M/S INSTAKART SERVICES PRIVATE LIMITED vs. THE UNION OF INDIA

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
R

TH
DATED THIS THE 9 DAY OF FEBRUARY, 2026

BEFORE

THE HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR

WRIT PETITION NO.4917 OF 2021 (T-RES)

BETWEEN:

M/S INSTAKART SERVICES PRIVATE LIMITED
A COMPANY INCORPORATED UNDER THE PROVISIONS
OF THE COMPANIES ACT, 2013
HAVING ITS REGISTERED OFFICE AT
BUILDINGS ALYSSA, BEGONIA & CLOVER EMBASSY
TECH VILLAGE
OUTER RING ROAD,
DEVARABEESANAHALLY VILLAGE
VARTHUR HOBLI
BENGALURU – 560 103
THROUGH ITS AUTHORISED
REPRESENTIVE
MR SIMHADRI C N
…PETITIONER











(BY SRI. TARUN GULATI, SENIOR COUNSEL FOR
SRI PRADEEP NAYAK., ADVOCATE)

AND:

1. THE UNION OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
GOVERNMENT OF INDIA
CENTRAL SECRETARIAT,
NORTH BLOCK, NEW DELHI-110001
REPRESENTED BY THE SECRETARY

2.
THE CENTRAL BOARD OF INDIRECT
TAXES AND CUSTOMS
NORTH BLOCK, NEW DELHI - 110 001
THROUGH ITS CHAIRMAN
Digitally
signed by
CHANDANA
B M
Location:
High Court of
Karnataka




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3.
THE GOODS AND SERVICE TAX COUNCIL
OFFICE OF THE GST COUNCIL
SECRETARIAT
TH
5 FLOOR, TOWER II
JEEVAN BHARTI BUILDING
JANPATH ROAD, CONNAUGHT PLACE
DELHI – 110 001

4.
THE PRINCIPAL COMMISSIONER OF CENTRAL TAX
BENGALURU EAST
C R BUILDING, QUEENS ROAD,
BENGALURU – 560 001.

5. THE STATE OF KARNATAKA
FINANCE DEPARTMENT
255, VIDHAN SOUDHA
BENGALURU – 560 001
THROUGH THE
ADDITIONAL CHIEF SECRETARY
…RESPONDENTS
(BY SRI. MADANAN PILLAI, CGC FOR R1;
SRI. M.UNNIKRISHNAN, ADVOCATE FOR R2, R3 & R4;
SRI. HEMA KUMAR, AGA FOR R5)

THIS WP IS FILED UNDER ARTICLE 226 OF THE
CONSTITUTION OF INDIA PRAYING TO DECLARE SECTION 16(2) (c)
OF THE CENTRAL GOODS AND SERVICES TAX ACT, 2017 AND THE
KARNATAKA GOODS AND SERVICES TAX ACT, 2017 ANNEXURE-A
AS NULL AND VOID AND HOLD IT TO BE UNCONSTITUTIONAL
BEING VIOLATIVE OF ARTICLES 14 AND 19(1)(g), ARTICLE 265 AND
ARTICLE 300A OF THE CONSTITUTION OF INDIA AND STRIKE
DOWN THE SAME, ETC.,
THIS PETITION, COMING ON FOR FURTHER HEARING , THIS
DAY, ORDER WAS MADE THEREIN AS UNDER:


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CORAM: HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR

ORAL ORDER

In this petition, petitioner seeks the following reliefs:


“ (a) Issue a Writ, order or directions in the nature of
declaration or any other writ, order or direction of like nature
to declare Section 16 (2) (c) of the Central Goods and
Services Tax Act, 2017 and the Karnataka Goods and
Services Tax Act, 2017 [Annexure A] as null and void and
hold it to be unconstitutional being violative of Articles 14 and
19 (1) (g), Article 265 and Article 300A of the Constitution of
India and strike down the same;

(b) Alternatively, issue a Writ of mandamus, or a Writ
in the nature of mandamus, or any other appropriate Writ,
Order or directions, reading down Section 16(2) (c) of the
Central Goods and Services Tax Act, 2017 and the
Karnataka Goods and Services Tax Act, 2017 in such a
manner which allows the benefit of ITC to bona fide
recipients such as the Petitioner which has complied with all
the other conditions under Section 16 (2) of the Central
Goods and Services Tax Act, 2017 and the Karnataka
Goods and Services Tax Act, 2017 despite any fault/lapse or
non-payment of tax to the Government by the suppliers;

(c) Issue a Writ, order or directions in the nature of
declaration or certiorari or any other writ, order or direction of
like nature to declare Rule 36 (4) of the Central Goods and
Services Tax Rules, 2017 and Karnataka Goods and Service
Tax Rules, 2017 [Annexure B] as null and void and hold it to


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be ultra vires the Central Goods and Services Tax Act, 2017
and Karnataka Goods and Services Tax Act, 2017 as also
declaring the same as unconstitutional being violative of
Articles 14 and 19 (1) (g), Article 265 and Article 300A of the
Constitution of India and strike down/quash the same;

(d) Issue a Writ of mandamus, or a Writ in the nature
of mandamus, or any other appropriate Writ, Order or
directions, directing the Respondents not to proceed against
the Petitioner in terms of the Impugned Provisions;

(e) issue a Writ of mandamus or any other appropriate
writ, order or direction restraining the Respondents, their
subordinates, servants and agents from in any manner
whatsoever raising demands or from taking coercive action
for enforcing the Impugned Provisions against the Petitioner;

(f) for such further and other reliefs, as this Hon'ble
Court may deem fit and proper in the nature and
circumstances of the case.”

2. The petitioner is a private limited company
incorporated under the Companies Act, 1956, and is registered
under GST Enactments in the State of Karnataka. The petitioner is
engaged interalia in the business of providing logistic services to
various sellers, who undertake sale transactions through online
market place of M/s.Flipkart Internet Private Limited and the logistic


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services providing by the petitioner including packaging freight
delivery and end-to-end logistic support to customers including
warehousing services to store the goods which are sold by the said
sellers to their respective customers. The petitioner has also
obtained registration under CGST Act and SGST / UTGST Acts of
respective states and Union territories, in which it operates and
while the petitioner operates in various states and Union Territory
across India, the Registered office of the petitioner and its principal
place of business in the State of Karnataka is at Bangalore.

3. The petitioner has filed the present petition challenging
the Constitutional validity of Section 16(2)(c) of the CGST / KGST
Act and Rule 36 (4) of the CGST / KGST Rules on various grounds
/ contentions including interalia contending that the impugned
provisions cast an impossible burden on the recipients of the Input-
Tax Credit (ITC) viz., to ensure payment of tax by the suppliers and
ensuring timely filing of the returns by the supplier which is clearly
beyond the control of the petitioner and similarly placed recipients.
It is also contended that the impugned provisions are in
contraventions of the very scheme of the Act, since they seek to
shift the entire onus on the recipients of the goods or services or


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both including the obligation which is cast on the suppliers, thereby
rendering the impugned provisions as manifestly arbitrary and
falling foul of Articles 14, 19(1)(g), 265 and 300A of the Constitution
of India. Alternatively, petitioner has prayed for reading down of
the aforesaid impugned provisions of the CGST / KGST Act in such
a manner that allows the benefit of ITC to bonafide recipients such
as, the petitioner which has complied with all other conditions
under Section 16(2) of the CGST / KGST Act despite any fault /
lapse or non-payment of tax to the Government by the suppliers. It
was therefore contended that the petition deserves to be disposed
of accordingly.

4. Heard learned Senior Counsel for the petitioner and
learned counsel for the respondents as well as learned AGA and
perused the material on record.

5. In addition to reiterating the various contentions urged
in the petition and rejoinder / reply filed by the petitioner and the
material on record, learned Senior Counsel for the petitioner
submits that the impugned provisions are manifestly arbitrary,
ultravires and unconstitutional falling foul of Articles 14, 19(1)(g),
265 and 300A of the Constitution of India. It was submitted that


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bonafide purchasers / recipients of goods and services such as the
petitioner cannot be penalized for fault of suppliers / vendors and
ITC cannot be denied merely because of the fault of the supplier
without verifying the genuineness of the transactions of the
recipients. It was also submitted that it was impermissible in law to
compel a person to do the impossible and such impossible
conditions need not be complied with or followed by the petitioner
since the said unforeseen circumstances were beyond the control
of the petitioner and similarly placed assessees. It was further
submitted that genuine tax credit payable / available in favour of
the petitioner and similarly / identically situated persons was a
vested right and indefeasible right and the same cannot be taken
away due to the lapses / faults of the supplier.
5.1 Learned Senior Counsel would alternatively submit that
various High Courts have read down the impugned provisions in
such a manner that allows the benefit of ITC to bonafide recipients
such as, the petitioner which has complied with all other conditions
under Section 16(2) of the CGST / KGST Act despite any fault /
lapse or non-payment of tax to the government by the suppliers
and as such, the present petition deserves to be allowed and


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disposed of in favour of the petitioner. In support of his
submissions, learned Senior Counsel would rely upon the following
judgments:
1. Commissioner Trade and Tax Delhi vs. Shanti
Kiran India (P) Ltd., (2025) 25 Centax 222 (SC)
2. National Plasto Moulding vs. State of Assam,
(2024) 21 Centax 182(Gau)
3. On Quest merchandising India Pvt.Ltd. vs. UoI,
2018 (10) GSTL 182 (Del)
4. CTE vs. Arise India Ltd., 2022 (60) GSTL 215 (SC)
5. Jain Steels & Alloys Mfrs. vs. CCT, 2019 SCC
OnLine Kar 3943
6. Onyx Designs vs. Asst. Commr. Of C.T., (2019 67
GSTR 209
7. State of Karnataka vs. Rajesh Jain, 2016-VIL-701
KAR
8. Mukand Ltd. Vs. State of Karnataka , 2018-VIL-82-
KAR
9. On Quest Merchandising India Pvt.Ltd., vs.
UoI,2018 (10) GSTL 182 (Del)
10. CTE vs. Arise India Ltd, 2022 (60) GSTL 215 (SC)
11. Gheru Lal Bal Chand vs. State of Haryana, [2013]
29 Taxmann.com 484 [P&H]
12. M/s. Tarapore & Co. vs. State of Jharkhan, 2029
SCC OnLine Jhar 1918
13. Chunni Lal Parshadi Lal vs. Commissioner of
Sales Tax, UP (1986) 2 (SCC) 501


