Introduction
The Hon’ble High Court of Punjab and Haryana decided, in the case of Shaurya Alloys Pvt. Ltd. v. State of Punjab and another, CWP-34296-2024 (O&M), and other related cases, on 01.10.2026, that although Section 16(2)(c) of the Central Goods and Service Tax Act, 2017 (“the Act”) is constitutionally valid, it should not be invoked indiscriminately against the purchasing dealer for the fault of the selling dealer.
Facts of the Matter
The Hon’ble Punjab and Haryana High Court had to deal with a set of 424 writ petitions filed by the purchasing dealers (hereinafter called “the Petitioners”) against Government of India, Government of Punjab, Government of Haryana and Union Territory of Chandigarh along with their GST authorities (hereinafter called “the Respondents”). The Petitioners had availed Input Tax Credit (“ITC”) in respect of their purchases as per the Central Goods and Services Tax Act, 2017 (“the Act”). The Respondents issued show cause notices and orders denying or reversing the ITC under Section 16(2)(c) of the Act. The reason for denial and or reversal of ITC was the non-compliance of the sellers to the government exchequer. The Court has found that there are instances of the provision being applied mechanically, purely due to the registration of the selling dealer being cancelled retrospectively without any investigation. A lot of notices have been issued under Section 74 of the Act.
The petitioners maintained that they had paid taxes to their supplier, received proper tax invoices, and secured the goods. However, they had no way of knowing what happened with the tax money with respect to the Government. The petitioners, therefore, challenged the legality of Section 16(2)(c) on the principle of lex non cogit ad impossibilia and violation of Articles 14, 19(1)(g), 21, 265 and 300 A of the Indian constitution, and sought reading down of the provision. The High Court observed that it would consider only statutory provisions and would not look into the particulars of the individual cases.
The Act at first planned a process of matching and verifying between the seller and the purchaser through GSTR Forms 1, 2A, 2 and 3, and Section 42 gave way to matching, reversal and reclaiming of ITC. However, this system never came into effect because of technological issues, and the Department resorted to the temporary return in form of GSTR-3B. Since 01.10.2022, Sections 42 and 43 have been removed and Section 41 has also seen replacement, while Rule 37A of Central Goods and Services Act, 2017 (which will be referred henceforth as “CGST Rules”) has been incorporated since 26.12.2022, which speaks about ITC reversal and reclaiming of the same by the recipient once supplier files the return. Most of the cases pertain to the time before rule 37A.
Various High Courts have taken varied positions regarding this subject. The Delhi High Court decided to side with genuine consumers considering VAT. Other High Courts such as Tripura, Gauhati and Karnataka have read down this provision related to GST to protect genuine buyers. Gujarat High Court, however did not go in this direction and preferred not to read down this provision, a decision which was later affirmed by the Supreme Court. The issue then came up before the Division Bench of Punjab and Haryana High Court.
Issues Before the High Court
- Whether Section 16(2)(c), read with Section 155, is ultra vires Articles 14, 19(1)(g), 21, 265 and 300A of the Constitution, or ought to be read down?
- If valid, in what manner and subject to what safeguards may it be invoked against a purchasing dealer?
Contentions of the Parties
According to Petitioners, the provision contradicts the column of lex non cogit ad impossibilia, which describes absent possibility of the verification by the purchaser of the payment of the tax made by the seller. They said that the original scheme of matching and reconciling based on Sections 37, 38, 42, 43 of the Act was not realized, but Section 41 was amended on 01.10.2022 and before appearance of Rule 37A, there was no way to claim the reversal of credit. Citing Gheru Lal Bal Chand and On Quest Merchandising (Delhi High Court) as examples, the Petitioners requested that the operation of the provision be limited to fraudulent and collusive transactions only and transactions made with sellers who are non-existent at the market.
As per the Revenue, ITC is legal entitlement and cannot be claimed under the provisions of Section 16(2) unless certain conditions are met. It stated that the investigation revealed that there were dubious dealings, roundabout banking routes, immediate cash withdrawals, and payment of output tax by the suppliers merely through ineligible ITC. Further, reliance was placed on the provisions of Section 155 which lays down the burden of proof on the claimant and the judgment of the Maruti Enterprises v. Union of India (Gujarat High Court), which was upheld by the Supreme Court in Bhandari Scrap Traders.
Decision and Findings
According to the Court, it is the tax paid to the government exchequer that forms the very basis of ITC, which is a statutory benefit. Such an argument failed simply because the actual complaint relates not so much to the provisions themselves but to their application. The principle of judicial discipline also prohibits the reading down of the provisions.
However, Section 16(2)(c) cannot operate as a standalone provision. It must be construed harmoniously with Sections 41, 73, 74, 75(12), 76, 79 and 155 and Rules 36, 37A and 88C of the Central Goods and Services Tax Rules, 2017. Indiscriminate invocation would render Section 76 otiose and burden a purchaser who has already paid tax. The Court accordingly issued the following guidelines:
- Although cancellation of seller registration or submission of nil return may warrant an inquiry, it will not suffice in itself to deny input tax credit.
- The proper officer is required to record the satisfaction with respect to the seller, invoices, nature of default and proceedings against the seller, and establish the connection between the purchaser and the supplier.
- Notice needs to contain the evidence. The notice must contain the evidence in accordance with G.R. Infra Projects and Tata Steel under Section 74, and the frauds of the seller cannot be made attributable to buyer without such evidence.
- The officer should evaluate the status of legal proceedings against the seller according to Sections 73, 74 and 76, prevent any dual recovery and allow for re-claiming of credit to the extent provided by Rule 37A.
- The purchaser is liable for burden under Section 155. This liability can be discharged via invoices, e-way bills, payment receipts, weighbridge slips and stock records.
- The statutory framework peculiar to the concerned period has to be enforced namely, prior to 01.10.2022, since 01.10.2022 and since 26.12.2022 (Rule 37A). Other amendments are not retroactive.
- The cancellation of the seller’s registration does not automatically lead to the cancellation of the purchaser’s registration. A personal hearing and a well-reasoned order explaining the decision concerning each disputed issue are required.
The court disposed of the petitions by allowing replies to be filed within 8 weeks, passing fresh reasoned orders in those cases where adjudication already took place, and holding the amounts deposited subject to adjustment or refund along with interest. There will be no coercive recovery in the meantime, and all disputes remain open while the proceedings against the errant sellers remain unaffected. The court praised the introduction of technologies for real-time verification, as well as the ideas of the GST Council with regard to its policies.
AMLEGALS Remarks
By establishing a fair and equitable equilibrium between revenue protection and fairness to genuine buyers, the ruling prevents automatic disapproval of ITC and urges the Department to engage in investigation, disclosure, and justification.
Still, this does not relieve genuine buyers from their burden. They must provide documentary evidence of delivery of goods and payment, and exercise caution in dealing with their suppliers. Taxpayers should also consider the different stages of law, as there is no scope of re-availment before 26.12.2022.
For any queries or feedback, feel free to connect with Dhwani.tandon@amlegals.com