The High Court of Punjab and Haryana at Chandigarh Bench has ruled that ITC denial cannot rest solely on supplier’s default or retrospective cancellation of registration, and proper officers must record satisfaction on foundational facts before invoking the provision of Section 16(2)(c) GST Act. The Court held that Section 16(2)(c) of the CGST Act, 2017 is constitutionally valid and does not warrant invalidation, since the requirement of actual payment of tax to the Government is intrinsic to the very foundation of ITC and falls within the wide legislative competence of Parliament in fiscal matters.
However, the provision cannot be treated as a standalone condition and must be construed in harmony with the integrated statutory scheme of which it forms part. The vice of arbitrariness does not inhere in the text of Section 16(2)(c) but arises when the provision is torn out of its statutory context and applied in a routine and mechanical manner, particularly where the registration of the selling dealer has been retrospectively cancelled without examining the genuineness of the transaction, added the Court.
The Court accordingly laid down 14 guidelines governing the invocation of Section 16(2)(c) by proper officers, directed that pending show cause notices and orders be decided afresh in the light of these guidelines, and clarified that nothing in the judgment shall preclude the Department from proceeding against the defaulting selling dealers in accordance with law.
The Division Bench comprising the Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor undertook a detailed examination of the statutory scheme of the GST Act, 2017, tracing its evolution through three distinct phases. The Court noted that the original GST framework, as enacted in 2017, contained an elaborate architecture of matching, verification, reversal and reclaim of ITC under Sections 37, 38, 39, 41 and 42 read with the relevant CGST Rules, which was intended to enable the purchasing dealer to verify, in a time-bound manner, whether the selling dealer had discharged the corresponding tax liability.
However, this scheme was never fully implemented due to technical glitches, and the Government introduced the temporary Form GSTR-3B in place of the originally contemplated GSTR-2 and GSTR-3 returns. Eventually, vide the Finance Act 2022, Sections 42 and 43 were omitted w.e.f. 1 October 2022, Section 41 was substituted to provide for final availment of ITC on a self-assessment basis, and Rule 37A was inserted w.e.f. 26 December 2022 to provide for reversal and re-availment of ITC where the supplier subsequently files the return, added the Court.
The Court surveyed the divergent judicial pronouncements, noting that the Delhi High Court in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi [2017 SCC OnLine Del 11286], the Gauhati High Court in National Plasto Moulding v. State of Assam [SCC Online Gau 1596], the Tripura High Court in Sahil Enterprises v. Union of India [2026 SCC OnLine Tri 4], and the Karnataka High Court in M/s Instakart Services Private Limited v. Union of India [2026 SCC OnLine Kar 2469] had read down Section 16(2)(c) to protect bona fide purchasing dealers. On the other hand, the Gujarat High Court in Maruti Enterprises v. Union of India had upheld the constitutional validity of Section 16(2)(c), and its view was affirmed by the Supreme Court in Bhandari Scrap Traders v. Union of India [2026 SCC OnLine SC 1570].
The Court also took note of Section 76 of the Act, which casts an absolute liability on the person who has collected tax to deposit it with the Government, and of Section 75(12), which empowers the Department to recover unpaid self-assessed tax without assessment upon a mismatch between GSTR-1 and GSTR-3B.
Briefly, a batch of petitions was taken up together by the High Court of Punjab and Haryana at Chandigarh, reserved on 21 August 2026, raising a common and substantial question of law on the scope and interpretation of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The petitioners are purchasing dealers who had paid tax to their suppliers along with the value of goods, but whose Input Tax Credit (ITC) was sought to be denied or reversed solely on the ground that the selling dealer had not deposited the tax so collected with the Government.
The petitioners challenged the vires of Section 16(2)(c) as being violative of Articles 14, 19(1)(g), 21, 265 and 300A of the Constitution, contending that the provision asks them to perform an impossible act, since they have no statutory means to verify whether the supplier has deposited the tax collected from them. In the alternative, the petitioners sought a reading down of the provision so that the liability of the purchasing dealer is confined only to cases involving fraud, collusion, non-existent suppliers or paper transactions without actual movement of goods.
Most of the petitions related to the period prior to the introduction of Rule 37A of the CGST Rules, when no mechanism existed for re-availment of ITC once reversed.
