Section 16(2)(c) Upheld: Supreme Court Dismisses SLP — No ITC to Buyer Unless Supplier Pays the Tax
By CA Chandrasekhar Kutty, Founding Partner, Sashthi Taxlegal Advisory Services LLP
Bhandari Scrap Traders vs. Union of India & Ors. — SLP(C) No. 23931/2026 with SLP(C) Nos. 24088 & 24103/2026, Order dated 24-07-2026
A Significant Development
One of the most fiercely contested questions under GST has witnessed a significant development. On 24th July 2026, the Hon’ble Supreme Court (Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva) dismissed the Special Leave Petitions filed against the judgment of the Gujarat High Court dated 01-05-2026 in SCA No. 749/2025, and in
doing so, affirmed the constitutional validity of Section 16(2)(c) of the CGST Act, 2017.
While the dismissal of an SLP — even by a speaking order — may not amount to a final and conclusive adjudication of the issue by the Supreme Court in the manner a judgment in a regular civil appeal would, the significance of this order cannot be understated. The Court has not merely declined to interfere; it has recorded its reasons and expressed complete agreement with the Gujarat High Court.
In simple terms, the position of law now stands settled: a buyer cannot claim Input Tax Credit unless the tax charged on the supply has actually been paid to the Government by the supplier. The buyer may have a valid tax invoice, may have received the goods, and may have paid the full amount including GST to the supplier — yet if the supplier defaults in depositing the tax, the credit in the hands of the buyer is not available.
Importantly, this is not a dismissal in limine. The Supreme Court has passed a reasoned, speaking order expressing “complete and respectful agreement” with the views of the Gujarat High Court. Following the law laid down in Kunhayammed vs. State of Kerala, while the doctrine of merger does not apply to the dismissal of an SLP, where the Supreme Court records reasons while dismissing, the declaration of law contained therein is binding under
Article 141. The order will therefore carry considerable persuasive and precedential weight before all High Courts, Tribunals and adjudicating authorities.
Background: The Challenge to Section 16(2)(c)
Section 16(2)(c) of the CGST Act makes payment of tax by the supplier to the Government a condition precedent for availment of ITC by the recipient. Ever since the inception of GST, this provision has been under attack on the ground that it punishes an honest buyer for the fault of the supplier — a person over whom the buyer has no control.
The challengers drew heavily from the jurisprudence developed under the erstwhile VAT regime, particularly the Delhi High Court’s celebrated ruling in the context of Section 9(2)(g) of the Delhi VAT Act, where the provision was read down to protect bona fide purchasing dealers. The argument was simple: if a bona fide buyer could not be penalised for the seller’s default under VAT, the same protection must flow under GST.
The Gujarat High Court, in the impugned judgment, undertook a detailed comparative analysis of the two enactments and rejected this parity argument. The matter was then carried to the Supreme Court.
What the Supreme Court Held
Three findings from the order deserve careful attention.
First — No parity between Delhi VAT and CGST. The Supreme Court approved the Gujarat High Court’s detailed analysis (from paragraph 42 onwards of the impugned judgment) of the differences between the Delhi VAT Act, 2004 and the CGST Act, 2017, together with the scheme of availing ITC under GST as set out in paragraph 56. The Court held that these differences “clearly demonstrate that there is no possibility of drawing parity” between the two enactments. The purchasing dealer under the CGST Act cannot be treated on par with a purported bona fide purchasing dealer under the Delhi VAT Act when the supplier fails to pay tax. This effectively closes the door on the entire line of argument built on the VAT-era
precedents.
Second — The Tripura High Court route offers no refuge. The petitioners pointed out that an SLP had already been entertained against the Tripura High Court’s decision in Sahil Enterprises vs. Union of India [(2026) 154 GSTR 108 (Tri.)]. The Supreme Court noted that the Tripura High Court had not undertaken the comparative exercise which the Gujarat High Court carried out. The pendency of that SLP was therefore held to be no ground to keep the
present challenge alive.
Third — The re-availment mechanism answers the hardship argument. The Court specifically noted the Gujarat High Court’s reference to Section 41 read with Sections 73 and 74 of the CGST Act, under which the purchasing dealer is entitled to re-avail the reversed ITC once the supplier is made to discharge the tax liability. This statutory
safety valve, in the Court’s view, adequately balances the equities. The buyer’s remedy is not to challenge the condition, but to ensure recovery is pursued against the defaulting supplier — upon which the credit stands restored.
On this reasoning, the Court held that the Gujarat High Court was “fully justified” in declining to declare Section 16(2)(c) unconstitutional or to read down the provision, and dismissed the SLPs.
Implications for Taxpayers and Pending Litigation
The consequences of this ruling are far-reaching.
Constitutional challenges stand substantially weakened. While the issue may still receive fuller consideration — the SLP against the Tripura High Court’s decision in Sahil Enterprises remains pending — writ petitions before various High Courts assailing the vires of Section 16(2)(c) now face a formidable hurdle in the form of this reasoned order.
Taxpayers relying on such challenges to keep demands in abeyance must re-strategise without delay.
The battleground shifts from vires to facts. With the provision upheld, the defence in supplier-default cases must now be built on the factual matrix — genuineness of the transaction, receipt of goods or services, payment through banking channels, compliance with the other limbs of Section 16(2), and the benefit of Circular No. 183/15/2022-GST and Circular No. 193/05/2023-GST for mismatch cases of the early years.
Recovery from the supplier must be pressed. The Supreme Court’s endorsement of the re-availment mechanism gives taxpayers a judicially recognised right: where ITC has been reversed on account of the supplier’s non-payment, the department should first be pressed to recover the tax from the defaulting supplier under Sections 73/74, and upon such recovery, the recipient is entitled to re-avail the credit. Taxpayers should place this order on record in adjudication and appellate proceedings to secure this right.
Vendor management becomes a compliance function. For businesses, the message is unambiguous — vendor due diligence, continuous monitoring of GSTR-2B, tracking supplier filing behaviour, and contractual indemnity clauses with GST protection are no longer optional good practices. They are now the only real shield against a liability the Constitution will not relieve.
Concluding Thoughts
The Supreme Court has spoken, and the ambiguity of nearly nine years stands resolved. Section 16(2)(c) is constitutionally valid, and the condition of tax payment by the supplier is here to stay. While one may debate the fairness of visiting the supplier’s default upon the buyer, the judicial answer is that the statute itself provides the cure — recovery from the supplier and restoration of credit to the buyer. For taxpayers and professionals alike, the focus must now shift from challenging the law to working within it: robust vendor compliance on the one hand, and vigorous pursuit of the reavailment remedy on the other.
The author is a Chartered Accountant with over 25 years of practice, specialising in indirect taxation and GST litigation. Views expressed are personal. This article is for general information and does not constitute professional advice.
Sashthi Taxlegal Advisory Services LLP | GST Litigation • Advisory • Appellate
Representation | Hosur • Bengaluru