Facts of the Case:

The petitioner, a partnership firm engaged in the business of rubber across various parts of India including the State of Tripura, was duly registered under the CGST Act, 2017 and the Tripura SGST. For its manufacturing operations, the petitioner purchased input materials from respondent during the period 08.03.2018 to 30.11.2018. According to the petitioner, the purchases were made in the ordinary course of business, the goods were utilized for manufacturing finished products, and the taxes were duly paid to the supplier. Based on these transactions, the petitioner claimed Input Tax Credit (ITC).

Subsequently, the department issued a show cause notice under Section 73(1) alleging that for the period August 2017 to July 2019, tax had either not been paid or was short-paid or that ITC had been wrongly availed. The petitioner submitted a reply asserting that the transactions were genuine and that the supplier had collected tax on the supplies. However, the adjudicating authority passed an order holding that the petitioner had wrongly availed ITC and directed recovery of the said amount. Aggrieved by the order, the petitioner filed the present writ petition challenging the denial of ITC.

Issue:

Whether Input Tax Credit can be denied to a purchasing dealer under Section 16(2)(c) of the CGST Act solely because the supplier failed to deposit the tax with the Government, even though the transaction between the parties was bona fide.

Held that:

The Court noted that the show cause notice and the adjudication order did not contain any finding that the transaction between the petitioner and the supplier was fraudulent, collusive, or not bona fide. The proceedings had been initiated under Section 73, which applies to cases other than fraud, wilful misstatement, or suppression of facts. If the department believed that the transaction was fraudulent, the proper provision would have been Section 74.

The Court relied on its earlier decision in Sahil Enterprises v. Union of India, where the validity and interpretation of Section 16(2)(c) were examined. In that judgment, the Court held that the provision must be read down to avoid constitutional infirmity under Article 14 of the Constitution. It observed that a purchasing dealer who has acted bona fide and taken all reasonable precautions cannot be expected to ensure that the supplier deposits the tax collected from him with the Government.

Applying the same principle, the Court held that the petitioner had entered into genuine business transactions, and there was no finding that the transactions were sham or intended to defraud the revenue. Therefore, denial of ITC merely because the supplier failed to deposit tax would be unjustified.

Case Name: Malaya Rub-Tech Industries v. Union of India dated 10.02.2026

To read the complete judgement 2026 Taxo.online 364