Issue No. January/2026/01

SAHIL ENTERPRISES VS. UNION OF INDIA & ORS. WP(C) 688 OF 2022 (Tripura High Court)

Petitioner brought goods from the registered supplier and paid GST along with price. The supplier reported these sales in GSTR-1, the return used to show outward supplies. On paper the transactions were in order and reflected the same. The issue arose at the next stage, while filing GSTR-3B, the monthly return through which the tax is actually paid to the government, the supplier declared NIL liability. The GST collected from the petitioner was never deposited. The Department thereafter turned to the buyer & Issued Show Cause Notice asking the Petitioner to reverse over Rs. 1.11 Crore of the Input Tax Credit. That demand was later confirmed by an order. This was done even though it wasn’t disputed that the petitioner had paid the tax to the supplier and the purchases were properly recorded in the returns.

The Petitioner herein challenged Section 16(2)(c) of the CGST Act. It said that the provision punishes a buyer for the supplier’s failure. It also says that the law expects the buyer to do something impossible, to ensure that the supplier pays tax to the government. The petitioner argued that this leads to double taxation because the buyer ends up paying tax twice, once to the supplier and again by losing ITC. It also pointed out that the GST law gives buyers no way to check whether a supplier has actually paid the tax. Whereas, the Department herein defending the provision argued that ITC is a statutory benefit and cannot be claimed as an absolute right.  Further it argued that department is free to attach conditions to it. The department also said courts should be slow to interfere in tax matters and that Section 16(2)(c) simply ensures that ITC is granted only when tax has reached the government.

The Hon’ble High Court held that while Input Tax Credit can be claimed only if the tax charged by the supplier is paid to the Government, the provision cannot be applied to deny credit to a bona fide purchaser for the supplier’s default. The Hon’ble High Court further observed that while Parliament is competent to impose conditions on the availment of ITC, Section 16(2)(c), if applied without distinction, “places an onerous burden on a bona fide purchasing dealer.” While upholding the constitutionality of the provision, the court held that “Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue.” The bench added that the buyer “cannot be asked to do the impossible, i.e., to identify a selling dealer who will not deposit with the Government, the tax collected by him from purchasing dealers, and avoid transacting with such selling dealers.” “In these circumstances, if the law seeks to visit disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution”, it opined. Explaining the need to exempt bonafide purchasers, the court noted that “there is a failure by the Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is a need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.” Further the Hon’ble Court found nothing to suggest fraud or collusion. The transactions were genuine. The supplier alone was at fault. The order denying credit was set aside, and the department was directed to grant the petitioner Input Tax Credit of Rs 1,11,60,830.