HC Reads Down Section 16(2)(aa): ITC Cannot Be Denied to Bona Fide Buyers for Supplier’s Lapse

M/s McLeod Russel India Ltd., a public limited company engaged in the production and supply of tea, filed a writ petition challenging the constitutional validity of Section 16(2)(aa) of the CGST and AGST Acts. The company argued that the provision unfairly links a purchaser’s eligibility to claim Input Tax Credit to the supplier’s filing of invoice details in GSTR-1 and their reflection in GSTR-2A/2B, an aspect entirely outside the purchaser’s control.

The petitioner contended that the denial of ITC despite paying GST to the supplier results in double taxation and contradicts the foundational GST principle of taxing only value addition. They also relied on various judicial precedents where bona fide purchasers were protected when suppliers defaulted in their statutory obligations.

Issue Raised: Whether Section 16(2)(aa) of the CGST/AGST Acts, tying ITC eligibility to the supplier’s GSTR-1 compliance, can validly restrict Input Tax Credit for bona fide purchasers.

HC Ruled: The Court acknowledged that Section 16(2)(aa) was introduced to curb fraudulent ITC claims and enhance systemic transparency, but emphasised that GST is fundamentally a tax on the buyer, with the seller serving only as a collecting agent. The Court held that such a restriction contradicts the core GST objective of eliminating cascading taxation and cannot be mechanically enforced to the detriment of honest taxpayers.

The Court read it down to protect genuine buyers. It ruled that ITC cannot be denied without allowing the purchaser to establish bona fides through tax invoices and supporting documentation, even if the supplier defaults in GSTR-1 filing. The judgment clarifies that this reading down will operate until the CBIC devises a workable mechanism that prevents bona fide ITC loss due to supplier-side non-compliance. Therefore, the writ petition was disposed of with these directions.

To Read Full Judgment, Download PDF Given Below