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14. Govindan & Co vs. The Sate of Tamil Nadu, (1975)
35 STC 50 (Mad.)
15. Sri vinayaga Agencies vs. Asst. Commr. (CT),
2013 SCC OnLine Mad 323
16. Bharat Steels vs. Commercial Tax Officer, 2015
SCC OnLine Mad 9136
17. Infiniti Wholesale Ltd. V. Assistant Commissioner,
(2015) 82 VST 457
18. Assistant Commissioner vs. Infiniti Wholesale
Ltd., [2017] 99 VST 341 (Mad)
19. Bharat Steel v.Commercial Tax Officer, 2015 SCC
OnLine Mad 9136
20. Infiniti Wholesale Ltd. V. Assistant Commissioner,
(2015) 82 VST 457
21. Assistant Commissioner vs. Infiniti Wholesale
Ltd., [2017] 99VST 341 (Mad)
22. Commissioner of Central Excise, Jalandhar v.
Mahajan Steel and Allied Industries, 2009 SCC
OnLine P&H 6941
23. Shree Yarns vs. Assistant Commissioner, 2017
SCC OnLine Mad 5730
24. Lawrance Livingston vs. Commercial Tax Officer,
2019 SCC OnLine Mad 10993
25. R.S.Infra Trasmission Ltd., v. State of Rajasthan,
2018 SCC OnLine Raj 3587
26. The State of Madras vs. Radio and Electricals Ltd.,
and Anr, 1966 SCC OnLine SC 132
27. Commissioner of Central Excise, Jalandhar vs.
M/s. Kay Kay Industries, 2013 (295) ELT 117


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28. Indsur Global Ltd vs. UOI, 2014 (310) ELT 833
(Guj)
29. Computer Consultants vs. Assistant
Commissioner (CT), Hosur (South) Assessment
Circle Ors., WP 305 TO 208 OF 2016
30. D.Y.Beathel Enterprises vs. State Tax Officer (Data
Cell) 2022 (58) G.S.T.L. 269 (Mad)
31. Sanchitha Kundu 7 Anr vs. The Assistant
Commissioner of State Tax, Bureau of
Investigation, south Bengal Ors. 2022 (63) GSTL
413 (Cal.)
32. LGW Industries vs. Union of India, (2023) 4 Centax
373 (Cal.)
33. Asst. Commr. State Tax vs. Suncraft Energy Pvt
Ltd., (2023) 13 Centax 189 (S.C.)
34. Balaji Exim vs. Commissioner of CGST, (2023) 5
Centax 41 (Del.)
35. Hanuman Industrial Corporation vs. Govt of NCT
of Delhi, (2024) 22 Centax 18 (Del.)
36. R.N. Garg and Sons vs Union of India, (2024) 21
Centax 453 (Del.)
37. APN Sales and Marketing vs. Union of India,
(2024) 22 Centax 218 (Del.)
38. Bright Star Plastic Industries vs. Additional
Commissioner of Sales Tax (Appeal),2022 (57)
GSTL 226 (Ori)
39. National Plasto Moulding vs. State of Assam,
(2024) 21 Centax 182 (Gau)


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40. Indian Seamless Steel and Alloys Ltd. Vs. Union of
India, 2003 (156) ELT 945 (Bom)
41. Hico Enterprises v. CC, 2005 (189) E.L.T.135 (T-LB)
42. CC.V.Hico Enteprises 2008 (228) E.L.T 161 (S.C)
43. SKH Sheet Metal Component vs. UOI 2020 (38)
G.S.T.L 592 (Del.)
44. CCE, Pune vs. Dai Ichi Karkaria Ltd., 1999 (112)
ELT 353 (SC)
45. Shabnam Petrofils Pvt.Lts. vs. Union of India 2019
(29) G.S.T.L.225(Guj)
46. Jayam and Co. vs. Assistant Commissioner and
Anr. 2016 (15) SCC 125
47. Union of India vs. Adfert Technologies Pvt.Ltd.,
(2020) 115 taxmann.com 29 (SC)
48. Adfert Technologies Pvt.Ltd., vs. UOI, 2020 (32)
GSTL 726 (P&H)
49. Eicher Motors Ltd vs. UOI, 1999(106) ELT 3
50. R.L.Enterprises vs. Commissioner State Goods
and Services Tax Delhi (2024) 23 Centax 237 (Del.)
51. Himalaya Communication Pvt.Ltd., vs. Union of
India (2025) 31 Centax 329 (H.P)
52. CCE, East Singhabhum vs. Tata Motors Ltd., 2013
(294) ELT 394 (Jhar)
53. Commr of C.Ex.Cus. & ST vs. Juhi Alloys Ltd.,
2014 (302) ELT 487 (All)
54. Best Corp Science Pvt.Ltd., vs. Principal
Commissioner CGST Commissionerate, (2024) 22
Centax 531 (DeL)


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55. Commissioner Trade and Tax, New Delhi vs.
Shanti Kiran (P) Ltd., (2025) 35 Centax 222 (S.C.)
56. R.T.Infotech vs. Additional Commissioner, Grade
2 (2025) 31 Centax 204 (All)
57. Lokenath Construction Pvt.Ltd., vs. Tax/ Revenue
Government of West Bengal, (2024) 18 Centax 97
(Cal)
58. Siddharth Enterprises vs. Nodal Officer, 2019 929)
GSTL 664
59. Kunj Behari Lal Butail vs. State of H.P.(2000) 3 scc
40
60. Global Energy Pvt.Ltd., vs. Central electricity
Regulatory Commissioner, (2009) 15 SCC 570
61. Petroleum and Natural Gas Regulatory Board vs.
Indraprastha Gas Limited, (2015) 9 SCC 570
62. Bimal Chadnra Banerjee vs. State of M.P., 1970(2)
SCC 467
63. UoI vs. Intercontinental Consultants and
Technocrafts Pvt.Ltd., (2018) 4 SCC 669
64. Indian Express Newspaper (Bombay) Pvt.Ltd., vs.
UoI, (1985) 1 SCC 641
65. Babaji Kondaji Garad vs. Nasik Merchants Co-
operative Bank Ltd., (1984) 2 SCC 50
66. Gupta modern Breweries vs. State of J&K, (2007) 6
SCC 317
67. Cellular Operators Association of India vs. T.R.A.I,
2016(7) SCC 703
68. Deputy Commissioner of Income Tax v. Pepsi
Foods Limited, (2021) 7 SCC 413


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69. Devarsh P.Patel v. Deputy Commissioner of
Income Tax-2018 (9) TMI 1635 (Guj)
70. Kartik Vijay Sonavane v. Deputy Commissioner
Income Tax 2021 (11) TMI 682 (Guj)
71. Assistant Commissioner of Income Tax v. Om
Prakash Gattani -242 I.T.R 638 (Gauhati)

6. Per contra, learned counsel for the respondents would
reiterate the various contentions urged in the statement of
objections and submit that there is no merit in the petition and the
same is liable to be dismissed.

7. I have given my anxious consideration to the rival
submissions and perused the material on record.

8. The question that arises for consideration in the
present petition is as to whether the impugned provisions contained
in Section 16(2)(c) of the CGST / KGST Act and Rule 36(4) of the
CGST / KGST Rules are unconstitutional, invalid and ultravires the
provisions of the said Acts and violative of Articles 14, 19(1)(g), 265
and 300A of the Constitution of India or whether the impugned
provisions are to be read down in such a manner which allows the
benefit of ITC to bonafide recipients such as the petitioner, which


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has complied with all the other conditions under Section 16(2) of
the CGST / KGST Act despite any fault / lapse or non-payment of
tax to the government by the suppliers.

9. While dealing with the provisions of the Karnataka
Value Added Tax Act, 2005, the Hon’ble Division Bench of this
Court in Rajesh Jain’s case supra , held as under:
“ 7. The aforesaid shows that the finding of fact has
been recorded by the Tribunal that the assessee has fully
discharged the burden of proof to claim the deduction of
input tax as per the tax invoices. The aforesaid finding, in
view of the evidence produced and referred to hereinabove
by the Tribunal, cannot be said to be perverse. Hence, the
question needs to be answered in favour of the assessee.
Even if such question arises on the aspects of re-
appreciation of the evidence such would result into question
of fact. Hence, we do not find that any question of law would
arise for consideration, as sought to be canvassed.
8. Mr.T.K.Vedamurthy, learned AGA attempted to
contend that if the selling dealer has not deposited the
amount of VAT with the Government, then the purchaser
dealer would not be entitled to claim the benefit of entry tax
credit and the said aspect is not examined by the Tribunal.
9. We do not find that the matter can be stretched to
that extent as sought to be canvassed. Once the purchaser
dealer-assessee satisfactorily demonstrates that while
purchasing goods, he has paid the amount of VAT to the


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selling dealer, the matter should end so far as his entitlement
to the claim input tax credit. If the selling dealer has not
deposited the amount in full or a part thereof, it would be for
the Revenue to proceed against the selling dealer. But
thereby the benefit of input tax credit cannot be deprived to
the purchaser dealer.”

10. The Division Bench of the Delhi High Court in the case
of On Quest Merchandizing India’s case supra, held as under:
“ 39. Applying the law explained in the above
decisions, it can be safely concluded in the present case that
there is a singular failure by the legislature to make a
distinction between purchasing dealers who have bona fide
transacted with the selling dealer by taking all precautions as
required by the DVAT Act and those that have not.
Therefore, there was need to restrict the denial of ITC only to
the selling dealers who had failed to deposit the tax collected
by them and not punish bona fide purchasing dealers. The
latter cannot be expected to do the impossible. It is trite that
a law that is not capable of honest compliance will fail in
achieving its objective. If it seeks to visit disobedience with
disproportionate consequences to a bona fide purchasing
dealer, it will become vulnerable to invalidation on the
touchstone of Article 14 of the Constitution.
40. The need for the law to distinguish between
honest and dishonest dealers was acknowledged by the
Punjab and Haryana High Court in Gheru Lal Bal Chand v.
State of Haryana (supra) where the constitutional validity of a


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similar Section 8 of the Haryana DVAT Act, 2003 („HVAT
Act') was being considered. It was held that:
"In legal jurisprudence, the liability can be fastened on
a person who either acts fraudulently or has been a party to
the collusion or connivance with the offender. However, law
nowhere envisages imposing any penalty either directly or
vicariously where a person is not connected with any such
event or an act. Law cannot envisage an almost impossible
eventuality. The onus upon the assessee gets discharged on
production of Form VAT C-4 which is required to be genuine
and not thereafter to substantiate its truthfulness by running
from pillar to post to collect the material for its authenticity. In
the absence of any malafide intention, connivance or
wrongful association of the assessee with the selling dealer
or any dealer earlier thereto, no liability can be imposed on
the principle of vicarious liability. Law cannot put such
onerous responsibility on the assessee otherwise, it would
be difficult to hold the law to be valid on the touchstone of
Articles 14 and 19 of the Constitution of India. The rule of
interpretation requires that such meaning should be
assigned to the provision which would make the provision of
the Act effective and advance the purpose of the Act. This
should be done wherever possible without doing any
violence to the language of the provision. A statute has to be
read in such a manner so as to do justice to the parties. If it
is held that the person who does not deposit or is required to
deposit the tax would be put in an advantageous position
and whereas the person who has paid the tax would be
worse, the interpretation would give result to an absurdity.
Such a construction has to be avoided.

