Rajasthan High Court Upholds GST Department’s Power to Deny ITC for Insolvent Suppliers

Shree Karni Electrovision Ruling Reinforces Strict Compliance Under Section 16(2)(c)

CASE: M/s Shree Karni Electrovision vs. Union of India & Ors. (Rajasthan High Court)|

CITATION: 2026 Taxo.online 2587

1.   BACKGROUND

The Rajasthan High Court’s judgment in M/s Shree Karni Electrovision v. Union of India & Ors. (2026 Taxo.online 2587) reaffirms the mandatory nature of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), which conditions Input Tax Credit (ITC) eligibility on the actual deposit of tax by the supplier to the Government. The case underscores the burden on purchasers to verify supplier compliance and rejects arguments that insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) override GST statutory obligations.

The ruling aligns with a line of judicial precedents, including the Gujarat High Court’s decision in Maruti Enterprise (2026 Taxo.online 432), and serves as a warning to businesses relying on ITC without due diligence.

1.   FACTS OF THE CASE

M/s Shree Karni Electrovision (the petitioner) procured goods from a supplier who later became insolvent and failed to deposit the GST collected from the petitioner. The petitioner claimed ITC on the tax paid to the supplier, arguing that the supplier’s insolvency absolved it of responsibility under Section 16(2)(c). The GST department, however, denied the credit and issued an order under Section 74 of the CGST Act, demanding recovery of the wrongly availed ITC.

The petitioner challenged the order, contending that:

• Section 16(2)(c) is ultra vires as it imposes an impossible obligation on purchasers to verify supplier tax payments without a statutory mechanism.
• The IBC resolution plan extinguished the supplier’s tax liability, rendering the department’s demand
• The maxim lex non cogit ad impossibilia (the law does not compel the impossible) applied, as the petitioner had no means to ensure the supplier’s compliance post-insolvency.

The department countered that Section 16(2)(c) is a non-negotiable condition for ITC eligibility, and the burden of proof lies on the purchaser to establish compliance; that ITC wrongly availed is recoverable under the Act, and insolvency proceedings do not override GST statutory obligations; and that the petitioner failed to exercise due diligence in verifying the supplier’s tax compliance.

1.   ISSUES

1. Whether Section 16(2)(c) of the CGST Act is ultra vires for imposing an obligation on purchasers to verify supplier tax payments without a statutory mechanism.
2. Whether insolvency proceedings under the IBC extinguish the supplier’s tax liability, thereby entitling the purchaser to ITC.
3. Whether the department’s order under Section 74 denying ITC is valid in the absence of the supplier’s tax deposit.

2.   CONTENTIONS OF THE PARTIES

CONTENTIONS OF THE PETITIONER

Ultra Vires Argument

• Section 16(2)(c) violates constitutional principles by imposing an impossible obligation

— requiring purchasers to verify supplier tax payments without a statutory mechanism (e.g., a real-time portal for tracking tax deposits).

• Invoked the maxim lex non cogit ad impossibilia, contending that the law cannot compel compliance with an unworkable condition.

IBC Overrides GST

• Relied on the IBC resolution plan, which extinguished the supplier’s tax liability, to argue that the department’s demand was untenable.
• Contended that the IBC’s overriding effect (under Section 238) nullified the GST department’s claim.

Due Diligence

Claimed it had no means to verify the supplier’s tax compliance post-insolvency and that the department’s demand was arbitrary and punitive.

CONTENTIONS OF THE REVENUE

Section 16(2)(c) is Mandatory

• A clear, non-negotiable condition for ITC eligibility; the burden of proof lies on the purchaser to establish compliance, and Rule 37A reinforces this by requiring reversal of ITC if the supplier fails to deposit tax.

Insolvency Does Not Override GST

• IBC proceedings do not extinguish statutory tax obligations under the CGST Act; cited Section 41 of the CGST Act, which allows the department to recover unpaid tax from the supplier.
• The petitioner’s ITC claim was premised on a statutory assumption — that the supplier’s tax had been deposited — which was false in this

Due Diligence is Non-Negotiable

• Relied on the Gujarat High Court’s decision in Maruti Enterprise (2026 Taxo.online 432), which held that ITC operates on the statutory assumption that tax collected has been remitted, and is not available as a matter of right absent such deposit.

The petitioner failed to exercise due diligence in verifying the supplier’s compliance, rendering the ITC claim invalid.

1.   HELD

The Rajasthan High Court dismissed the writ petition and upheld the department’s order, holding as follows:

1.  Section 16(2)(c) is Constitutionally Valid

The Court ruled that Section 16(2)(c) is a clear, mandatory condition for ITC eligibility and does not suffer from constitutional infirmity. It rejected the petitioner’s argument that the provision imposes an impossible obligation, holding that purchasers must exercise due diligence in verifying supplier compliance. The Court noted that the absence of a statutory mechanism (e.g., a real-time portal) does not invalidate the provision, as purchasers can rely on GST returns, e-invoices, and other documentary evidence to establish compliance.

