tax invoices, could not be denied ITC merely because the selling dealer failed to deposit the tax. The Department's remedy was against the defaulting selling dealer, unless material established collusion between the parties.
Commissioner of Trade and Tax, Delhi v. Arise India Ltd.	2018 SCC OnLine SC 3859	The Supreme Court dismissed the Revenue's challenge to On Quest without interfering with the Delhi High Court's judgment. Liberty was granted to the Revenue to approach the High Court in cases where the purchase transactions were alleged to be non-bona fide.
Shanti Kiran India (P.) Ltd. v. CTT Dept.	2013 SCC OnLine Del 50	The Delhi High Court held that ITC could not be denied to a bona fide purchaser merely because the selling dealer's registration was cancelled retrospectively and the seller had failed to deposit tax. In the absence of a mechanism enabling the purchaser to verify the seller's tax payment or cancellation status, and without material establishing collusion, ITC could not be denied.
Commissioner Trade and Tax Delhi v. Shanti Kiran India (P.) Ltd.	2025 SCC OnLine SC 2389	The Supreme Court upheld the Delhi High Court's decision, noting that the sellers were registered on the date of the transactions, the purchasers had acted bona fide, and the transactions/invoices had not been doubted after inquiry. ITC was therefore directed to be granted after due verification.
National Plasto Moulding v. State of Assam	SCC Online Gau 1596	The Gauhati High Court applied the reasoning in On Quest in the GST context and held that the relevant GST provisions could be read down to protect bona fide purchasers, setting aside the SCNs and consequential orders, while leaving the Department free to proceed where purchases were not bona fide.
Sahil Enterprises v. Union of India	2026 SCC OnLine Tri 4	The Tripura High Court similarly applied the reasoning of On Quest to the GST regime and granted relief to bona fide purchasing dealers. The Court held that the Department could proceed in cases where the purchase transactions were found to be non-bona fide.
M/s Instakart Services Private Limited v. Union of India and Others	2026 SCC OnLine Kar 2469	The Karnataka High Court took a similar view in the GST context, applying the reasoning that mechanical denial of ITC to a bona fide purchaser for the seller's default would require the statutory provisions to be read down to avoid arbitrariness and constitutional infirmity.
Maruti Enterprises v. Union of India	2026 SCC OnLine Guj 4013	The Gujarat High Court declined to read down Section 16(2)(c) of the CGST Act or declare it unconstitutional. It held that the GST scheme contains a mechanism under Sections 41, 73, 74 and Rule 37A whereby ITC can be re-availed after the supplier discharges the tax. The purchaser is therefore not permanently deprived of ITC merely because of the supplier's default.
Bhandari Scrap Traders v. Union of India	2026 SCC OnLine SC 1570	The Supreme Court upheld the Gujarat High Court's approach and held that the DVAT and CGST schemes cannot be treated at par. In the GST regime, Sections 41, 73 and 74, along with Rule 37A, provide a statutory mechanism for reversal and subsequent re-availment of ITC. Accordingly, no ground was made out to declare Section 16(2)(c) unconstitutional or to read it down.

Brief Arguments by Petitioner

Section 16(2)(c) cannot be implemented in isolation

Section 16(2)(c) should be collectively read with Sections 16(2), 37, 38, 39, 41, 42 and 155, along with the rules made thereunder. Several supporting provisions of the original GST mechanism were only partly implemented, making it impossible for the purchasing dealer to ensure compliance by the seller. In such circumstances, the principle of lex non cogit ad impossibilia would apply. Section 16(2)(c), therefore, cannot be implemented in isolation by requiring the recipient to ensure that the supplier has actually discharged its tax liability.

Changes in the Statutary Scheme was implemented w.e.f. 01.10.2022

The petitioners submitted that in respect of matters governed by the statutory framework prior to the amendment of Rule 37 w.e.f. 01.10.2022 and the introduction of Rule 37A of the CGST Rules w.e.f. 26.12.2022, the purchasing dealer did not have the benefit of the specific re-availment mechanism subsequently incorporated in Rule 37A. According to the petitioners, this legislative change demonstrated the practical difficulty in complying with the earlier requirement under Section 16(2)(c).