In other words, the genuineness of the certificate and
declaration may be examined by the taxing authority, but
onus cannot be put on the assessee to establish the
correctness or the truthfulness of the statements recorded
therein. The authorities can examine whether the Form VAT
C-4 was bogus and was procured by the dealer in collusion
with the selling dealer. The department is required to allow
the claim once proper declaration is furnished and in the
event of its falsity, the department can proceed against the
defaulter when the genuineness of the declaration is not in
question. However, an exception is carved out in. The event
where fraud, collusion or connivance is established between


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the registered purchasing dealers or the immediate
preceding selling registered dealer or any of the
predecessors selling registered dealer, the benefit contained
in Form VAT C-4 would not be available to the registered
purchasing dealer. The aforesaid interpretation would result
in achieving the purpose of the rule which is to make the
object of the provisions of the Act workable, i.e., realization
of tax by the revenue by legitimate methods."

41. The Court respectfully concurs with the above
analysis and holds that in the present case, the purchasing
dealer is being asked to do the impossible, i.e. to anticipate
the selling dealer who will not deposit with the Government
the tax collected by him from those purchasing dealer and
therefore avoid transacting with such selling dealers.
Alternatively, what Section 9 (2) (g) of the DVAT Act requires
the purchasing dealer to do is that after transacting with the
selling dealer, somehow ensure that the selling dealer does
in fact deposit the tax collected from the purchasing dealer
and if the selling dealer fails to do so, undergo the risk of
being denied the ITC. Indeed Section 9 (2) (g) of the DVAT
Act places an onerous burden on a bonafide purchasing
dealer.
42. All this points to a failure to make a correct
classification on a rational basis so that the denial of ITC is
not visited upon a bonafide purchasing dealer. This failure to
make a reasonable classification, does attract invalidation
under Article 14 of the Constitution, as pointed out rightly by
learned counsel for the Petitioners. This is also what
weighed with the Court in Shanti Kiran India Pvt. Ltd. (supra)
where it was observed as under:
"In the present case, Section 9 (1) grants- input-tax
credit to purchasing dealers. Section 9 (2), on the other hand


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lists out specific situations where the benefit is denied. The
negative list, as it were, is restrictive and is in the nature of a
proviso. As a result, this Court is of the opinion that the
interpretation. placed by the Tribunal-that there is statutory,
authority for granting input-tax credit only to the extent tax is
deposited by the selling dealer, is unsound and contrary, to
the, statute, It is also iniquitous because an onerous burden
is placed on the purchasing dealer - in the absence of clear
words to that effect in the statute to keep a vigil over the
amounts deposited by the selling dealer. The court, does not
see any provision or methodology by which the purchasing
dealer can monitor the selling dealers behaviour, 'vis-a-vis
the latter's VAT returns. Indeed, Section 28 stipulates
confidentiality in such matters. Nor is this Court in agreement
with the Tribunal's opinion that insertion of clause (g) to
section 9 (2) is clarificatory. As observed earlier, Section 9
(2) is an exception to the general rule granting input-tax
credit to dealers who qualify .for the benefit. The conditions
for operation of the exception are well defined. The absence
of any condition such as the one spelt out in clause (g) and
its addition in 2010, rules out legislative intention of its being
a mere clarification of the law which always existed."

43. The Petitioners have argued that Section 9 (2) (g)
also suffers from the vice of arbitrariness and is, on that
ground, hit by Article 14 of the Constitution. There is some
uncertainty as of today on whether a law can be struck down
only on the ground of arbitrariness thereby attracting Article
14 of the Constitution. This doubt has been created by the
decision of the Supreme Court in Rajbala v. State of
Haryana (supra) and Binoy Viswam v. Union of India (2017)
7 SCC 59 the correctness of both of which has been doubted
by the Supreme Court in its recent 3:2 decision in Shayara
Bano v. Union of India 2017 (9) SCALE 178, invalidating
triple talaq where, in the majority opinion of Justice R. F.
Nariman, after noting that the decision in State of Andhra


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Pradesh v. McDowell & Co. (1996) 3 SCC 709 was on this
point per incuriam, observed as under:
"53. However, in State of Bihar v. Bihar Distillery Ltd.,
(1997) 2 SCC 453 at paragraph 22, in State of M.P. v.
Rakesh Kohli, (2012) 6 SCC 312 at paragraphs 17 to 19, in
Rajbala v. State of Haryana & Ors., (2016) 2 SCC 445 at
paragraphs 53 to 65 and 387 Binoy Viswam v. Union of India
(2017) 7 SCC 59 at paragraphs 80 to 82, McDowell (supra)
was read as being an absolute bar to the use of
"arbitrariness" as a tool to strike down legislation under
Article 14. As has been noted by us earlier in this judgment,
Mcdowell (supra) itself is per incuriam, not having noticed
several judgments of Benches of equal or higher strength, its
reasoning even otherwise being flawed. The judgments,
following McDowell (supra) are, therefore, no longer good
law."

44. The above passage occurs in the opinion of
Justice R. F. Nariman in which Justice U. U. Lalit joined. A
separate opinion was given by Justice Kurien Joseph
concurring with the above opinion of Justice Nariman in
which it was observed:
"In that view of the matter, I wholly agree with the
learned Chief Justice that the 1937 Act is not a legislation
regulating talaq. Consequently, I respectfully disagree with
the stand taken by Nariman, J. that the 1937 Act is a
legislation regulating triple talaq and hence, the same can be
tested on the anvil of Article 14. However, on the pure
question of law that a legislation, be it plenary or
subordinate, can be challenged on the ground of
arbitrariness, I agree with the illuminating exposition of law
by Nariman, J." (emphasis supplied)

45. It would therefore appear that the decisions in
Rajbala v. State of Haryana (supra) and Binoy Viswam v.
Union of India (supra) which held that a legislation cannot be
challenged on the ground of arbitrariness are no longer good


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law. In view of the uncertainty on this issue, the Court does
not propose to examine it further in this batch of cases. In
any event, the Court has, for the reasons explained,
concluded that the failure of Section 9 (2) (g) of the DVAT
Act to make a rational classification between purchasing
dealers who are bona fide and those that are not renders it
vulnerable to invalidation under Article 14 of the Constitution.
46.1 What remains is the discussion of the decisions relied
upon by the Department to defend the validity of Section 9 (2)
(g) of the DVAT Act as it stands. In M/s. Mahalaxmi Cotton
Ginning Pressing & Oil Industries v. State of Maharashtra
(supra) the Bombay High Court was concerned with
interpreting Section 48 (5) of the MVAT Act, which reads as
under:
"(5) For the removal of doubt it is hereby declared
that, in no case the amount of set off or refund on any
purchase of goods shall exceed the amount of tax in respect
of the same goods, actually paid, if any, under this Act or any
earlier law, into the Government Treasury except to the
extent where purchase tax is payable by the Claimant dealer
on the purchase of the said goods effected by him:

Provided that, where tax levied or leviable under this
Act or in earlier law is deferred or is deferrable under any
Package Scheme of Incentives implemented by the State
Government, then the tax shall be deemed to have been
received in the government treasury for the purposes of this
sub-section."

46.2 It can straightway be seen that Section 48 (5) of
the MVAT Act is not an exact replica of Section 9 (2) (g) of
the DVAT Act. For instance, Section 48 (5) of the MVAT Act
requires the selling dealer to have "actually paid" the tax
collected by him with the Government for the purposes of the


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purchasing dealer availing ITC, whereas Section 9 (2) (g) of
the DVAT Act requires the selling dealer to either "deposit"
the tax collected or lawfully adjust it against his output tax
apart from correctly reflecting the sale in his returns. While
‟
interpreting those words „actually paid , the Bombay High
Court relied on the decisions in State of Madhya Pradesh v.
Indore Iron and Steel Mills Private Limited (1999) 111 STC
261 (SC), N.B. Sanjana v. Elphinstone Spinning & Weaving
Mills Co. Ltd. (1971) 1 SCC 337 (SC), Sulekh Ram & Sons v.
Union of India (1978) 2 ELT J 525 (Del), which were
confirmed by the Supreme Court in CCE v. Decent Dyeing
Co. (1990) 45 ELT 201 (SC).
46.3 It also requires to be noted that the Bombay High
Court was concerned with a situation where the purchase
transactions disclosed by the purchasing dealer did not
match the sale transactions disclosed by the selling dealer.
In contrast, in the cases before this Court there is no
instance where Annexures 2A and 2B have not matched.
‟
46.4 Two of the critical paras in the Bombay High Court s
decision in M/s. Mahalaxmi Cotton Ginning Pressing & Oil
Industries v. State of Maharashtra (supra) are paras 48 and
55, which read thus:
"48. In the context in which the words "actually paid" are
used in the MVAT Act, "actually paid" means what has been
as a matter of fact deposited in the treasury. Hence, in the
context of the provisions of Section 48(5), we cannot accept
the contention of the Petitioner that "actually paid ... in the
government treasury" means or should be read to mean
what tax ought to have been deposited but has not actually
been deposited in the treasury. To accept the submission
would be to rewrite the legislative provision. Moreover, the
concept of a set off presupposes that tax has been paid in
respect of the goods in respect of which a set off is claimed.


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To allow a set off though the tax has not been paid actually
would be to defeat the legitimate interests of the Revenue.
Hence, in the overall statutory scheme of Section 48; sub-
section (5) has a rational basis and foundation. The liability
to pay tax is that of the selling dealer. As the Constitution
Bench held in Tata Iron & Steel Co. Limited v. State of Bihar
(1958) 9 STC 267 (SC); AIR 1958 SC 452 and in George
Oakes (Private) Limited v. State of Madras (1962) 13 STC
98 (SWC); AIR 1962 SC 1037, whether the tax is passed on
by the selling dealer to the purchasing dealer is a matter of
their contractual understanding. Once that is the position that
has held the field in our jurisprudence for over fifty years and
has been reiterated in Khazan Chand v. State of Jammu and
Kashmir (1984) 56 STC 214 (SC); AIR 1984 SC 762 and
Central Wines v. Special Commercial Tax Officer (1987) 65
STC 48 (SC); (1987) 2 SCC 371, by the Supreme Court, a
dealer cannot obviate his liability to pay tax on his sale
transaction, by claiming a set off and placing the
responsibility to recover tax on an earlier link in the chain on
the Revenue. To test the constitutionality of Section 48(5)
one must ask oneself whether the legislature has acted
discriminatorily or whether the provision is facially or ex facie
discriminatory. Neither is the object or effect of Section 48(5)
discriminatory. The State legislature was not bound to grant
a set off. If the legislature had not granted a set off, that
would not have a bearing on its competence or on
constitutionality, since a tax on the sale of goods falls within
the purview of Entry 54. In granting a set off, the legislature
can impose conditions and that imposed in Section 48(5) is
not lacking in rationality. Moreover, the scheme for set off in
Section 48 has to be read in its entirety and as one cohesive
whole. The legislature cannot be compelled to grant a set off,
ignoring the conditions which it imposes. The conditions are
not severable and are part of one integrated scheme."
xxx xxx xxx
55. The Punjab and Haryana High Court held that
while the genuineness of a certificate and a declaration may
be examined by the taxing authority, the onus cannot be
placed on the assessee to establish the correctness or the
truthfulness of the statements recorded therein. The High
Court held that the Department must allow the claim once a
proper declaration is furnished. In the event of its falsity, the
Department can proceed against the defaulter when the


