High Court Reads Down Section 16(2)(c) CGST Act; Bona Fide Purchasers Cannot Be Denied ITC

The petitioner, M/s Sahil Enterprises, purchased rubber products from M/s Sentu Dey during July 2017-January 2019 and paid GST of Rs. 1.11 crore to the supplier. Although the supplier disclosed the outward supplies in GSTR-1, it failed to deposit the tax and filed NIL GSTR-3B returns.

The GST authorities blocked the petitioner’s electronic credit ledger and passed an order under Section 73 confirming the reversal of ITC with interest and penalty. The petitioner challenged both the demand and the constitutional validity of Section 16(2)(c) of the CGST Act.

Main Issue: Whether ITC can be denied to a bona fide purchaser who has paid GST to the supplier, solely because the supplier failed to deposit the tax with the Government.

HC’s Order: The Tripura High Court partly allowed the petition. While upholding the constitutional validity of Section 16(2)(c), the Court held that the provision must be read down and cannot be applied to deny ITC to bona fide purchasers. It observed that a buyer has no mechanism to verify whether the supplier has deposited GST and denial of ITC in such cases would lead to double taxation and arbitrariness.

Relying on Quest Merchandising and Shanti Kiran India, the Court held that Section 16(2)(c) can be invoked only in cases involving fraud or collusion. Therefore, the demand order was set aside, and ITC of Rs. 1.11 crore was directed to be allowed.

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