Facts of the Case:

In this case, the petitioner was denied input tax credit (ITC) by GST authorities on the ground that its suppliers had failed to deposit the tax collected from it with the Government. The denial was based on Section 16(2)(c) of the CGST/KGST Act read with Rule 36(4) of the CGST/KGST Rules, which effectively required that tax must actually be paid to the Government for the recipient to avail ITC.

The Petitioner contended that it had fulfilled all statutory conditions for availing ITC, including purchasing goods/services from registered suppliers, receiving the supplies, and making payment of consideration along with tax. It argued that it cannot be expected to ensure compliance by the supplier in depositing tax and that denial of ITC in such circumstances was arbitrary.

Issue:

Whether input tax credit can be denied to a bona fide purchaser under Section 16(2)(c) of the CGST/KGST Act merely because the supplier has failed to deposit the tax with the Government, and whether such provisions impose an unreasonable burden on the recipient.

Held That:

The High Court held that ITC cannot be denied to a bona fide purchaser who has complied with all conditions under Section 16(2) of the CGST Act, merely due to the default of the supplier in depositing tax.

The Court read down Section 16(2)(c) and Rule 36(4) to the extent that they would otherwise penalize genuine recipients for supplier defaults. It ruled that such provisions must be interpreted in a manner that protects bona fide taxpayers who have acted in good faith and undertaken genuine transactions.

The Court clarified that denial of ITC would be justified only in cases involving fraud, collusion, or where the transaction itself is not genuine. It further held that in cases of non-payment of tax, the department must proceed against the defaulting supplier and cannot shift the burden onto the purchaser. Reliance was placed on the decision of the Tripura High Court in M/s Sahil Enterprises v. Union of India (2026), with which the Court expressed agreement. Accordingly, the impugned order denying ITC was set aside and the petition was allowed.

The judgment provides significant relief to bona fide taxpayers by ensuring that ITC is not denied due to supplier non-compliance beyond the recipient’s control. It reinforces the principle that tax liability and compliance obligations cannot be unfairly shifted onto purchasers. The ruling also narrows the scope of Section 16(2)(c), emphasizing that it must be applied reasonably and in line with the objective of GST as a value-added tax system. Importantly, it draws a clear distinction between genuine transactions and fraudulent arrangements, safeguarding ITC entitlement in the former while preserving the department’s power to act against tax evasion.

Case Name: M/s. Instakart Services Private Limited Versus The Union of India, The Central Board of Indirect Taxes and Customs New Delhi, The Goods and Service Tax Council, The Principal Commissioner of Central Tax Bengaluru, The State of Karnataka. Dated 09.02.2026

To read the complete judgement 2026 Taxo.online 756