Litigation Tracker: CGST Section 16(2)(c) Input Tax Credit Denial

🤖 AI Summary & Direct Legal Ratio:
The Supreme Court of India definitively settled the litigation surrounding Section 16(2)(c) of the CGST Act in Bhandari Scrap Traders v. Union of India (July 2026). The apex court upheld the provision's constitutional validity, ruling that an Input Tax Credit (ITC) claim is completely contingent upon the supplier actually depositing the tax with the government. Arguments relying on VAT-era jurisprudence (Arise India) to spare bona fide purchasers from ITC denial were firmly rejected.

Executive Overview: The Impossible Burden on Purchasers

Section 16(2)(c) has been one of the most heavily litigated provisions under the GST regime. Taxpayers consistently argued that it places an impossible burden (lex non cogit ad impossibilia) on genuine purchasers to ensure their vendors' compliance.

While early judgments from the Madras and Calcutta High Courts favored taxpayers by imposing the burden of recovery primarily on the defaulting supplier, subsequent rulings from the Kerala, Madhya Pradesh, and Gujarat High Courts strictly interpreted the statute in favor of the Revenue. The July 2026 Supreme Court decision conclusively ended the debate.

🏛️ Judicial Scorecard: Section 16(2)(c) High Court & Supreme Court Rulings

⚖️ Impact of the Supreme Court Ruling

The Supreme Court’s 2026 judgment in Bhandari Scrap Traders conclusively rejected the argument that Section 16(2)(c) should only apply to fraudulent transactions. By upholding the provision, the Court firmly anchored ITC as a statutory benefit contingent upon the actual tax reaching the exchequer.

Rule 37A: The Statutory Safety Valve

With the legal burden resting solely on the recipient, the primary statutory recourse is Rule 37A of the CGST Rules. It provides a mechanism for taxpayers to reverse the availed credit when the supplier defaults in filing GSTR-3B by the specified date, while explicitly preserving the right to re-avail the ITC once the supplier eventually deposits the tax.

🛡️ Action Plan for Businesses

Given the strict interpretation upheld by the Supreme Court, businesses must implement stringent commercial safeguards:

1. Payment Withholding: Withhold the GST component of vendor payments until the tax is accurately reflected in GSTR-2B and corresponding tax filings are confirmed.
2. Strict Indemnity Clauses: Integrate robust indemnity clauses in vendor contracts to automatically recover lost ITC and associated interest/penalties from defaulting suppliers.
3. Vendor Due Diligence: Periodically evaluate vendor compliance ratings and transition procurement towards highly compliant suppliers.
4. Rule 37A Tracking: Maintain a separate ledger for ITC reversed under Rule 37A to ensure timely re-availment the moment the supplier rectifies their default.

For specialized GST litigation and audit defense, consult the ITRnGST Legal Team.