Tripura High Court Reads Down Section 16(2)(c) of CGST Act
Case Details
- Case Name: Sahil Enterprises vs. Union of India & Others
- Court: Tripura High Court
- Writ No.: WP(C) No. 688 of 2022
- Date of Judgment: 6 January 2026
- Coram: Hon’ble Chief Justice M.S. Ramachandra Rao
🔍 Background of the Case
- Sahil Enterprises, a bona-fide trader of rubber products, purchased goods from a registered supplier and paid GST to the supplier between July 2017 and January 2019.
- The supplier filed GSTR-1 (showing outward supplies) but filed NIL GSTR-3B, meaning GST collected was not deposited with the Government.
- Despite the buyer paying GST:
- The department blocked ITC in the buyer’s Electronic Credit Ledger.
- A demand of ₹1.11 crore was raised under Section 73 of the CGST Act.
- The buyer challenged:
- Constitutional validity of Section 16(2)(c), and
- Demand order denying ITC.
⚖️ Legal Issue Before the Court
Can Input Tax Credit (ITC) be denied to a bona-fide purchaser solely because the supplier failed to deposit GST with the Government?
📜 Relevant Statutory Provisions
🔹 Section 16(2)(c), CGST Act, 2017
ITC is available only if:
“the tax charged in respect of such supply has been actually paid to the Government…”
🔹 Section 73, CGST Act
Applies to non-fraud cases (no suppression, wilful misstatement, or collusion).
Important: Section 74 (fraud cases) was not invoked against the buyer.
🧠 Key Observations of the Tripura High Court
1️⃣ Purchaser Cannot Do the Impossible
- There is no mechanism for a buyer to verify whether:
- The supplier has filed GSTR-3B, or
- The supplier has deposited GST with the Government.
- A purchaser cannot control or monitor the supplier’s tax compliance.
Law cannot demand the impossible from a taxpayer.
2️⃣ Penalising Buyer for Supplier’s Default Is Arbitrary
- Buyer paid GST once to the supplier.
- Denial of ITC forces buyer to pay GST again, resulting in double taxation.
- This violates:
- Article 14 (Equality)
- Article 19(1)(g) (Right to Trade)
- Article 265 (No tax without authority of law)
- Article 300-A (Right to Property)
3️⃣ Section 16(2)(c) Places Onerous Burden on Honest Buyers
- The provision fails to distinguish between:
- Bona-fide purchasers, and
- Collusive or fraudulent transactions.
📚 Reliance on Strong Judicial Precedents
🔹 Delhi High Court – DVAT Era
- Quest Merchandising India Pvt. Ltd. v. GNCT of Delhi
- Held: ITC cannot be denied to bona-fide buyers for supplier’s default.
🔹 Supreme Court Approval
- Commissioner of Trade & Taxes v. Arise India Ltd.
- Commissioner of Trade & Taxes v. Shanti Kiran India Pvt. Ltd.
Supreme Court affirmed that ITC cannot be denied if transactions are genuine.
🔹 Gauhati High Court (GST Regime)
- National Plasto Moulding v. State of Assam
- McLeod Russel India Ltd. v. Union of India
Both judgments read down Section 16(2)(c) in favour of bona-fide buyers.
❌ Contrary Views by Other High Courts
Some High Courts upheld Section 16(2)(c) without reading it down, including:
- Kerala
- Patna
- Madhya Pradesh
- Madras
- Andhra Pradesh
Why Tripura HC Did Not Follow Them?
- These judgments did not consider:
- Delhi HC rulings
- Supreme Court affirmations
- Practical impossibility for buyers to ensure supplier compliance
✂️ Reading Down – What the Court Actually Did
The Court did not strike down Section 16(2)(c).
Instead, it read it down, meaning:
Section 16(2)(c) will apply ONLY in cases of:
- Fraud
- Collusion
- Sham / non-genuine transactions
👉 NOT to bona-fide purchasers who:
- Paid GST
- Received goods/services
- Transacted with registered suppliers
- Reflected invoices in GST returns
🏛️ Final Decision of the Court
✔️ Section 16(2)(c) is constitutional
✔️ Cannot be used to deny ITC in bona-fide transactions
✔️ ITC of ₹1.11 crore restored
✔️ Demand order set aside
📌 Key Takeaways for Taxpayers
- Genuine buyers are protected under the GST law.
- ITC cannot be denied mechanically.
- Department must proceed against defaulting suppliers, not honest purchasers.
- Section 73 invocation itself shows absence of fraud.
- This judgment strengthens taxpayer confidence in GST regime.