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genuineness of the declaration is not in question. However,
an exception has been carved out in the event that fraud,
collusion or connivance is established between the
registered purchasing dealer or the immediate preceding
selling dealer or the earlier dealer in the chain. The judgment
of the High Court did not involve a challenge to a provision
such as Section 48(5) of the MVAT Act, 2002. We may only
note with the greatest respect and deference that while the
High Court has relied upon the observations contained in the
decisions of the Benches of two Learned Judges of the
Supreme Court in Atul Fasteners (2007) 7 VST 278 (SC) and
in Corporation Bank (2009) 19 VST 84 (SC), the earlier
decisions of the Constitution Benches in TISCO (1958) 9
STC 267 (SC); AIR 1958 SC 452 and in George Oakes
(1962) 13 STC 98 (SC); AIR 1962 SC 1037 were not
perhaps drawn to the attention of the Court. Moreover, the
decision in Elphinston Spinning AIR 1971 SC 2039 which
construed the word "paid" in Rule 10 of the Central Excise
Rules involved an issue of short levy. Finally we may note
that a provision such as Section 48(5) which uses clear and
express words such as that in "no case" shall a set off
exceed the tax "actually paid" in the government treasury did
not fall for consideration."

46.5 The reference, in para 48 above, to the decisions
of the Supreme Court in Khazan Chand v. State of Jammu
and Kashmir (supra) and Central Wines v. Special
Commercial Tax Officer (supra), was in the context of the
liability to pay tax being essentially on the selling dealer. It
was held there that a selling dealer cannot obviate his
‟
liability to pay tax on his „sale transaction by claiming set off
and placing the responsibility to recover tax on an earlier link
in the chain on the Revenue. It proceeds on the basis that
the State Legislature is not "bound to grant a set off". It
further states that the Legislature cannot be "compelled to
grant a set-off, ignoring the conditions which it imposes".


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46.6 In the present case, the conditions imposed for the grant
of ITC are spelt out in Sections 9 (1) and (2) of the DVAT Act
and have been adverted to earlier. The claim of the
purchasing dealer in the present case is not that it should be
granted that ITC de hors the conditions. Their positive case is
that each of them, as a purchasing dealer, has complied the
conditions as stipulated in Section 9 and therefore, cannot be
denied ITC because only selling dealer had failed to fulfil the
conditions thereunder. More importantly, the Court finds that
there is no provision in the MVAT Act similar to Section 40A
of the DVAT Act. Section 40A of the DVAT Act takes care of a
situation where the selling dealer and the purchasing dealer
act in collusion with a view to defrauding the Revenue. In fact,
the operative directions in Mahalaxmi Cotton Ginning
Pressing and Oil Industries (supra) indicate that such a
measure was suggested by the State Government itself to go
after defaulters, i.e. selling dealers failing to actually pay the
tax. The Department there undertook to upload on its website
the details of the defaulting dealers. It was further undertaken
that once there was a final recovery of the tax from the selling
dealer, refund would be granted to the purchasing dealer.
46.7 Mr. Satyakam has placed extensively reliance on
para 55 of the decision of the Bombay High Court where that
High Court disagreed with the conclusions of the Punjab &
Haryana High Court in Gheru Lal Bal Chand v. State of
Haryana (supra). The Bombay High Court appears to have
distinguished the said decision only because there was no
provision in the HVAT Act similar to Section 48 (5) of the
‟
MVAT Act which required the tax to be „actually paid into


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the Government treasury. In the considered view of the
Court, the decision of the Bombay High Court in Mahalaxmi
Cotton Ginning Pressing and Oil Industries (supra) turned on
the peculiar wording of Section 48 (5) of the MVAT Act.
Secondly, the fact situation where the transactions disclosed
by the purchasing dealer and the selling dealer did not match
does not exist in the present cases. Consequently, the Court
does not consider the decision of the Bombay High Court in
Mahalaxmi Cotton Ginning Pressing and Oil Industries
(supra) to be of assistance to the Department. The fact that
the SLP against the said decision was dismissed by the
Supreme Court does not alter the position.
47.1 Turning now to the decision of the Madras High
Court in Jayam & Co. v. Assistant Commissioner (supra), it
is seen that in the said case, the parties agreed that the
sale/purchase price as reflected in the invoice would be the
gross price. Discounts would later be passed by way of
credit notes. The Madras High Court held that, insofar as the
‟
Tamil Nadu Value Added Tax („TNVAT ) was concerned, the
dealer had to produce a tax invoice evidencing the amount of
input tax. It was further held that discount passed on through
credit notes could not be considered for determination of
‟
„price and that the "tax invoice alone" ought to be
considered for determining the tax liability.
47.2 The provision under challenge in Jayam & Co. v.
Assistant Commissioner (supra) was Section 19 (20) of the
TNVAT Act which reads as under:
"(20) Notwithstanding anything contained in this
section, where any registered dealer has sold goods at a


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price lesser than the price of the goods purchased by him,
the amount of the input tax credit over and above the output
tax of those goods shall be reversed."
47.3 Here again, it can be seen that Section 9 (2) (g)
of the DVAT Act is differently worded. Three conditions that
were mandated by the above provision as noted by the
Supreme Court were as under:
"(a) ITC is a form of concession provided by the
Legislature. It is not admissible to all kinds of sales and
certain specified sales are specifically excluded.
(b) Concession of ITC is available on certain
conditions mentioned in this Section.
(c) One of the most important condition is that in order
to enable the dealer to claim ITC it has to produce original
tax invoice, completed in all respect evidencing the amount
of input tax."

47.4 The Court in Jayam & Co. went strictly by the
wording of the above provision to determine what would form
the subject matter of the tax liability and concluded that it
was only the price indicated in the tax invoice and not price
as reduced by the credit note. The Court fails to appreciate
how the aforementioned decision can be of any assistance
to the Department in the present case since the provision
which the Court is concerned with herein is in a different
context and, therefore, differently worded as well.
48. The decision of the Supreme Court in Corporation
Bank (supra) applies to the present case on all fronts. The
Court explained there that the selling dealer collects tax as
an agent of the Government. Therefore, the bona fide buyer
cannot be put in jeopardy when he has done all the law
requires him to do so. The purchasing dealer has no means
to ascertain and secure compliance by the selling dealer.


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Again, in Central Wines, Hyderabad (supra) the Supreme
Court inter alia observed that "the Seller acts as an agent of
the buyer while collecting the tax".
Reading down
49. The question that next arises is whether Section 9
(2) (g) of the DVAT Act, for reasons already explained,
requires to be struck down as violative of Article 14 or can be
saved from invalidity by any known interpretational device?
50. The offending part of Section 9 (2) (g) of the DVAT
‟
Act is the expression „the dealers or class of dealers
occurring therein which, as it presently stands, makes no
distinction between selling and purchasing dealers and
further between bona fide purchasing dealers and those not
bonafide.
51. In Delhi Transport Corporation v. DTC Mazdoor
Congress AIR 1991 SC 101, a Constitution Bench of the
Supreme Court explained in what cases the doctrine of
‟
„reading down of statutes to save their constitutionality
could be deployed:
"The doctrine of reading down or of recasting the statute
can be applied in limited situations. It is essentially used,
firstly, for saving a statute from being struck down on
account of its unconstitutionality. It is an extension of the
principle that when two interpretations are possible--one
rendering it constitutional and the other making it
constitutional the former should be preferred. The
unconstitutionality may spring from either the incompetence
of the legislature to enact the statute or from its violation of
any of the provisions of the Constitution. The second
situation which summons its aid is where the provisions of
the statute are vague and ambiguous and it is possible to
gather the intention of the legislature from the object of the
statute, the context in which the provision occurs and the
purpose for which it is made. However, when the provision is


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cast in a definite and unambiguous language and its
intention is clear, it is not permissible either to mend or bend
it even if such recasting is in accord with good reason and
conscience. In such circumstances, it is not possible for the
Court to remake the statute. Its only duty is to strike it down
and leave it to the legislature if it so desires, to amend it. If
the remaking of the statute by the courts is to lead to its
distortion that course is to be scrupulously avoided. The
doctrine can never be called into play where the statute
requires extensive additions and deletions."

52. It was further explained in the same decision as
under:
"The Courts, though, have no power to amend the law by
process of interpretation, but do have power to mend it so as
to be in conformity with the intendment of the legislature.
Doctrine of reading down is one of the principles of
interpretation of statute in that process. But when the
offending language used by the legislature is clear, precise
and unambiguous, violating the relevant provisions in the
constitution, resort cannot be had to the doctrine of reading
down to blow life into the void law to save it from
unconstitutionality or to confer jurisdiction on the legislature."
Conclusions
53. In light of the above legal position, the Court
‟
hereby holds that the expression „dealer or class of dealers
occurring in Section 9 (2) (g) of the DVAT Act should be
interpreted as not including a purchasing dealer who has
bona fide entered into purchase transactions with validly
registered selling dealers who have issued tax invoices in
accordance with Section 50 of the Act where there is no
mismatch of the transactions in Annexures 2A and 2B.
‟
Unless the expression „dealer or class of dealers in Section
‟
9 (2) (g) is „read down in the above manner, the entire
provision would have to be held to be violative of Article 14
of the Constitution.


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54. The result of such reading down would be that the
Department is precluded from invoking Section 9 (2) (g) of
the DVAT to deny ITC to a purchasing dealer who has bona
fide entered into a purchase transaction with a registered
selling dealer who has issued a tax invoice reflecting the TIN
number. In the event that the selling dealer has failed to
deposit the tax collected by him from the purchasing dealer,
the remedy for the Department would be to proceed against
the defaulting selling dealer to recover such tax and not deny
the purchasing dealer the ITC. Where, however, the
Department is able to come across material to show that the
purchasing dealer and the selling dealer acted in collusion
then the Department can proceed under Section 40A of the
DVAT Act.
55. Resultantly, the default assessment orders of tax,
interest and penalty issued under Sections 32 and 33 of the
DVAT Act, and the orders of the OHA and Appellate Tribunal
insofar as they create and affirm demands created against
the Petitioner purchasing dealers by invoking Section 9 (2)
(g) of the DVAT Act for the default of the selling dealer, and
which have been challenged in each of the petitions, are
hereby set aside.”

