The Hon’ble Supreme Court’s dismissal of the SLP in #BhandariScrapTraders v. Union of India & Ors. has upheld the Hon’ble Gujarat HC’s judgment on Sec 16(2)(c) of the #CGSTAc.
But the significance of the decision goes beyond simply saying that #ITC becomes ineligible where the supplier has not paid the tax.
The Hon’ble Gujarat HC examined whether the reasoning adopted by the Hon’ble Delhi HC in On #QuestMerchandising could be applied to the #GSTregime.
In On Quest, the Hon’ble Delhi HC read down the DVAT provision due to the lack of an effective mechanism for genuine purchasers to verify supplier tax payment. The Hon’ble Tripura HC later extended similar reasoning to Sec 16(2)(c) of the CGST Act in Sahil Enterprises.
The Hon’ble Gujarat HC, however, found that the #GSTframework is structurally different.
Under #GST, Section 16(2)(c), Section 41(2) and Rule 37A provide for reversal of ITC where the supplier has not discharged the tax liability and subsequent re-availment once the supplier pays the tax.
The Court also considered the destination-based nature of GST and the inter-State transfer of tax through the #IGST mechanism. Allowing credit merely on an invoice, without the underlying tax reaching the Government, could affect the revenue of the state of actual place of supply.
The Court therefore held that Section 16(2)(c) could not be viewed in isolation.
It also examined the doctrine of reading down & held that it cannot be used merely because a statutory provision causes hardship. Reading down is warranted only where plain meaning creates a genuine constitutional infirmity. The wider GST framework already provides the necessary safeguards and corrective mechanisms.
The #Court further relied on settled principles that equitable considerations cannot override the express provisions of a taxing statute, and that ITC is a statutory concession subject to prescribed conditions, rather than an unconditional or vested right.
At the same time, the Court did acknowledge the genuine difficulties faced by bona fide purchasers.
It urged the #Government to consider measures for real-time verification of supplier tax payments & stronger recovery action against defaulting suppliers, so genuine purchasers are not disproportionately burdened by supplier defaults.
What does this mean for #businesses?
~ A valid invoice is important.
~ Payment to the supplier is important.
~ Receipt of the goods or services is important.
But none of these, by themselves, completes the #ITC story.
The supplier’s compliance can directly affect the recipient’s ITC position.
This makes supplier due diligence, regular GSTR-2B reconciliation, vendor monitoring & appropriate contractual safeguards increasingly important. The transaction may be between you and your supplier. But the ITC exposure can travel with your supplier too.
