CGST |Tripura High Court Reads Down Section 16(2)(c), Shields Bona Fide Buyers From ITC Denial

The Tripura High Court has read down Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, holding that while Input Tax Credit can be claimed only if the tax charged by the supplier is paid to the Government, the provision cannot be applied to deny credit to a bona fide purchaser for the supplier's default.A Division Bench of Chief Justice M S Ramachandra Rao and Justice S Datta Purkayastha observed that while Parliament is competent to impose conditions on the availment of ITC, Section 16(2)(c), if applied without distinction, “places an onerous burden on a bona fide purchasing dealer.”While upholding the constitutionality of the provision, the court held that "Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue."The bench added that the buyer “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 from purchasing dealers, and avoid transacting with such selling dealers.” "In these circumstances, if the law seeks to visit disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution", it opined. Explaining the need to exempt bonafide purchasers, the court noted that "there is a failure by the Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is a need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers." The petitioner/purchaser in this case is a trader in rubber products. It bought goods from a registered supplier and paid GST along with the price. The supplier reported these sales in GSTR-1, the return used to show outward supplies. On paper, the transactions were in order and reflected in the system. The issue arose at the next stage. While filing GSTR-3B, the monthly return through which tax is actually paid to the government, the supplier declared nil liability. The GST collected from the petitioner was never deposited. The department then turned to the buyer. The Assistant Commissioner issued a show cause notice asking the petitioner to reverse over Rs 1.11 Crore of Input Tax Credit. That demand was later confirmed by an order. This was done even though it was not disputed that the petitioner had paid the tax to the supplier and the purchases were properly recorded in returns. Before the High Court, the petitioner challenged Section 16(2)(c) of the CGST Act. It said the provision punishes a buyer for the supplier's failure. It also said the law expects the buyer to do something impossible, to ensure that the supplier pays tax to the government. The petitioner argued that this leads to double taxation because the buyer ends up paying tax twice, once to the supplier and again by losing ITC. It also pointed out that the GST law gives buyers no way to check whether a supplier has actually paid the tax. The tax department defended the provision. It argued that ITC is a statutory benefit and cannot be claimed as an absolute right. Parliament, it argued, is free to attach conditions to it. The department also said courts should be slow to interfere in tax matters and that Section 16(2)(c) simply ensures that ITC is granted only when tax has reached the government. The High Court accepted the challenge in part. It held that Section 16(2)(c) is not unconstitutional and does not violate Articles 14 (equality before law), 19(1)(g) (freedom to carry on trade or business), 265 (no tax can be levied or collected except by authority of law) or 300-A (right to property) of the Constitution. But it also said the law makes no distinction between honest buyers and cases involving fraud or collusion. That, the Court said, is the real problem. The bench held that the provision must therefore be read down. It can be used where transactions are not genuine or are collusive. It cannot be used against a bona fide purchaser. On the facts, the court found nothing to suggest fraud or collusion. The transactions were genuine. The supplier alone was at fault. The order denying credit was set aside, and the department was directed to grant the petitioner Input Tax Credit of Rs 1,11,60,830. Case Title: Sahil Enterprises v. Union of India Citation: 2026 LLBiz HC (TRI) 1 Case Number: WP(C) No.688 of 2022 For Petitioner: Advocates Naveen Bindal, Mukul Singla, Prabal Kumar Ghosh For Respondent: Deputy S.G.I., Bidyut Majumder, Senior Advocate Bibhal Nandi Majumder...

CGST |Tripura High Court Reads Down Section 16(2)(c), Shields Bona Fide Buyers From ITC Denial

Mehak Dhiman

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