11. In a batch of petitions including Arise India’s case
supra , the Apex Court affirmed the decision of the Delhi High Court
in On Quest Merchandizing India’s case supra and held as
under:


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“ On hearing Learned Additional Solicitor General
appearing for the petitioner, we are not inclined to interfere
with the impugned order. The special leave petition is
dismissed.
2. Learned Additional Solicitor General, however,
submits that a batch of petitions were decided by the
impugned order and there are some of the case where the
purchase transactions are not bona fide like the present case
and those case ought to have been remitted back to the
competent authority.
3. Learned Additional Solicitor General Submits
that the petitioner would move the High Court with necessary
particulars for directions in this behalf for which liberty is
granted, as prayed for.
4. Pending applications(s), if any, stand disposed. Of.”

12. In Onyx Design’s case supra, this Court followed the
aforesaid judgments and held as under:
“ 12. From the aforesaid rulings, it is clear that the
benefit of input tax cannot be deprived to the purchaser
dealer, if the purchaser dealer satisfactorily demonstrates
that while purchasing goods, he has paid the amount of tax
to the selling dealer. If the selling dealer has not deposited
the amount in full or a part thereof, it would be for the
revenue to proceed against the selling dealer.
13. It is beneficial to refer to the judgment of the
honourable High Court of Delhi in the case of Arise India
Limited, wherein the validity of section 9(2)(g) of the Delhi *


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Value Added tax Act, 2004 ("the DVAT Act", for short) fell for
consideration. Section 9(2)(g) of the DVAT Act reads as
under (page 189 in 56 GSTR) :
"(g) to the dealers or class of dealers unless the tax
paid by the purchasing dealer has actually been deposited
by the selling dealer with the Government or has been
lawfully adjusted against output tax liability and correctly
reflected in the return filed for the respective tax period."
14. The findings are recorded by the honourable court at
paragraphs 39, 40 and 41 as under (pages 198 and 199 in
56 GSTR) :
"39. Applying the law explained in the above decisions, it
can be safely concluded in the present case that there is a
singular failure by the Legislature to make a distinction
between purchasing dealers who have bona fide transacted
with the selling dealer by taking all precautions as required
by the DVAT Act and those that have not. Therefore, there
was need to restrict the denial of ITC only to the selling
dealers who had failed to deposit the tax collected by them
and not punish bona fide purchasing dealers. The latter
cannot be expected to do the impossible. It is trite that a law
that is not capable of honest compliance will fail in achieving
its objective. If it seeks to visit disobedience with
disproportionate consequences to a bona fide purchasing
dealer, it will become vulnerable to invalidation on the
touchstone of article 14 of the Constitution.
40. The need for the law to distinguish between honest
and dishonest dealers was acknowledged by the Punjab and
Haryana High Court in Gheru Lal Bal Chand v. State of
Haryana [2011] 45 VST 195 (P&H) where the constitutional
validity of a similar section 8 of the Haryana VAT Act, 2003
("HVAT Act") was being considered. It was held that (pages
208 and 209 in 45 VST) :
'In legal jurisprudence, the liability can be fastened on a
person who either acts fraudulently or has been a party to


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the collusion or connivance with the offender. However, law
nowhere envisages to impose any penalty either directly or
vicariously where a person is not connected with any such
event or an act. Law cannot envisage an almost impossible
eventuality. The onus upon the assessee gets discharged on
production of Form VAT C-4 which is required to be genuine
and not thereafter to substantiate its truthfulness by running
from pillar to post to collect the material for its authenticity. In
the absence of any mala fide intention, connivance or
wrongful association of the assessee with the selling dealer
or any dealer earlier there- to, no liability can be imposed on
the principle of vicarious liability. Law cannot put such
onerous responsibility on the assessee otherwise, it would
be difficult to hold the law to be valid on the touch tone of
articles 14 and 19 of the Constitution of India. The rule of
interpretation requires that such meaning should be assigned
to the provision which would make the provision of the Act
effective and advance the purpose of the Act. This should be
done wherever possible without doing any violence to the
language of the provision. A statute has to be read in such a
manner so as to do justice to the parties. If it is held that the
person who does not deposit or is required to deposit the tax
would be put in an advantageous position and whereas the
person who has paid the tax would be worse, the
interpretation would give result to an absurdity. Such a
construction has to be avoided.
In other words, the genuineness of the certificate and
declaration may be examined by the taxing authority, but
onus cannot be put on the assessee to establish the
correctness or the truthfulness of the statements recorded
therein. The authorities can examine whether the Form VAT
C-4 was bogus and was procured by the dealer in collusion
with the selling dealer. The Department is required to allow
the claim once proper declaration is furnished and in the
event of its falsity, the Department can proceed against the
defaulter when the genuineness of the declaration is not in
question. However, an exception is carved out in the event
where fraud, collusion or connivance is established between
the registered purchasing dealers or the immediate
preceding selling registered dealer or any of the
predecessors selling registered dealer, the benefit contained
in Form VATC-4 would not be available to the registered
purchasing dealer. The aforesaid interpretation would result


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in achieving the purpose of the rule which is to make the
object of the provisions of the Act, workable, i.e., realization
of tax by the revenue by legitimate methods.'
41. The court respectfully concurs with the above
analysis and holds that in the present case, the purchasing
dealer is being asked to do the impossible, i.e. to anticipate
the selling dealer who will not deposit with the Government
the tax collected by him from those purchasing dealer and
therefore avoid transacting with such selling dealers.
Alternatively, what section 9(2)(g) of the DVAT Act requires
the purchasing dealer to do is that after transacting with the
selling dealer, somehow ensure that the selling dealer does
in fact deposit the tax collected from the purchasing dealer
and if the selling dealer fails to do so, undergo the risk of
being denied the ITC. Indeed section 9(2)(g) of the DVAT Act
places an onerous burden on a bona fide purchasing dealer."
15. The honourable Delhi High Court read down the
said section 9(2)(g) to the effect that the expression "dealer
or class of dealers" should be interpreted as not including a
purchasing dealer who has bona fide entered into purchase
transactions with validly registered selling dealers who have
issued tax invoices in accordance with the Act where there is
no mismatch of the transactions. It was observed that unless
the expression "dealer or class of dealers" in section 9(2)(g)
"read down" in the above manner, the entire provision has to
be held to be violative of article 14 of the Constitution. It is
also significant to note that the said judgment has been
confirmed by the honourable apex court.
16. The reasonings of the prescribed authority for
disallowing the input-tax credit recorded in the assessment
order are quoted hereunder :


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"The reply filed by the assessee was studied in detail. It is
true that the dealer has effected purchases from the dealers
who have been registered under the provisions of the KVAT
Act, 2003. While some of them have been subsequently de-
registered, others were still filing returns during the
assessment year. However, in all the cases where input
credit is proposed to be disallowed, it is very much true that
those dealers have not remitted the taxes collected from the
assessee. This would lead to substantial loss of revenue to
the State. Since the amount collected by the assessee is not
remitted to the Government, input credit on these purchases
cannot be given to the assessee.
Further, it is advised in the reply that the Department
should initiate recovery actions from the defaulting dealers in
terms of Part V, rules 55 to 130B of the KVAT Rules, 2003.
However, the undersigned officer is very limited in resources
and powers to initiate action against all such defaulters. An
assessing officer has power to verify books of accounts and
issue notices to only those dealers for whom assignment
note is issued by the honourable Commissioner of
Commercial Taxes, Karnataka. What is more, the defaulting
dealers in the instant case (assessee's sellers) are very few ;
however, they may run into thousands in some other case.
Given the limited resource and manpower, it is nearly
impossible for the Department to initiate action against all
defaulting dealers, where multiple reassessments have to be
done and it becomes difficult to keep track of all the
defaulters.
Hence,. .. .
In view of the above discussions, it is clear that the
assessee has the knowledge that the taxes paid by him on
purchases made from defaulting dealers has not been
remitted to the Government. Though there is no provision in
the KVAT Act, 2003 which restricts input credit on purchases
effected from defaulting dealers, if the input is not restricted,
it would lead to loss of revenue to the State. State is not a
profit-making body but a system which is involved in
providing amenities and protection to the citizen. For these
activities, it needs money, and taxes collected by people
forms major source of its income. Hence, when an amount


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collected by way of tax which is due to the State is not
remitted, it leads to loss of revenue to the State's exchequer.
If input credit is allowed even on the purchases where the tax
due to the Government was not paid, it leads to a bad trend
and to substantial loss of revenue to the State." (emphasis
supplied)
17. The reasons assigned by the assessing officer
establishes that the petitioner-assessee has fully discharged
the burden of proof to claim the deduction of input tax as per
the tax invoices but the selling dealer has failed to remit the
said collected taxes. The purchaser dealer having paid the
amount of VAT to the registered selling dealer, his
entitlement to claim input-tax credit need not be tagged with
the registered selling dealer depositing the said collected tax
amount in full or a part thereof. The charging provision of
section 3 provides that the tax shall be levied on every sale
of goods in the State by a registered dealer or a dealer liable
to be registered in accordance with the provisions of the Act.
Further, the tax shall also to be levied, and paid by every
registered dealer or dealer liable to be registered on the sale
of taxable goods to him for use in the course of his business,
by a person who is not registered under this Act.
Indisputably, the petitioner has purchased the goods from a
registered dealer not from an unregistered dealer. Section 9
of the KVAT Act provides collection of tax by registered
dealers. If there is any default on the part of such registered
dealers in not remitting the tax, so collected into the
Government treasury or any designated bank and furnish
monthly returns as specified under section 35 to the
prescribed authority, the proceedings are required to be


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initiated against such registered selling dealers in
accordance with the provisions of the KVAT Act.
18. The Division Bench of this court in the case of
Bhavani Enterprises (2019) 67 GST 201 (Karn), was dealing
with the penalty imposed by the prescribed authority under
section 70(2) of the KVAT Act wherein, the input-tax credit
availed by the assessee was held to be on the basis of fake
and false invoices of the selling dealers who actually did not
exist and upon investigation and query, being found that
those dealers did not exist and therefore the input-tax credit
could not be allowed in the hands of the purchasing dealer.
In that context, it is held that the burden of proving that input
tax claim is correct lies upon the dealer claiming such input-
tax credit.
19. In the case of Microqual Techno Private Limited
(2012) 52 VST 362 (Karn), the revisional authority exercising
the suo motu power of revision against the order of the first
appellate authority which set aside the penalty imposed had
recorded a finding that the invoices produced were not
genuine as the same were procured through a mediator
which was well within the knowledge of the assessee. In
such circumstances, it was observed that in order to claim
the benefit of refund of input tax, the assessee has produced
fake invoices which did not reflect the genuine transaction. It
is not a bona fide act of the assessee. Accordingly, the
penalty levied under section 70 of the Act was confirmed.