1.  IBC Does Not Override GST Statutory Obligations

The Court held that insolvency proceedings under the IBC do not extinguish statutory tax obligations under the CGST Act. It emphasized that the IBC’s overriding effect (Section 238) does not apply to tax laws, which operate independently. The Court observed that the department retains the right to recover unpaid tax from the supplier, and the petitioner’s ITC claim was premised on a false statutory assumption

— that the supplier’s tax had been deposited.

2.  Burden of Proof Lies on the Purchaser

The Court reiterated that the burden of proof lies on the purchaser to establish compliance with Section 16(2)(c). It held that the petitioner failed to discharge this burden, as it could not demonstrate that the supplier had deposited the tax.

THE COURT RELIED ON MARUTI ENTERPRISE

“The entitlement to input tax credit operates on the statutory assumption that the tax collected by the supplier has been duly remitted to the Government. Credit is reflected in the Electronic Credit Ledger maintained by the State only upon such payment. Consequently, unless the tax collected by the supplier is deposited with the Government, the purchasing dealer cannot claim ITC as a matter of right.”

1.  Department’s Order Under Section 74 is Valid

The Court upheld the department’s order under Section 74, which provides for the recovery of wrongly availed ITC. It held that the order was legally sound, as the petitioner had availed ITC without satisfying the conditions under Section 16(2)(c).

1.   EXTRACTS OF RELEVANT PROVISIONS

Section 16(2)(c) of the CGST Act, 2017

“No registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless the tax charged in respect of such supply has been actually paid to the Government.”

Section 41 of the CGST Act, 2017

STATUTORY TEXT

“Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his Electronic Credit Ledger.”

Rule 37A of the CGST Rules, 2017

STATUTORY TEXT

“Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.”

1.   PRECEDENT CASE LAW

The Court relied on the Gujarat High Court’s decision in Maruti Enterprise v. Union of India & Ors. (2026 Taxo.online 432), which held:

EXTRACT

“Even in a situation where the supplier fails to remit the tax collected from the purchasing dealer, the latter is not without recourse. The purchasing dealer may pursue appropriate remedies against the supplier, while the Government retains the authority to recover the unpaid tax from the defaulting supplier. The mere absence of a specific statutory mechanism enabling recovery by the purchasing dealer from the supplier cannot, by itself, render Section 16(2)(c) of the CGST Act ultra vires.”

1.   KEY TAKEAWAYS

Practical Implications:

• Strict Compliance with Section 16(2)(c): The judgment reinforces the mandatory nature of Section 16(2)(c), which conditions ITC eligibility on the actual deposit of tax by the supplier. Businesses must exercise due diligence in verifying supplier compliance, as failure to do so risks denial of ITC and recovery under Section 74.
• IBC Does Not Override GST Obligations: Insolvency proceedings under the IBC do not extinguish statutory tax obligations under the CGST Purchasers cannot rely on IBC resolution plans to claim ITC if the supplier has not deposited tax.
• Burden of Proof Lies on the Purchaser: The Court placed the burden of proof squarely on the purchaser to establish compliance with Section 16(2)(c). Businesses must maintain robust documentation (e.g., GST returns, e-invoices, payment proofs) to substantiate ITC claims.
• Risk of Recovery Under Section 74: The judgment validates the department’s power to recover wrongly availed ITC under Section 74, even where the supplier’s non-compliance is due to insolvency. Businesses must proactively reverse ITC under Rule 37A if the supplier fails to deposit tax.
• Due Diligence is Non-Negotiable: The ruling underscores the importance of due diligence in supplier selection and monitoring — regularly checking supplier GST returns (GSTR-1, GSTR-3B), obtaining confirmation of tax deposits, and reversing ITC if the supplier’s registration is canceled or tax is unpaid.
• Judicial Deference to Statutory Conditions: The Court deferred to the statutory text of Section 16(2)(c), rejecting arguments that the provision is unworkable or unconstitutional, limiting the scope for judicial intervention where purchasers fail to comply with GST conditions.

1.   CONCLUSION

The Shree Karni Electrovision judgment (2026 Taxo.online 2587) serves as a landmark ruling on the strict interpretation of Section 16(2)(c) and the limits of ITC eligibility. It warns businesses that ITC is not an absolute right but a conditional entitlement tied to supplier compliance. The ruling also clarifies the interplay between GST and IBC, holding that insolvency does not override statutory tax obligations.

Businesses must strengthen their compliance frameworks to avoid denial of ITC and recovery proceedings under Section 74. For tax professionals and GST practitioners, the judgment reinforces the need for proactive due diligence and documentary evidence to substantiate ITC claims.