Facts of the Case:

In this case, the petitioner engaged in the trading of rubber products, purchased goods from a registered supplier during the period July 2017 to January 2019 after paying GST amounting to ₹1,11,60,830/-. The supplier duly reflected the outward supplies in its GSTR-1 returns but failed to deposit the tax collected from the petitioner with the Government and filed ‘Nil’ GSTR-3B returns.

On investigation, the Department proceeded against the supplier and simultaneously denied the petitioner the benefit of Input Tax Credit (ITC) on the ground that the tax had not been actually paid to the Government, invoking Section 16(2)(c) of the CGST Act, 2017.

The petitioner’s electronic credit ledger was blocked, and a show cause notice under Section 73 was issued, culminating in an order dated 17.05.2022 confirming demand of tax, interest, and penalty. Aggrieved, the petitioner challenged both the constitutional validity of Section 16(2)(c) and the adjudication order, contending that it was a bona fide purchaser and could not be penalised for the supplier’s default.

Issue:

Whether Section 16(2)(c) of the CGST Act, 2017, which conditions availment of ITC on actual payment of tax to the Government by the supplier, is unconstitutional; and if not, whether ITC can be denied to a bona fide purchasing dealer solely because the supplier failed to remit the tax, despite there being no allegation of collusion, fraud, or non-genuine transactions.

Held that:

The Court upheld the constitutional validity of Section 16(2)(c) of the CGST Act, holding that it is not violative of Articles 14, 19(1)(g), 265, or 300-A of the Constitution.

However, applying the doctrine of “reading down” and relying extensively on the jurisprudence laid down by the Delhi High Court in Quest Merchandising India Pvt. Ltd. and Shanti Kiran India (P) Ltd., as affirmed by the Supreme Court in Arise India Ltd. and subsequent cases, the Court held that Section 16(2)(c) cannot be interpreted to deny ITC to a bona fide purchaser.

The Court observed that a purchasing dealer has no mechanism or control to ensure that the supplier deposits the tax collected with the Government, and imposing such an obligation would require the purchaser to do the impossible, leading to arbitrary and disproportionate consequences. Since the Department itself invoked Section 73 (and not Section 74), and there was no allegation of fraud, collusion, or non-genuine transactions against the petitioner, the transaction was held to be bona fide.

Consequently, the impugned order dated 17.05.2022 was set aside, and the respondents were directed to allow ITC of ₹1,11,60,830/- to the petitioner.

The ruling reinforces that ITC, though statutory, is designed to prevent double taxation and cannot be denied merely due to a supplier’s default where transactions are genuine and duly documented.

Case Name: M/s. Sahil Enterprises Versus Union of India, through its Secretary, Government of India, Ministry of Finance, Department of Revenue, New Delhi., Commissioner, Central Goods & Services Tax, Tripura Assistant Commissioner, Tripura M/s. Sentu Dey, Represented by its Proprietor Sri Sentu Dey, Bairagi Bazar, Jumerdhepha. dated 06.01.2026

To read the complete judgement 2026 Taxo.online 11