Supreme Court Stays Tripura HC Ruling Allowing ITC To Buyer Despite Supplier's Failure To Deposit GST

Today, the Supreme Court issued notice in the Union of India's challenge to a Tripura High Court judgment which allowed a purchaser to claim Input Tax Credit (ITC) despite the supplier having failed to deposit the GST collected from the purchaser with the Government.

A Division Bench of Justices J.B. Pardiwala and K. Vinod Chandran also stayed the operation of the High Court's 6 January 2026 judgment.

The case concerns the interpretation of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, which requires, among other conditions for availing ITC, that the tax charged on the supply must have actually been paid to the Government.

Background

The dispute arose from transactions between Sahil Enterprises, a trader in rubber products, and its supplier. Sahil Enterprises purchased goods from the supplier and paid GST on the purchases, involving tax of around Rs. 1.11 crore. The supplier, however, allegedly failed to deposit the GST collected from Sahil Enterprises with the Government and filed 'Nil' GSTR-3B returns.

During an investigation into the supplier, the GST authorities found that the supplier had reported sales to Sahil Enterprises in its returns but had allegedly failed to deposit the corresponding tax with the Government. The authorities consequently held that Sahil Enterprises was not entitled to ITC on the tax paid to the supplier.

The authorities thereafter issued a demand-cum-show cause notice to Sahil Enterprises under Section 73 of the CGST Act, proposing reversal of ITC of Rs. 1,11,60,830 along with interest and penalty. The Assistant Commissioner confirmed the demand in May 2022.

Sahil Enterprises challenged the demand before the Tripura High Court and also questioned the constitutional validity of Section 16(2)(c). It contended that it was a bona fide purchaser, had actually paid the GST charged by the supplier and had no mechanism to ensure that the supplier subsequently deposited the tax with the Government.

The High Court found considerable force in the contention. It noted the practical difficulty for a purchaser in verifying whether the supplier had actually discharged its tax liability and observed that the purchaser ordinarily had no control over the supplier's subsequent conduct.

It upheld the constitutional validity of Section 16(2)(c), but read down the provision in cases involving bona fide transactions. It held that ITC should not be denied to a purchaser in a bona fide transaction merely because the selling dealer subsequently failed to deposit the tax with the Government. It held that ITC could be denied where the transaction itself was not bona fide or was collusive or fraudulent.

Accordingly, the High Court set aside the order against Sahil Enterprises and directed the authorities to allow ITC of Rs. 1,11,60,830 to the purchaser.

The Union of India challenged the judgment before the Supreme Court, questioning the High Court's interpretation of Section 16(2)(c). The Special Leave Petition raises, among other issues, the question of whether the statutory requirement that the tax charged on a supply must have actually been paid to the Government can be diluted while determining a purchaser's entitlement to ITC.

For Petitioner: Mr. N Venkatraman ASG., Mr. Gurmeet Singh Makker AOR

For Respondent: Mr. S. Ganesh, Sr. Advocate, Mr. Ajay Aggarwal, Adv, Mr. Naveen Bindal, Adv. 4. Mr. Mr. Mukul Singla, Adv, Mr. Aman Bansal, Adv, Mr. Adarsh Aggarwal, Adv, Mr. Aryan Bindal, Adv, Mr. Madhur Aggarwal, Adv, Mr. Vishnu Kant, AOR, Ms. Rajnandini, Mr. Sarthak Singh

For Impleader: Mr. Balbir Singh Sr. Adv, Mr. Naman Tandon AOR