The purchaser has no means to ascertain actual payment of tax by the supplier

The petitioners submitted that GST operates on a monthly tax-period basis and, at the time of availing ITC, the purchasing dealer can ordinarily rely only upon its books of account, tax invoices, payment records and other transaction documents. Once the purchaser has paid the tax component to the supplier through banking channels, the purchaser has no means to determine whether the supplier has actually deposited such tax with the Government. Consequently, the purchaser cannot reasonably be expected to guarantee future compliance by the supplier.

Chain transactions demonstrate the impossibility of ensuring supplier compliance

The petitioners placed an illustration of a multi-level supply chain, commencing from a kabadiwala and extending through manufacturers, wholesalers and retailers up to the ultimate customer. It was submitted that a default at an earlier stage of the supply chain could adversely affect ITC availed by several subsequent purchasers, even though those purchasers had genuine transactions and possessed all the prescribed documents. Thus, a purchaser at one stage may be denied ITC because of a default committed by a supplier several levels earlier, with whom the purchaser had no direct connection.

Retrospective cancellation of registration can adversely affect genuine transactions

The petitioners submitted retrospective cancellation could affect genuine transactions even where the purchasing dealer had tax invoices, payment proofs, movement proofs and other supporting documents. The purchasing dealer cannot, at the time of entering into the transaction, anticipate that the supplier or an earlier supplier in the chain would have its registration cancelled retrospectively. Once the purchaser has undertaken the transaction with a registered supplier, received the goods/services, paid the consideration and tax through banking channels, and maintained the prescribed documents, subsequent default by the supplier should not automatically result in denial of ITC.

Relief claimed was only with respect to Bonafide transactions

The petitioners clarified that their grievance was confined to genuine transactions with their own suppliers. They did not claim entitlement to ITC where the transaction itself was found to be fictitious, where goods were not supplied, or where there was fraud or collusion between the supplier and the purchasing dealer. The objection was against the routine application of Section 16(2)(c) merely because the supplier failed to pay tax or because the registration of a predecessor dealer in the supply chain was subsequently cancelled retrospectively. The petitioners accepted that ITC could legitimately be denied where there was fraud, collusion, non-existent suppliers or absence of actual movement/supply of goods.

Statute itself provide mechanism for recovery from the supplier

It was submitted that the GST law itself contains mechanisms for recovering unpaid tax from the defaulting supplier. Specific reliance was placed on Section 75(12), under which tax reflected in GSTR-1 but not discharged through GSTR-3B can be recovered in accordance with law. Reliance was also placed on Rule 88C, under which a supplier can be required to explain or discharge the difference between the tax reported in GSTR-1 and GSTR-3B. Therefore, once the supplier's default is capable of being detected and recovered by the Department, the burden should not routinely be shifted to the purchasing dealer.

Reliance on Larsen & Toubro regarding statutory machinery

Reliance was placed on Commissioner, Central Excise and Customs v. Larsen & Toubro Ltd., 2016 (1) SCC 170. It was contended that a substantive taxing provision requires an effective statutory machinery and procedure for its implementation. In the absence of the machinery contemplated under the GST legislation, Section 16(2)(c) could not, according to the petitioners, be effectively enforced against the purchasing dealer.

Denial of ITC may result in double taxation

It was submitted that where the purchaser has already paid the tax component to the supplier and is subsequently required to reverse the ITC because the supplier failed to deposit the tax, the same transaction may effectively result in double taxation upon the purchasing dealer. This would, according to the petitioners, be contrary to the basic objective of the GST regime of eliminating cascading of taxes.

Department should proceed against the defaulting supplier

The petitioners contended that the primary liability to deposit tax collected from the purchaser rests upon the supplier. Reliance was also placed on Section 76, which imposes an obligation upon a person collecting tax to pay the amount to the Government. Therefore, the Department ought to proceed against the defaulting supplier for recovery of tax, interest and penalty instead of routinely requiring the bona fide purchaser to reverse ITC.

