Shaurya Alloys Pvt. Ltd. v. State of Punjab & Anr.

Punjab & Haryana High Court   •   01 October 2026   •   CWP-34296-2024 (O&M) & 423 connected writ petitions
Case Summary
The Punjab & Haryana High Court upheld the constitutional validity of Section 16(2)(c) of the GST Act but held that ITC cannot be mechanically denied or reversed merely because the supplier failed to deposit tax or its registration was subsequently cancelled. The Court laid down 14 safeguards governing invocation of Section 16(2)(c).
Coram: Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor
Area of Law: GST / Taxation — Input Tax Credit, Section 16(2)(c), Supplier Default, ITC Reversal & Procedural Safeguards
Citation: CWP-34296-2024 (O&M) & 423 connected writ petitions
Date: 01 October 2026

Legal Issue

Whether Section 16(2)(c) of the GST Act, which makes availability of Input Tax Credit conditional upon actual payment of tax to the Government by the supplier, is constitutionally valid; and whether ITC can be denied to a purchasing dealer solely because of the supplier's tax default or retrospective cancellation of registration.

Brief Facts

A batch of 424 writ petitions was placed before the Punjab & Haryana High Court raising a common issue concerning denial or reversal of Input Tax Credit under Section 16(2)(c).

The purchasing dealers contended that although they had paid the consideration and GST to their suppliers and possessed the requisite invoices and transactional documents, ITC was being denied because suppliers had either failed to deposit tax with the Government, filed nil or short returns, or had their GST registrations subsequently or retrospectively cancelled.

The petitioners challenged Section 16(2)(c), read with Section 155, principally on the ground that it compelled purchasing dealers to perform an impossible obligation because they had no means of ensuring that the supplier actually deposited the tax collected from them.

The Revenue defended the provision on the ground that ITC is a statutory concession subject to fulfilment of prescribed conditions and relied upon instances involving alleged bogus transactions, circular trading and fraudulent availment of credit.

Held / Decision

The High Court upheld the constitutional validity of Section 16(2)(c) read with Section 155 and rejected the plea to read down the provision only to cases involving fraud, collusion or non-existent transactions.

However, the Court held that Section 16(2)(c) cannot be treated as a standalone provision so as to mechanically saddle the purchasing dealer with ITC reversal merely because the selling dealer failed to deposit tax.

Before denying ITC, the proper officer must examine the genuineness of the transaction, the nature and circumstances of the supplier's default, the material connecting the purchaser with the default or alleged fraud, and the statutory remedies available against the supplier. A reasonable opportunity of hearing must also be granted.

The Court accordingly framed 14 guidelines governing all pending and future proceedings under Section 16(2)(c).

Important Observations

The Court held that cancellation of the supplier's GST registration, filing of nil or short returns or receipt of an alert may justify commencement of an inquiry, but cannot by themselves justify denial or reversal of ITC.

Before issuing a show-cause notice, the officer must apply independent mind to the supplier, invoices, tax period, quantum of ITC, nature of default and recovery proceedings already initiated against the supplier. Investigation should establish a direct link between the purchaser and the alleged statutory violation.

Where fraud, wilful misstatement or suppression is alleged under Section 74 or Section 74A, the foundational facts must appear in the notice itself. Fraud of the supplier cannot automatically be attributed to the purchaser merely because the parties transacted with each other.

The burden under Section 155 remains upon the purchasing dealer, which may be discharged through documents such as tax invoices, e-way bills, transport receipts, weighbridge slips and stock or consumption records. Such material must be considered by the proper officer while passing the order.

The Court further directed that authorities must consider recovery proceedings against the defaulting supplier and ensure that the same tax is not recovered twice. The statutory framework applicable during the relevant tax period must be applied rather than later amendments retrospectively.

A purchasing dealer's registration also cannot be cancelled merely because the supplier's registration was cancelled. Personal hearing must ordinarily be afforded, and the final order must contain specific findings on the disputed conditions of Section 16(2).

Full Headnote

GST — Input Tax Credit — S.16(2)(c) r/w S.155 — Supplier's Tax Default: Constitutional validity upheld. Supplier's failure to deposit tax or retrospective cancellation of registration, by itself, cannot warrant mechanical denial or reversal of purchaser's ITC. Proper officer must examine transaction genuineness, supplier default, purchaser's nexus with alleged fraud and available recovery mechanism, after due hearing. Fourteen procedural safeguards prescribed for pending and future proceedings.

Legal Significance

The judgment provides a major procedural framework for GST authorities dealing with ITC disputes arising from supplier-side defaults.

While affirming that actual payment of tax to the Government remains a statutory condition for ITC, the Court prevented Section 16(2)(c) from being applied as an automatic recovery mechanism against bona fide purchasers.

The ruling requires authorities to conduct an evidence-based, transaction-specific inquiry before reversing ITC and reinforces principles of natural justice, disclosure of relied-upon material, reasoned adjudication and protection against double recovery.

For the 424 pending petitions, the Court directed authorities to reconsider the matters in accordance with the new guidelines, grant personal hearings and pass fresh reasoned orders. It further restrained fresh coercive recovery until such reconsideration, while preserving the Department's right to proceed against defaulting suppliers.

View Original Judgment
Disclaimer: This case summary and headnote are provided for informational and educational purposes. Readers should refer to the original judgment for the complete text and authoritative legal position.