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20. In view of admission of the genuine transaction as
well as bona fide claim and in the absence of any other
allegations made against the purchasing dealer in the
assessment orders, merely for the reason that selling
dealers have not deposited the collected tax amount or some
of the selling dealers have been subsequently de registered
cannot be a ground to deny the input-tax credit.
21. It is the contention of the petitioner that
respondent No. 1—prescribed authority has misstated the
dates of de-registration of certain selling dealers. These
factual aspects requires to be re-considered by the
respondent No.1—prescribed authority. It is needless to
observe that in the event of purchases made by the
assessee relates to the period subsequent to de- registration
of the selling dealer, no input-tax credit can be allowed.
22. For the reasons aforesaid, the reassessment
orders and the demand notices at Annexures A, B, C and D
are set aside. The proceedings are restored to the file of
respondent No. 1—prescribed authority for reconsideration.
Respondent No. 1—prescribed authority shall reconsider the
matter in accordance with law keeping in mind the
observations made hereinabove and after providing an
opportunity of hearing to the petitioner shall conclude the
reassessments in an expedite manner.
23. Writ petitions stand disposed of in terms of the
above.”


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13. Subsequently, in Jain Steel’s case supra, this Court
relied upon Onyx Design’s case supra and held as under:
“ 7. Having heard the learned counsel appearing for
the parties and perusing the material on record, it is ex fade
apparent that the assessing authority has denied the input
tax credit mainly on the ground that the selling dealer has not
deposited the taxes collected. It is recorded that the selling
dealer-M/s. Sai Baba Industries, Tumkur TIN : 29290220285,
has not filed monthly returns in VAT-100s from December
2014 onwards; it clearly goes to prove that the petitioner has
not paid output taxes payable to the Government.
There is no dispute regarding the genuineness of the
purchase made by the petitioner-purchasing dealer. The
assessing authority sans examining the transaction of the
petitioner inasmuch as the payment of taxes made to the
selling dealer, merely for the reason that the selling dealer
has not deposited the collected tax amount, ought not to
have arrived at a decision to deny the input tax credit. This
court in the case of Onyx Designs (2019) 67 GSTR 209
(Karn)), has observed as under (page 220 in 67 GSTR):
“20. In view of admission of the genuine transaction
as well as bona fide claim and in the absence of any other
allegations made against the purchasing dealer in the
assessment orders, merely for the reason that selling
dealers have not deposited the collected tax amount or some
of the selling dealers have been subsequently deregistered
cannot be a ground to deny the input tax credit.”

In the case of Bhavani Enterprises (2019) 67 GSTR
201 (Karn)), the Divi-sion Bench has observed thus (page
208 in 67 GSTR):


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“11. Thus, burden of proving that the claim of input tax
credit is correct, is squarely upon the assessee who never
discharged the said burden in the present case. The first
appellate authority was absolutely wrong in setting aside the
penalty assuming such burden of proof to be on the
Revenue. The revisional authority, was therefore, perfectly
justified and within his jurisdiction to restore the order of
penalty in these circumstances. We also find that at least two
of the dealers from whom input tax credit invoices were
claimed in the present case were for consideration before
this court in Microqual Techno Private Limited v. Additional
Commissioner of Commercial Taxes (2012) 52 VST 362
(Karn)) case also, namely, M/s. S.L.V. Enterprises and M/s.
T.D. and company. Therefore, the same or similar bogus
selling dealers registered without actual dealers existing
appears to be forming the chain of producing false and fake
invoices, on the basis of which, such input tax credit was
claimed by the purchasing dealers.”

In the case of Bhavani Enterprises (2019) 67 GSTR
201 (Karn)), it was imperative that some of the dealers from
whom input tax credit invoices were claimed in the case
were before this court in Microqual's case 2012 VST 362
(Karn)), namely, M/s. S.L.V. Enterprises and M/s. T.D. and
Company, where the similar bogus selling dealers registered
without actual dealership producing false and fake invoices
claiming input tax credit. In that context it has been held that
the assessee did not knowingly produced such invoices,
knowing them to be false or fake. A dealer entering into a
genuine transaction of purchase always knows the existence
and identity of selling dealer. Considering these aspects, the
Division Bench has held that these questions remains finding
of fact, not giving raise to any question of law and has
restored the penalty.



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11. There is no cavil on the said legal proposition.
Now, the fulcrum of dispute is whether the assessee has
discharged the burden of proving the claim of input tax credit
on the payment of taxes alleged to have been made. Without
examining the same, merely on the ground that no selling
dealer has deposited the collected taxes, input tax credit has
been denied. This factual aspect requires to be reconsidered
by the assessing authority in the light of the judgments
referred to above.
12. Even as regards denial of input tax credit
relating to the purchase of old used machinery from M/s.
Saibaba Industries claimed as capital goods by the assessee
is not supported by any satisfactory reasons.
13. For the aforesaid reasons, the assessment
order impugned deserves to be set aside. Accordingly, the
impugned order and the demand notice both dated March
30, 2019 at annexures F and G are set aside and the matter
is remanded to the assessing officer to reconsider the matter
in the light of the observations made hereinabove. All the
rights and contentions of the parties are left open.
Compliance shall be made by the respondent in an expedite
manner.
14. The writ petition stands disposed of in terms of the
above.”

14. The Apex Court in Shanthi Kiran’s case supra , relied
upon the judgment of the Delhi High Court in On Quest and


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noticed that the same had been confirmed by the Apex Court in
SLP (Civil) 36750/2017 and held as under:
“ 1. Heard learned counsel for the appellant and
perused the record.
2. In these appeals the short issue that arose for
consideration before the Delhi High Court1 was whether the
benefit of Input Tax Credit (ITC) is available to the
registered purchaser dealers (respondents herein) who paid
taxes to registered seller dealer(s) in 1 1 High Court Date:
2025.10.10 13:52:23 IST Reason: terms of invoice(s) raised
by them even though those seller dealers did not deposit
the collected tax with the Government.
3. There is no dispute that on the date of transaction,
the seller dealer(s) were registered with the Department.
However, after the transaction, the registration of those
seller dealer(s) was cancelled, and they defaulted in
depositing the tax collected by them from the purchaser
dealer(s). The High Court vide impugned judgment and
order(s) found respondent(s) bona fide purchaser dealer(s)
who had paid taxes in good faith to registered seller
dealer(s) and, therefore, entitled to the benefit of ITC and,
accordingly, allowed the said benefit to them after due
verification of invoices.
4. A similar issue later arose for consideration before
the High Court in On Quest Merchandising India Pvt. Ltd.
vs. Government of NCT of Delhi and Ors., 2017 SCC
OnLine Delhi 13037 in the context of the provisions of
Section 9(2) (g) of Delhi Value Added Tax Act, 2004.


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5. Section 9(1) of DVAT Act permits ITC to a
registered dealer in respect of turnover of purchases
occurring during the tax period where the purchase arises in
the course of his activities as a dealer and the goods are to
be used by him directly or indirectly for the purpose of
making sales which are liable to tax under Section 7 of the
DVAT Act. Sub- section (2) of Section 9 sets out the
conditions under which such ITC would not be allowed.
Clause (g) of sub-section (2) of Section 9 made ITC benefit
available to a purchasing dealer only when the tax paid by
the purchasing dealer has actually been deposited by the
selling dealer with the Government or has been lawfully
adjusted against output tax liability and correctly reflected in
the return filed for the respective tax period. Reading down
clause 2 2 DVAT Act (g) of sub-section (2) of Section 9, in
On Quest Merchandising India (supra), the Delhi High Court
held:
“62. In light of the above legal position, the Court
hereby holds that the expression ‘dealer or class of dealers’
occurring in Section 9 (2) (g) of the DVAT Act should be
interpreted as not including a purchasing dealer who has
bona fide entered into purchase transactions with validly
registered selling dealers who have issued tax invoices in
accordance with Section 50 of the Act where there is no
mismatch of the transactions in Annexures 2A and 2B.
Unless the expression ‘dealer or class of dealers’ in Section
9 (2) (g) is ‘read down’ in the above manner, the entire
provision would have to be held to be violative of Article 14
of the Constitution.
63. The result of such reading down would be that
the Department is precluded from invoking Section 9 (2) (g)
of the DVAT to deny ITC to a purchasing dealer who has
bona fide entered into a purchase transaction with a
registered selling dealer who has issued a tax invoice
reflecting the TIN number. In the event that the selling


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dealer has failed to deposit the tax collected by him from the
purchasing dealer, the remedy for the Department would be
to proceed against the defaulting selling dealer to recover
such tax and not deny the purchasing dealer the ITC.
Where, however, the Department is able to come across
material to show that the purchasing dealer and the selling
dealer acted in collusion then the Department can proceed
under Section 40A of the DVAT Act.”

6. The aforesaid decision of the High Court was
challenged before this Court in Special Leave to Appeal
(Civil) No.36750 of 2017. The said special leave petition
was disposed of without interfering with the order of the
High Court.
7. In light thereof, as we find that there is no dispute
regarding the selling dealer being registered on the date of
transaction and neither the transactions nor invoices in
questions have been doubted, based on any inquiry into
their veracity, we do not find a good reason to interfere with
the order of the High Court directing for grant of ITC benefit
after due verification. The appeals lack merit and are,
accordingly, dismissed.
8. Pending application(s), if any, shall stand disposed of.”

15. While dealing with the Constitutional validity of the
impugned provisions, the Guwathi High Court in National Plasto
Moulding’s case supra , held as under:
Learned senior counsel for the petitioners has
submitted that though in this batch writ petitions, the
petitioners have challenged the validity of section 16(2)(c)
and 16(2)(d) of the Assam Goods and Services tax Act, 2017


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as well as the validity of section 16(2)(c) and 16(2)(d) of the
Central Goods and Services tax Act, 2017 along with the
show-cause notices issued to the petitioners, however, the
controversy involved in these writ petitions is squarely
covered by the decision of the Delhi High Court in the case
of On Quest Merchandising India Pvt. Ltd. v. Government of
NCT of Delhi, reported in [(2018) 56 GSTR 177 (Delhi); 2017
SCC OnLine Del 11286.] , wherein it was categorically held
that a purchasing dealer cannot be punished for the act of
the selling dealer in case the selling dealer had failed to
deposit the tax collected by it.
2. It is submitted that the Delhi High Court has
observed that the provisions of section 9(2)(g) of the Delhi
Value Added tax Act, 2004 can be read down and the
demand raised against the purchasing dealers, who have
entered into bona fide transaction, cannot be sustained. It is
also submitted that the special leave appeal against the said
judgment of the Delhi High Court has already been
dismissed by the honourable Supreme Court on January 10,
2018 vide petition for Special Leave to Appeal No. 36750 of
2017 [Commissioner of Trade and Taxes v. Arise India
Limited, (2024) 129 GSTR 542 (SC); 2018 SCC OnLine SC
3859.] .
3. Mr. S.C. Keyal, learned Standing Counsel, CGST
and Mr. B. Gogoi, learned counsel for the respondent State
are not in position to dispute the fact that the controversy
raised in these writ petitions is squarely covered by the
decision of the Delhi High Court rendered in On Quest
Merchandising India Pvt. Ltd. [On Quest Merchandising India