Brief Arguments by Respondent

ITC is a statutory benefit subject to strict conditions

The Revenue contended that entitlement to avail ITC is not an absolute or vested right but a statutory benefit, which can be availed only upon strict fulfilment of the conditions and restrictions prescribed under the Act of 2017. Section 16 expressly makes availment of ITC conditional upon actual payment of tax in respect of the supply to the Government and therefore the taxpayer does not have an indefeasible right to avail or retain ITC where the mandatory requirements of Section 16(2), particularly clause (c), remain unfulfilled. Reliance was placed upon the judgment of the Gujarat High Court in Maruti Enterprises affirmed by Bhandari Scrap Traders.

Genuine transaction cannot be presumed merely from invoices and banking channels

The Revenue submitted that investigations have revealed cases where transactions were not genuine despite being supported by invoices and banking channels. In some cases, payments shown to have been made to the supplier were routed through different bank accounts and amounts were immediately withdrawn in cash. Further, in many cases, where the supplier discharges its tax liability by utilising fraudulent or ineligible ITC, such payment cannot be treated as valid compliance with Section 16(2)(c), since the ITC utilised itself lacks legal admissibility. Therefore, the genuineness of the transaction has to be examined on the basis of the surrounding facts and material

Burden of proof lies upon the person claiming the ITC

The Revenue contended that once the Department forms a prima facie opinion regarding fraudulent availment or utilisation of ITC on the basis of objective material, the burden is placed upon the claimant by virtue of Section 155 of the Act of 2017 to establish his entitlement to the credit claimed.

Prima Facie satisfaction is sufficient before issuing a show cause notice

It was argued that proceedings under the GST Act are primarily civil in nature and the Department is not required to establish fraud beyond reasonable doubt before issuing a show cause notice. Only a prima facie satisfaction based upon objective material is necessary.

Cross-examination is not an invariable requirement

The Revenue contended that grant of cross-examination cannot be treated as an invariable requirement, particularly where the so-called proprietors are merely dummy persons and the actual operators remain behind the fraudulent entities. The Department is entitled to undertake investigation on the basis of the material available before it.

Amendment only restructures the already existing mechanism and does not ceate any new liability

The Revenue submitted that the petitioners' reliance upon the original provisions of Section 41 was misplaced. The original statutory framework contained a comprehensive mechanism under Section 42 dealing with matching, reversal and reclaim of ITC. Thus, the concept of reversal of inadmissible credit existed from the inception of the GST regime. Substitution of Section 41 w.e.f. 01.10.2022 and omission of Sections 42 and 43 merely rationalised and restructured the statutory mechanism without creating a new liability.
13. Section 17(5)(i) operates independently
It was submitted that the statutory bar contained in Section 17(5)(i) operates independently and does not conflict with the provisions relating to re-availment of ITC under Section 41 read with Rule 37A. While Rule 37A permits re-availment where the supplier subsequently discharges the tax liability, such benefit is unavailable in cases falling under Section 74, where the payment itself arises from proceedings founded upon fraud.

Disputed questions of fact should be examined by statutory authorities

For the petitioners invoking writ at the stage of the SCN, reliance was placed upon Aman Kumar Rathaur v. State of Punjab, wherein, relying upon State of Punjab v. M/s Shiv Enterprises wherein the Court held that interference under Article 226 against an SCN is ordinarily unwarranted. It was submitted that disputed questions of fact are required to be examined by the statutory authorities and the assessee must place the relevant material before the competent authority.

Section 16(2)(c) should not protect fraudulent transactions

Lastly, reliance was placed upon M/s Sahil Enterprises, wherein the Tripura High Court held that Section 16(2)(c) ought not to be interpreted so as to deny ITC in respect of bona fide transactions and that the provision should be read down and applied only where the transaction is found to be non-genuine, collusive or fraudulent and intended to defraud the Revenue. Thus, the Revenue's contention was that the factual genuineness of the transactions must first be examined before determining entitlement to ITC.
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Findings and Judgement

Section 16(2)(c) cannot be construed as a standalone provision and has to be read harmoniously with other provisions

The High Court held that Section 16(2)(c) was originally part of a larger statutory mechanism comprising Sections 37, 38, 39, 41, 42 and 43, which contemplated matching and verification of the details furnished by the supplier and the recipient. Since Sections 42 and 43 were never implemented and Section 42 was subsequently omitted, Section 16(2)(c) cannot be construed and applied in isolation from the statutory scheme. The Court observed that the provision has to be read harmoniously with the other provisions of the GST legislation and the machinery provided therein.

