Karnataka High Court Holds Bona Fide Purchaser Entitled To ITC, Reads Down Rules In Favor Of Instakart

The Karnataka High Court on 9 February 2026 held that a bona fide purchaser cannot be denied input tax credit (ITC) merely because the selling dealer failed to deposit tax with the government.

A Single-Judge Bench of Justice S.R. Krishna Kumar read down Section 16(2)(C) of the CGST / KGST Act and Rule 36(4) of the CGST / KGST Rules to set aside the order denying ITC to Instakart Services Private Limited. He held:

“The impugned provisions contained in Section 16(2)(C) of the CGST / KGST Act and Rule 36(4) of the CGST / KGST Rules are hereby read down in a manner that allows the benefit of ITC to bona fide recipients such as the petitioner, which has complied with all other conditions under Section 16(2) of the CGST / KGST Act despite any fault / lapse or non-payment of tax to the government by the suppliers.”

Instakart had challenged the denial of input tax credit on the ground that its suppliers had not deposited the tax collected from it. It argued that it had complied with all statutory requirements, including payment of tax to registered suppliers, and that it could not be expected to ensure whether those suppliers deposited the tax with the government.

The tax authorities had denied the credit by invoking provisions that effectively placed the burden on the purchaser to ensure tax compliance by the seller. Instakart contended that bona fide purchasers or recipients of goods and services cannot be penalised for the fault of suppliers, and ITC cannot be denied without verifying the genuineness of the recipient's transactions.

The Court examined precedents, including Delhi High Court and Supreme Court rulings. It relied particularly on the Tripura High Court's decision in M/s Sahil Enterprises Vs. Union of India (6.01.2026), which held that a purchasing dealer who acts in good faith and pays tax cannot be penalised for the selling dealer's failure. Justice Kumar noted:

“I am in respectful agreement with the view taken by the Division Bench of the Tripura High Court in the case of M/s Sahil Enterprises Vs. Union of India and others – W.P.(C) 688/2022 dated 06.01.2026 and I am of the considered opinion that the present petition also deserves to be disposed of in terms of the said judgment….”

The Bench clarified that denial of ITC is justified only in cases of fraud, collusion, or non-genuine transactions, and not where the purchaser has acted bona fide. It held that where tax has not been deposited, the department must proceed against the defaulting seller rather than penalising the purchaser.

Accordingly, the Court set aside the order denying credit and disposed of Instakart's petition in line with the Sahil Enterprises judgment.

For Petitioner: Senior Counsel, Tarun Gulati, with Advocate, Pradeep Nayak

For Respondent: CGC, Madanan Pillai, Advocate M. Unnikrishnan and AGA, Hema Kumar