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Pvt. Ltd. v. Government of NCT of Delhi, (2018) 56 GSTR
177 (Delhi); 2017 SCC OnLine Del 11286.] .
4. Before the Delhi High Court, the validity of section
9(2)(g) of the Delhi Value Added tax Act, 2004 was under
challenge. The said provisions of the Delhi Value Added tax
Act are analogous to the provisions of section 16(2)(c) and
16(2)(d) of the Assam Goods and Services tax Act, 2017 as
well as section 16(2)(c) and 16(2)(d) of the Central Goods
and Services tax Act, 2017.
5. The Delhi High Court in the said judgment has
observed as under (pages 198, 199, 207 and 208 in 56
GSTR:
“39. Applying the law explained in the above decisions, it
can be safely concluded in the present case that there is a
singular failure by the Legislature to make a distinction
between purchasing dealers who have bona fide transacted
with the selling dealer by taking all precautions as required
by the DVAT Act and those that have not. Therefore, there
was need to restrict the denial of ITC only to the selling
dealers who had failed to deposit the tax collected by them
and not punish bona fide purchasing dealers. The latter
cannot be expected to do the impossible. It is trite that a law
that is not capable of honest compliance will fail in achieving
its objective. If it seeks to visit disobedience with
disproportionate consequences to a bona fide purchasing
dealer, it will become vulnerable to invalidation on the
touchstone of article 14 of the Constitution….
41. The court respectfully concurs with the above
analysis and holds that in the present case, the purchasing
dealer is being asked to do the impossible, i.e., to anticipate
the selling dealer who will not deposit with the Government
the tax collected by him from those purchasing dealer and
therefore avoid transacting with such selling dealers.
Alternatively, what section 9(2)(g) of the DVAT Act requires
the purchasing dealer to do is that after transacting with the


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selling dealer, somehow ensure that the selling dealer does
in fact deposit the tax collected from the purchasing dealer
and if the selling dealer fails to do so, undergo the risk of
being denied the ITC. Indeed section 9(2)(g) of the DVAT Act
places an onerous burden on a bona fide purchasing
dealer….
53. In light of the above legal position, the court hereby
holds that the expression ‘dealer or class of dealers’
occurring in section 9(2)(g) of the DVAT Act should be
interpreted as not including a purchasing dealer who has
bona fide entered into purchase transactions with validly
registered selling dealers who have issued tax invoices in
accordance with section 50 of the Act where there is no
mismatch of the transactions in annexures 2A and 2B.
Unless the expression ‘dealer or class of dealers’ in section
9(2)(g) is ‘read down’ in the above manner, the entire
provision would have to be held to be violative of article 14 of
the Constitution.
54. The result of such reading down would be that the
Department is precluded from invoking section 9(2)(g) of the
DVAT to deny ITC to a purchasing dealer who has bona fide
entered into a purchase transaction with a registered selling
dealer who has issued a tax invoice reflecting the TIN
number. In the event that the selling dealer has failed to
deposit the tax collected by him from the purchasing dealer,
the remedy for the Department would be to proceed against
the defaulting selling dealer to recover such tax and not deny
the purchasing dealer the ITC. Where, however, the
Department is able to come across material to show that the
purchasing dealer and the selling dealer acted in collusion
then the Department can proceed under section 40A of the
DVAT Act.”
6. The honourable Supreme Court [Commissioner of
Trade and Taxes v. Arise India Limited, (2024) 129 GSTR
542 (SC); 2018 SCC OnLine SC 3859.] has dismissed the
SLP preferred against the said judgment by passing the
following order (page 544 in 129 GSTR):


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“On hearing learned Additional Solicitor General
appearing for the petitioner, we are not inclined to interfere
with the impugned order [On Quest Merchandising India Pvt.
Ltd. v. Government of NCT of Delhi, (2018) 56 GSTR 177
(Delhi); 2017 SCC OnLine Del 11286.] . The special leave
petition is dismissed.
The learned Additional Solicitor General, however,
submits that a batch of petitions were decided by the
impugned order and there are some of the cases where the
purchase transactions are not bona fide like the present case
and those cases ought to have been remitted back to the
competent authority.
The learned Additional Solicitor General submits that the
petitioner would move the High Court with necessary
particulars for directions in this behalf for which liberty is
granted, as prayed for.
Pending application(s), if any, stand disposed of.”
7. Having gone through the above referred judgments,
we are of the view that the controversy raised in this batch of
writ petitions is squarely covered by the decision of the Delhi
High Court in the case of On Quest Merchandising India Pvt.
Ltd. [On Quest Merchandising India Pvt. Ltd. v. Government
of NCT of Delhi, (2018) 56 GSTR 177 (Delhi); 2017 SCC
OnLine Del 11286.] . Hence, the show-cause notices
impugned in the present writ petitions and the consequential
orders are set aside. However, the Department is free to act
in those cases, where the purchase transactions are not
bona fide, in accordance with law.
8. With these observations, these writ petitions are
disposed of.”



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16. All the aforesaid judgments were followed by the
Division Bench of Tripura High Court in Sahil Enterprises case
supra, in which the High Court while coming to the conclusion that
the impugned provisions were not violative of Articles 14, 19(1)(g),
265 and 300A of the Constitution of India, held that Section
16(2)(c) ought not to be interpreted to deny ITC to purchasers in a
bonafide transaction like the petitioner and it should be read down
and applied only where the transaction is found not be bonafide or
is a collusive fraudulent transaction to defraud the Revenue as
hereunder:
“ 1) The Challenge in this writ petition is primarily to
the constitutional validity of Section 16(2) (c) of the Central
Goods and Services Tax Act, 2017( for shot ‘ the Act’) In
additional In addition, petitioner has also sought for quashing
of an order dt.17.5.2022 issued by the Assistant
Commissioner, Central Goods and Services Tax, Tripura
Division-I, Agartala (Respondent no.3) confirming a demand
of Rs.1,11,60,830/- along with interest and penalty under
section 73 of the said Act.

The factual background to the filing of the Writ Petition:
2) The petitioner, a proprietary concern engaged in
trading of rubber products, had purchased different products
from M/s Sentu Dey (for short "supplier/ Respondent no.4")
on due payment of Goods and Services Tax ( for short


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'GST') and further sold them as such. These transactions
took place between July,2017 to January,2019 involving
GST of Rs.1,11,60,830/- which it had paid to its
vendor/supplier.
3) On an investigation by officers of the Enforcement
Branch of the CGST Commissionerate, Agartala of the
supplier Company, it was discovered that the respondent
no.4 was supplying rubber products to different traders, but
was not depositing the GST paid by the purchasers to it
including the petitioner with the Government. Respondent
no.4 had filed Form GSTR-01 return under section 37 of the
Act showing the sale of goods to the petitioner, but failed to
deposit the tax collected from petitioner while filing GSTR-3B
under section 39 of the Act. It had filed 'Nil' GSTR-3B
returns.
4) The respondent No.3 opined that as Respondent no.4
did not deposit the GST with the Government, petitioner is
not eligible to avail Input Tax Credit (for short 'ITC') of the
same amount to discharge it's output tax liability even though
petitioner had already paid the GST amount to Respondent
no.4. The respondent nos.1 to 3 blocked the whole ITC
balance as on 8.2.2021 amounting to Rs.7,32,353/- from the
Electronic Credit Ledger of the petitioner.
5) When petitioner sent an email dt.15.5.2020 enquiring
about the blocking of the ITC in its Electronic Credit ledger,
the respondent No.3, by letter dt.21.5.2020 informed
petitioner that Respondent no.4 had not discharged its tax
liabilities to the Government, and as petitioner had made


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purchases from Respondent no.4, it is not entitled to ITC of
the tax paid by it to Respondent no.4.
6) Later on 7.1.2021, the respondent issued a Demand-
cum-Show cause notice to petitioner invoking Section 73 of
the Act asking petitioner to show cause why Rs.1,11,60,830/-
wrongly availed by petitioner as ITC should not be reversed
along with interest and penalty.
7) Petitioner submitted reply on 8.2.2021 stating that it
could only verify the details of outward supplies reflected in
GSTR-2A and there was no mechanism to verify the GSTR-
3B filed by its supplier, Respondent no.4. It contended that
since it had paid the GST to Respondent no.4 and had
availed the ITC as per law, the demand raised in the
respondent No.3's notice should be dropped.
8) But on 17.5.2022, the respondent No.3 passed orders
confirming the demand raised in the show cause notice. This
order is impugned in the Writ Petition.
9) Petitioner had also filed a W.P.(C) 531 of 2021 in this
Court challenging the show cause notice issued by
respondent, but after the order dt.17.5.2022 was passed, it
withdrew the said writ petition and then filed the instant writ
petition challenging the constitutional validity of Section 16(2)
(c) of the Act as violative of Art.14,19(1)(g) and 300-A of the
Constitution of India and also challenging the order
dt.17.5.2022 passed by the respondent no.3.
10) The respondents 2 and 3 filed counter affidavit
refuting the pleas of the petitioner and contended that there
is no basis to say that Section 16(2)(c) of the Act is violative
of above provisions of the Constitution and contended that it


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is valid in all respects. They also contended that Courts must
be slow in inferring unconstitutionality of taxing statues as
legislature has lot of freedom in enacting such laws.
According to them the impugned order dt.17.5.2022 does not
suffer from any defect or error and should be sustained.
Consideration by the Court:
11) Section 16 deals with eligibility and conditions for
taking ITC. The said section to the extent relevant for our
consideration states:
"Section 16. Eligibility and conditions for taking
input tax credit.-
(1) Every registered person shall, subject to such
conditions and restrictions as may be prescribed and
in the manner specified in section 49, be entitled to
take credit of input tax charged on any supply of
goods or services or both to him which are used or
intended to be used in the course or furtherance of his
business and the said amount shall be credited to the
electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section,
no registered person shall be entitled to the credit of
any input tax in respect of any supply of goods or
services or both to him unless,-
(a) he is in possession of a tax invoice or debit note
issued by a supplier registered under this Act, or such
other tax paying documents as may be prescribed;
[(aa) the details of the invoice or debit note referred to
in clause
(a) has been furnished by the supplier in the
statement of outward supplies and such details have
been communicated to the recipient of such invoice or
debit note in the manner specified under section 37;]
(b) he has received the goods or services or both.
[Explanation.- For the purposes of this clause, it shall
be deemed that the registered person has received
the goods or, as the case may be, services-
(i) where the goods are delivered by the supplier to a
recipient or any other person on the direction of such