Applicability of the principle of lex non cogit ad impossibilia

The Court observed that where the statute does not provide the purchasing dealer with any mechanism to ascertain whether the tax collected by the supplier has actually been paid to the Government, the purchasing dealer cannot be expected to do something which is impossible for him to perform. In this context, reliance was placed on the principle of lex non cogit ad impossibilia.

Statutory machinery is essential for enforcement of a taxing provision

The Court placed its reliance on the decision in Commissioner, Central Excise and Customs v. Larsen & Toubro Ltd., 2016 (1) SCC 170, wherein the necessity of machinery provisions for implementation of a taxing provision was recognized. The Court further relied upon Bhawani Cotton Mills Ltd v. State of Punjab and another, 1967 SCC OnLine SC 39, where it was held that where the purchaser has no means or machinery to ascertain whether the vendor has paid the tax, the purchaser cannot simply be made liable for the same and be told to recover the amount from the vendor. Thus, Section 16(2)(c) has to be applied keeping in view the machinery and statutory mechanism available to enforce the obligation.

Section 76 provides a specific mechanism for recovery from the defaulting supplier

The Court held that if the supplier has collected tax from the purchaser but failed to deposit it with the Government, the statute itself provides a mechanism for recovery of such amount from the supplier under Section 76. Therefore, Section 76 cannot be rendered otiose by mechanically invoking Section 16(2)(c) against the purchasing dealer. Such an interpretation would result in the purchasing dealer bearing the tax burden despite having already paid the tax component to the supplier. The statutory intent will be frustrated in such an eventuality.

Statutory safeguards against supplier in default are already available

The Court noticed that the GST law contains several mechanisms to deal with default by the supplier, including restrictions on filing of returns, cancellation of registration under Section 29, restriction under Rule 138E, and recovery under Section 75(12) read with Rule 88C in cases of mismatch between GSTR-1 and GSTR-3B. The Court also considered Rule 37A, which provides a mechanism for re-availment of ITC where the supplier subsequently furnishes the relevant return and pays the tax. The Court observed that prior to Rule 37A there was no such mechanism for re-availment, and a purchasing dealer could otherwise be subjected to an additional burden for no fault of his own. Moreover, reversing ITC in most of the cases years after the transaction is bound to adversely impact smooth business transaction and would certainly not contribute to ease of doing business.

Mechanical invocation of Section 16(2)(c) is not permissible

The Court noted that in several cases Section 16(2)(c) had been invoked routinely and mechanically merely because the registration of the selling dealer had subsequently been cancelled, including with retrospective effect, or because the supplier had filed a return declaring nil or short tax liability. The Court held that subsequent cancellation of registration, including retrospective cancellation, nil or short payment of tax by the supplier, or an alert, intimation or complaint may be a starting point for inquiry, but by itself cannot be the basis for denial or reversal of ITC. The proper officer must examine the facts and circumstances of the particular transaction and record satisfaction after considering the material placed by the purchasing dealer.

Section 16(2)(c) is constitutionally valid

The real issue, according to the Court, is not the constitutional validity of Section 16(2)(c), but the manner in which the provision is invoked and applied. The provision cannot be read as authorising an automatic denial of ITC merely upon the default of the supplier. Though the constitutional validity of the Section is upheld by the Supreme Court in Bhandari Scrap Traders, the High Court held that upholding the validity of the provision, however, does not conclude the matter.

