Important Update – Supreme Court Decision of 24 July 2026
Update as of August 2026: The legal position concerning Input Tax Credit (ITC) where a supplier fails to deposit GST has materially developed after the original publication of this article.
In Sahil Enterprises v. Union of India, the Tripura High Court, in its judgment dated 6 January 2026, held that Section 16(2)(c) of the CGST Act should not be applied to deny ITC to a bona-fide purchaser merely because the supplier failed to deposit the tax with the Government. The Court accordingly granted relief to the purchaser in that case.
However, subsequently, in Bhandari Scrap Traders v. Union of India & Ors., by order dated 24 July 2026, the Supreme Court affirmed the Gujarat High Court’s approach that Section 16(2)(c) is constitutionally valid and is not required to be read down. The Supreme Court also specifically noted the differing approach adopted by the Tripura High Court in Sahil Enterprises.
Accordingly, the Sahil Enterprises judgment discussed below should be read in light of this subsequent Supreme Court development. A bona-fide purchaser should not assume that payment of GST to the supplier, by itself, guarantees entitlement to ITC where the statutory conditions governing the credit are not fulfilled.
This article is retained as an analysis of the important Sahil Enterprises judgment and its place in the evolving jurisprudence surrounding Section 16(2)(c) of the CGST Act.
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
🏛️ What the Tripura High Court Held
✔️ 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 After the Supreme Court Update
The Sahil Enterprises judgment remains important for understanding the judicial debate surrounding Section 16(2)(c) of the CGST Act. However, taxpayers should distinguish between what the Tripura High Court held in January 2026 and the subsequent legal development before the Supreme Court.
The practical position may be summarised as follows:
- The Tripura High Court granted relief to the bona-fide purchaser in Sahil Enterprises and read down Section 16(2)(c) in the circumstances considered by it.
- The subsequent Supreme Court decision in Bhandari Scrap Traders did not accept that Section 16(2)(c) was required to be read down merely to protect a bona-fide purchaser.
- Therefore, buyers should not rely solely on the argument that they paid GST to the supplier and were unaware of the supplier’s subsequent default.
- Businesses should maintain strong documentary evidence of genuine supplies, reconcile ITC with GSTR-2B, monitor vendor compliance and respond carefully to any ITC-related notice.
- Where ITC is ultimately denied because of supplier default, contractual remedies and recovery from the supplier may also need to be examined.
For a detailed discussion of the current position, practical safeguards and recovery options, read our updated guide: ITC Denied Due to Supplier Default: Can the Buyer Recover the Loss?
Disclaimer
This publication is intended solely for informational and educational purposes and does not constitute professional, legal, tax, or financial advice. While reasonable care has been taken to ensure the accuracy and relevance of the information at the time of publication, tax laws, rules, notifications, circulars and judicial interpretations may change over time. The views and opinions expressed herein reflect the author’s understanding at the time of publication and are subject to change without notice.
Readers are strongly advised to seek independent professional advice before making any decision or taking any action based on the information contained in this publication. The author and publisher expressly disclaim any responsibility or liability for any loss, damage, or consequence arising directly or indirectly from reliance on this content or from any action taken or not taken based on it.