The writ petition before the High Court of Tripura challenged the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 and assailed the order dated 17.05.2022 passed by the Assistant Commissioner confirming a demand of ₹1,11,60,830 along with interest and penalty under Section 73 of the Act.

The petitioner, a proprietary concern engaged in trading of rubber products, had purchased goods from a registered supplier on payment of applicable GST and subsequently sold the goods in the ordinary course of business. The transactions were duly reflected in the supplier’s GSTR-1 returns; however, the supplier failed to deposit the tax collected with the Government and filed NIL GSTR-3B returns. On this basis, the department denied Input Tax Credit to the petitioner and blocked its electronic credit ledger, holding that the condition prescribed under Section 16(2)(c) of the Act had not been fulfilled.

The petitioner contended that it had paid the tax to the supplier, possessed valid tax invoices, received the goods, and complied with all statutory requirements. It was argued that there exists no mechanism under the GST law enabling a purchaser to verify whether the supplier has actually deposited the tax with the Government. Denial of ITC in such circumstances, it was submitted, amounts to penalising a bona fide purchaser for the default of another person and results in double taxation, violating Articles 14, 19(1)(g), 265, and 300-A of the Constitution of India.

The respondents defended the provision by asserting that Input Tax Credit is a statutory concession subject to conditions and restrictions, and that courts should exercise restraint in interfering with fiscal legislation. It was contended that unless tax is actually paid to the Government, ITC cannot be allowed to the recipient.

Upon examination, the Court noted that it is practically impossible for a purchasing dealer to ensure or verify whether the supplier has discharged its tax liability to the Government. The purchaser has no control over the supplier’s compliance and cannot be expected to anticipate future defaults. Imposing such an onerous burden on a bona fide purchasing dealer was held to be unreasonable and arbitrary.

The Court relied on the reasoning adopted by the Delhi High Court in Quest Merchandising India Pvt. Ltd., which was affirmed by the Supreme Court in Arise India Ltd. and later followed in Shanti Kiran India (P) Ltd. The principle emerging from these decisions is that denial of ITC should be restricted to cases involving collusion, fraud, or non-bona fide transactions, and that a purchaser cannot be asked to do the impossible by ensuring the supplier’s tax payment.

The Court also took note of the decisions of the Gauhati High Court in National Plasto Moulding v. State of Assam and McLeod Russel India Ltd. v. Union of India, which similarly read down Section 16(2)(c) of the CGST Act in favour of bona fide purchasing dealers. While acknowledging that some High Courts had upheld the provision without reading it down, the Court observed that those decisions did not adequately consider the practical impossibility faced by purchasers or the binding precedents of the Supreme Court.

The Court reiterated the fundamental principle that Input Tax Credit is designed to prevent cascading and double taxation under the GST regime. In the absence of an express statutory provision authorising double taxation, a purchaser who has already paid tax to the supplier cannot be compelled to bear the tax burden again by denial of ITC.

Accordingly, the High Court held that while Section 16(2)(c) of the CGST Act is constitutionally valid, it must be read down. The provision cannot be interpreted to deny ITC to a purchasing dealer who has entered into a bona fide transaction with a registered supplier and complied with all statutory requirements. Denial of ITC is permissible only where the transaction is found to be non-bona fide, collusive, or fraudulent with intent to defraud the revenue.

The impugned order dated 17.05.2022 was set aside, and the respondents were directed to forthwith allow Input Tax Credit of ₹1,11,60,830 to the petitioner. The writ petition was partly allowed with no order as to costs.

LINK TO DOWNLOAD THE ORDER
https://mytaxexpert.co.in/uploads/1768097625_SahilEnterprisesVSUnionofIndia.pdf