Section 74 requires foundational facts of fraud to be disclosed

The Court held that where Section 74 is invoked against a purchasing dealer, the foundational facts leading to the inference of fraud, wilful misstatement or suppression of facts on the part of the noticee must emanate from the SCN itself. A bald or mechanical recital of the expressions “fraud, wilful misstatement or suppression of facts” is not sufficient, and the deficiency cannot subsequently be supplied through a counter affidavit or explanation. The fraud of the selling dealer does not, by itself, become the fraud of the purchasing dealer, unless the notice discloses the facts connecting the purchasing dealer with such fraud. Reliance was placed on judgements of GR Infra and Tata Steel.

Burden of proof lies with the claimant

The Court observed that the burden under Section 155 lies upon the purchasing dealer. Such burden can be discharged by producing relevant material such as invoices, proof of receipt of goods or services, e-way bills, transportation receipts, weighbridge records, stock and consumption records and other supporting documents. At the same time, the proper officer is required to examine the material produced by the purchasing dealer and deal with the same in the order.

Direct link between the purchasing dealer and the alleged supplier default must be established

The Court held that investigation must establish a direct link of the recipient with the suppliers so as to establish violation of Section 16(2). Mere default on the part of the supplier cannot automatically be attributed to the purchasing dealer. The proper officer has to examine the genuineness of the transaction, the circumstances in which the supplier failed to discharge the tax and whether there is any material connecting the recipient with such default.

In view of the above, the Court issued certain guidelines which are to be followed before invocation of Section 16(2)(c). The same has been summarised as follows:
(i) Section 16(2)(c) shall not be invoked mechanically; supplier cancellation, nil/short tax payment or alerts may only trigger an inquiry and cannot, by themselves, justify denial of ITC.
(ii) Before issuing an SCN, the proper officer must examine the supplier, invoices, tax period, ITC amount, nature of default, reasons for non-payment and proceedings initiated against the supplier.
(iii) The investigation must establish a direct link between the purchasing dealer and the supplier's default.
(iv) The SCN must disclose the relevant particulars, material relied upon, suppliers involved and the manner of alleged wrongful availment, along with relied-upon documents.
(v) Where fraud, wilful misstatement or suppression is alleged, the SCN must contain the foundational facts; supplier's fraud cannot automatically be attributed to the purchasing dealer.
(vi) The purchasing dealer bears the burden under Section 155 and may establish eligibility through invoices, proof of receipt, e-way bills, transport records, weighbridge slips, stock and consumption records, etc., which must be duly considered.
(vii) In cases of retrospective cancellation of the supplier's registration, the officer must examine the reasons, effective date and their nexus with the particular supply.
(viii) Proceedings and recovery against the supplier must be considered to avoid double recovery, and credit/re-credit shall be allowed to the extent permissible under the statutory provisions.
(ix) The statutory framework applicable to the relevant tax period must be applied, and later amendments or mechanisms cannot be applied retrospectively; the absence of a re-availment mechanism before 26.12.2022 must also be considered.
(x) Registration of the purchasing dealer cannot be cancelled merely because the supplier's registration was subsequently cancelled, without independent satisfaction of Section 29(2).
(xi) Personal hearing must be granted, and a request for cross-examination of third-party statements must be considered and decided by a reasoned order.
(xii) The adjudication order must be a speaking order, dealing with the reply and documents and recording specific findings on each disputed condition of Section 16(2) and, where applicable, the fraud, wilful misstatement or suppression attributable to the noticee.
(xiii) Payment or reversal of an amount through DRC-03 or otherwise during investigation does not dispense with the requirement of a proper SCN containing the foundational facts.
(xiv) These guidelines shall apply to all proceedings pending before the proper officers as well as proceedings initiated thereafter.
The High Court did not examine the merits of each individual case and directed that the proceedings shall be continued in accordance with this judgement.

CA Pradeep Jain_

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GST update /2026-27/0094

GST UPDATE.

Brief Facts of the Case

Relevant Section

Question before Hon’ble Court

SECTION 16(2)(C) AS SEEN BY DIFFERENT COURTS

Brief Arguments by Petitioner

Brief Arguments by Respondent

Findings and Judgement

CA Pradeep Jain_

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