M/s. Sahil Enterprises Versus Union Of India [WP (C) No. 688 Of 2022], Dated January 6, 2026

The Tripura High Court has held that Section 16(2)(c) of the GST Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction. It should be read down and applied only where the transaction is found to be not bona fide, or is a collusive transaction, or a fraudulent transaction to defraud the revenue.

BRIEF FACTS OF THE CASE

• The Petitioner has filed the writ petition before the Hon'ble High Court of Tripura challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act ('CGST Act') as being violative of Articles 14, 19(1)(g) and 300-A of the Constitution of India. The Petitioner also challenges the impugned order raising a demand of tax on the ground of alleged wrongful availment of input tax credit ('ITC').
• Section 16 deals with the eligibility conditions to avail ITC. Section 16(2)(c) allows availment of ITC to the purchaser only when the supplier had discharged the output liability through cash or by utilization of ITC. However, if the supplier has not paid the tax to the Government, the purchaser is not eligible to avail ITC. The relevant extract of the provision is reproduced below.
  
  "16. Eligibility and conditions for taking input tax credit— (2) Notwithstanding anything contained in this section, 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,
  
  (c) subject to the provisions of Section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply."

KEY OBSERVATIONS OF THE HON'BLE HIGH COURT

• The Hon'ble High Court has observed that Section 16(2)(c) of the CGST Act does not distinguish between bona fide purchasing-dealers who have complied with all statutory requirements and those who have failed to do so.
• A purchasing-dealer cannot be expected to foresee or control whether a selling-dealer will deposit the tax collected with the Government. The law requires the purchaser to ensure the seller pays the tax, which places an unreasonable and onerous burden on a bona fide purchasing-dealer.
• Although ITC is subject to conditions, those conditions must be reasonable and consistent with the purpose of GST, which is to avoid the cascading effect of taxation.
• The Court held that denying input tax credit to a bona fide purchaser on account of the selling dealer's default would lead to disproportionate consequences and render the provision vulnerable to challenge under Article 14 of the Constitution. A purchaser cannot be expected to perform the impossible, and denial of ITC in respect of genuine transactions would be arbitrary and unjust.
• It was held that Section 16(2)(c) of the Act is not violative of Art. 14, 19(1)(g) or 265 or 300-A of the Constitution of India, the Court read down the provision to clarify that denial of ITC would be permissible only in cases involving mala fide, collusive, or fraudulent transactions intended to defraud the revenue, and not where the purchasing-dealer has acted in good faith. The Court applied the doctrine of reading down, as laid down in B.R. Enterprises v. State of U.P. (1999) 9 SCC 700.

AURTUS COMMENTS

• Various High Courts have consistently held that bona fide purchasers cannot be denied Input Tax Credit (ITC) merely because the supplier has defaulted in payment of tax.
• In the case of Commissioner of Trade and Tax, Delhi vs. Shanti Kiran India (P) Ltd. [2025 (10) TMI 607 – SC], the Supreme Court upheld the Delhi High Court's finding that a purchaser who has paid tax in good faith is entitled to ITC (in the context of Delhi VAT law) even if the seller has not deposited the tax with the Government, subject to verification of invoices.
• The Tripura High Court also took note of the following rulings wherein the constitutionality of Section 16(2)(c) of the Act was upheld:
  • Kerala High Court in M. Trade Links v. Union of India, Nahasshukoor and another v. Assistant Commissioner [WP(C) NO. 31559 OF 2019]
  • Patna High Court in Aastha Enterprises v. State of Bihar [Civil Writ Jurisdiction Case No. 10395 of 2023]
  • Madhya Pradesh High Court in M/s Shree Krishna Chemicals v. Union of India [Writ Petition No. 5692 of 2025]
  • Madras High Court in M/s Baby Marine (Eastern) Exports v. Union of India and others [2025 (8) TMI 791(Madras)]
  • Andhra Pradesh High Court in Thirumalakonda Plywoods v. Assistant Commissioner [W.P.No.24235 of 2022]
• However, the Tripura High Court distinguished the above rulings on the ground that none of the above High Courts have looked at the practical impossibility for a purchaser to ensure that the seller pays the GST to the Government, particularly when he has no means of checking the said fact. Accordingly, the Tripura High Court held that the provision must, therefore, be read down and confined in its operation only to cases involving malafide, collusive, or fraudulent transactions intended to defraud the revenue.
• The Revenue has frequently sought to deny or recover input tax credit (ITC) from the buyer/recipient, particularly in cases where recovery from the supplier is unsuccessful or on the presumption that the supplier has failed to discharge the applicable tax liability for the relevant period without reaching out to the supplier in the first instance. Such an approach effectively shifts the supplier's default burden onto the buyer. This judgment provides substantial relief to bona fide buyers by reaffirming the legal position that ITC cannot be denied solely on account of the supplier's non-compliance, where the buyer has acted in good faith. The ruling is also expected to serve as a persuasive precedent for adjudication by various judicial and quasi-judicial forums in pending and future disputes of a similar nature. What becomes important in such cases is proper records and documentation to clearly establish that the transaction was bona fide.
• Various Judgements, including D.Y. Beathel Enterprises vs State Tax Officer, [2021 (3) TMI 1020 (Madras High Court)] and Arise India Ltd. vs Commissioner of Trade & Taxes, [2018 (1) TMI 555 (Delhi High Court)] have also held that, in the case of default by the supplier, the tax should first be recovered from the supplier, and not from the recipient. It is also pertinent to note that the GST law does not provide any mechanism for refund or conclusive closure in situations where GST is subsequently recovered from the supplier after a demand has already been raised on, or tax recovered from, the recipient in respect of the same transaction.

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