Facts of the case:

A batch of taxpayers challenged the constitutional validity of Section 16(2)(c) of the CGST Act, 2017 before the Gujarat High Court. The petitioners contended that the provision unfairly penalizes bona fide purchasers by making Input Tax Credit (ITC) contingent upon actual payment of tax by the supplier to the Government. According to them, a purchasing dealer has no control over the supplier’s compliance and therefore should not be denied ITC merely because the supplier defaults in remitting tax. The petitioners argued that Section 16(2)(c) was arbitrary and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution. Alternatively, they sought a reading down of the provision so that it would apply only in cases involving fraud, collusion, or connivance between the purchaser and supplier.

The Gujarat High Court rejected the challenge and upheld the provision. Aggrieved taxpayers thereafter approached the Supreme Court through Special Leave Petitions.

Issue:

Whether Section 16(2)(c) of the CGST Act, which makes availment of Input Tax Credit conditional upon actual payment of tax by the supplier to the Government, is unconstitutional or liable to be read down to protect bona fide purchasers from denial of ITC due to supplier default.

Held That:

The Supreme Court dismissed the Special Leave Petitions and affirmed the Gujarat High Court’s judgment. The Court held that the High Court was fully justified in concluding that no grounds existed either to strike down Section 16(2)(c) or to read down its operation.

Endorsing the detailed analysis undertaken by the Gujarat High Court, the Supreme Court observed that the GST framework fundamentally differs from the earlier VAT regime and therefore VAT-era protections available to bona fide purchasing dealers cannot automatically be imported into the GST system. The Court accepted the High Court’s reasoning that ITC is not a constitutional or vested right but a statutory concession subject to conditions prescribed by the legislature.

It further noted that the GST law contains safeguards under Sections 41, 73 and 74, enabling reversal and subsequent re-availment of ITC once the supplier discharges the tax liability.

Accordingly, the Supreme Court upheld the constitutional validity of Section 16(2)(c) and rejected the plea to dilute the statutory condition requiring actual payment of tax by the supplier.

Case name: Bhandari Scrap Traders v. Union of India & Ors. dated 24.07.2026