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registered person, whether acting as an agent or
otherwise, before or during movement of goods, either
by way of transfer of documents of title to goods or
otherwise;
(ii) where the services are provided by the supplier to
any person on the direction of and on account of such
registered person;] [(ba) the details of input tax credit
in respect of the said supply communicated to such
registered person under section 38 has not been
restricted;]
(c) subject to the provisions of 4[section 41 5[]], the *
tax charged in respect of such supply has been
actually paid to the Government, either in cash or
through utilisation of input tax credit admissible in
respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are
received in lots or instalments, the registered person
shall be entitled to take credit upon receipt of the last
lot or instalment:
Provided further that where a recipient fails to pay to
the supplier of goods or services or both, other than
the supplies on which tax is payable on reverse
charge basis, the amount towards the value of supply
along with tax payable thereon within a period of one
hundred and eighty days from the date of issue of
invoice by the supplier, an amount equal to the input
tax credit availed by the recipient shall be 9[paid by
him along with interest payable under section 50], in
such manner as may be prescribed:
Provided also that the recipient shall be entitled to
avail of the credit of input tax on payment made by
him 10[to the supplier] of the amount towards the
value of supply of goods or services or both along with
tax payable thereon.
(3) ......
(4) ... ...
[Provided ... ...
[(5) ... ....
(6)... ... " (emphasis supplied)

12) Section 16 (2) (c) of the Act thus denies to an
assessee availment of ITC in relation to supply of goods or


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services or both if tax charged in respect of such supply has
not been actually paid to the Government or through
utilization of input tax credit admissible in respect of the said
supply.
13) Rule 36 of the Central Goods and Services Tax Rules,
2017 is also relevant and it states:
"Rule 36: Documentary Requirements and
Conditions for claiming Input Tax Credit:
(1) The input tax credit shall be availed by a
registered person, including the Input Service
Distributor, on the basis of any of the following
documents, namely, -
(a) an invoice issued by the supplier of goods or
services or both in accordance with the provisions
of section 31;
(b) an invoice issued in accordance with the
provisions of clause
(f) of sub-section (3) of section 31, subject to the
payment of tax;
(c) a debit note issued by a supplier in accordance
with the provisions of section 34;
(d) a bill of entry or any similar document
prescribed under the Customs Act, 1962 or rules
made there-under for the assessment of integrated
tax on imports;
(e) an Input Service Distributor invoice or Input
Service Distributor credit note or any document
issued by an Input Service Distributor in
accordance with the provisions of sub-rule (1) of
rule 54.
(2) Input tax credit shall be availed by a
registered person only if all the applicable
particulars as specified in the provisions of Chapter
VI are contained in the said document Provided
that if the said document does not contain all the
specified particulars but contains the details of the
amount of tax charged, description of goods or
services, total value of supply of goods or services
or both, GSTIN of the supplier and recipient and
place of supply in case of inter-State supply, input


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tax credit may be availed by such registered
person.
(3) No input tax credit shall be availed by a
registered person in respect of any tax that has
been paid in pursuance of any order where any
demand has been confirmed on account of any
fraud, willful misstatement or suppression of facts
under section 74 .
(4) No input tax credit shall be availed by a
registered person in respect of invoices or debit
notes the details of which are required to be
furnished under subsection (1) of section 37
unless,-
(a) the details of such invoices or debit notes have
been furnished by the supplier in the statement of
outward supplies in FORM GSTR-1, as amended in
FORM GSTR-1A if any, or using the invoice
furnishing facility; and
(b) the details of input tax credit in respect of such
invoices or debit notes have been communicated to
the registered person in FORM GSTR-2B under
sub-rule (7) of rule 60."

14) Thus GST is paid by the purchaser to a supplier on
purchase of goods or services. The purchaser/dealer then
avails the tax paid to the supplier as ITC in its Electronic
Credit Ledger and offsets its partial liability by using the said
ITC and the tax collected on the profit margin is paid in cash.
The concept of ITC is to avoid burden of double taxation on
the tax payer.
15) Section 16 deals with the eligibility conditions to avail
ITC. Section 16(2) (c) allows availment of ITC to the
purchaser only when the supplier had discharged the output
liability through cash or by using ITC. But if the supplier has
not paid the tax to the Government, the purchaser is not
eligible to avail ITC.


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16) The fact that there is no mechanism with the recipient
of goods to verify whether the supplier has discharged its
liability to the Government, or not, is not disputed by
respondents. In view of this, it is impossible for the purchaser
to check whether the supplier has deposited the tax paid by
him to the Government and then avail ITC. Also the supplier
is not normally under the control of the purchaser. It is not
disputed that it is not possible for a purchaser to keep a
check on activities of its supplier or ensure that the latter
makes over to the Government, the GST paid to him by the
purchaser.
17) Petitioner contends that to deny a purchaser like
petitioner, who is a bona fide purchaser, and who has paid
the GST to the supplier, the ITC benefit is arbitrary and
unreasonable and violates Art.14, 19(1) (g) and Art.300-A of
the Constitution of India. They contend that for a mistake on
the part of the supplier to make over the tax collected from
purchaser to the Government, the purchaser cannot be
found fault with. Otherwise, it would be penalizing a person
for a mistake of another person. By denying the purchaser
availment of ITC and making the purchaser pay the tax to the
Government again amounts to double collection when he
has already paid to the supplier and it violates Art.265 of the
constitution of India.
18) We find considerable force in the contention of the
petitioner.
19) In our opinion, there is a failure by the Parliament,
while enacting Section 16 (2)(c) of the Act, to make a
distinction between purchasing dealers who have bona fide


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transacted with the selling dealer by taking all precautions as
required by the Act and those that have not. Therefore, there
is need to restrict the denial of ITC only to the selling dealers
who had failed to deposit the tax collected by them and not
punish bona fide purchasing dealers.
20) The purchasing dealer cannot be asked to do the
impossible, i.e., to identify a selling dealer who will not
deposit with the Government, the tax collected by him from
purchasing dealers, and avoid transacting with such selling
dealers.
21) Alternatively, what section 16(2)(c) of the Act requires
the purchasing dealer to do is that after transacting with the
selling dealer, somehow ensure that the selling dealer does
in fact deposit the tax collected from the purchasing dealer;
and if the selling dealer fails to do so, undergo the risk of
being denied the ITC. It would be extremely difficult for a
purchasing dealer to ensure that the selling dealer deposits
the GST collected from him with the Government.
22) So section 16(2) (c) of the Act places an onerous
burden on a bona fide purchasing dealer.
23) In these circumstances, if the law seeks to visit
disproportionate consequences to a bona fide purchasing
dealer, it will become vulnerable to invalidation on the
touchstone of Article 14 of the Constitution.
24) Reading down a provision is undoubtedly an accepted
method to save it from the vice of unconstitutionality. It would
be appropriate in the instant case too to adopt the said
principle.


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25) In B.R. Enterprises v. State of U.P.1, the situation
where such a principle of reading down can be applied is
explained in the following terms:
"81. ..... Similarly, for upholding any provision,
if it could be saved by reading it down, it should be
done, unless plain words are so clear to be in
defiance of the Constitution. These interpretations
spring out because of concern of the courts to
salvage a legislation to achieve its objective and not
to let it fall merely because of a possible ingenious
interpretation. The words are not static but dynamic.
This infuses fertility in the field of interpretation. This
equally helps to save an Act but also the cause of
attack on the Act. Here the courts have to play a
cautious role of weeding out the wild from the crop, of
course, without infringing the Constitution. For doing
this, the courts have taken help from the Preamble,
Objects, the scheme of the Act, its historical
background, the purpose for enacting such a
provision, the mischief, if any which existed, which is
sought to be eliminated."

26) In CST v. Radhakrishan2, sanction for prosecution of
a dealer under the M.P. General Sales tax Act was given by
the Commissioner of Taxes under section 46 (1) (c) of the
said Act, though there was a procedure for recovery of tax by
imposing penalty under section 22(4-A) of the said Act. The
validity of the sanction was questioned on the ground that
under the Sales Tax Act, the Commissioner is entitled to
pursue two different procedures for enforcing and realizing
the assessment made, but as there is no guidance as to the
circumstances in which he should resort to either of the two
procedures, the provision regarding grant of sanction is
invalid. Rejecting the said (1999) 9 SCC 700 : (2000) 120
STC 302, at page 764 :


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(1979) 2 SCC 249 : (1979) 118 ITR 534, at page 257
contention and reading down the provision enabling
prosecution for failure to pay tax by a dealer, the Supreme
Court held:
"15 . ... .... In considering the validity of a
statute the presumption is in favour of its
constitutionality and the burden is upon him who
attacks it to show that there has been a clear
transgression of constitutional principles. For
sustaining the presumption of constitutionality the
court may take into consideration matters of
common knowledge, matters of common report, the
history of the times and may assume every state of
facts which can be conceived. It must always be
presumed that the Legislature understands and
correctly appreciates the need of its own people and
that discrimination, if any, is based on adequate
grounds. It is well settled that courts will be justified
in giving a liberal interpretation to the section in
order to avoid constitutional invalidity. These
principles have given rise to rule of reading down
the sections if it becomes necessary to uphold the
validity of the sections. In the present case it is
seen, under Section 46 before a prosecution can be
launched, it is necessary that the assessee should
have failed to pay the tax due within the time
allowed without reasonable cause. The duty of the
Commissioner is, therefore, to be satisfied that the
assessee has failed without reasonable cause and
without recourse to prosecution under Section
46(1)(c), the tax due cannot be collected. The
provisions of Section 22(4-A) can be read as being
applicable to cases in which the stringent step of
prosecution is considered not necessary. The option
is with the Commissioner and if he thinks levy of
penalty would achieve the purpose of collection of
the tax he can have recourse to the provisions of
Section 22(4-A). Before levying a penalty under
Section 22(4-A), the Commissioner shall give
reasonable opportunity of being heard as to why the
penalty should not be levied. Reading the two
provisions harmoniously, we are of the view that the


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discretion is given to the Commissioner to resort to
one of the two remedies as the facts of the case
may require. In graver cases he will be justified in
taking the drastic remedy and resorting to
prosecution in the criminal court if he is satisfied that
such a course is necessary for the collection of the
tax expeditiously. If the discretion is not properly
exercised the court may be justified in interfering in
such cases but the law cannot be held to be invalid."
(emphasized supplied)
27) A provision similar to Section 16(2)(c) of the Act also
existed in Section 9(2) (g) the Delhi Value Added Tax Act,
2004.
28) This provision was considered by the Delhi High Court
in Quest Merchandising India Pvt.Ltd and others v.
Government of NCT of Delhi and others3.
Section 9(1) of DVAT Act permits ITC to a
registered dealer in respect of turnover of purchases
occurring during the tax period where the purchase
arises in the course of his activities as a dealer and
the goods are to be used by him directly or indirectly
for the purpose of making sales which are liable to
tax under Section 7 of the DVAT Act. Sub section
(2) of Section 9 sets out the conditions under which
such ITC would not be allowed. Clause
(g) of sub-section (2) of Section 9 made ITC benefit
available to a purchasing dealer only when the tax
paid by the purchasing dealer has actually been
deposited by the selling dealer with the Government
or has been lawfully adjusted against output tax
liability and correctly reflected in the return filed for
the respective tax period.
Reading down clause (g) of sub-section (2) of
Section 9, in On Quest Merchandising India (3
supra), the Delhi High Court held:
(2017) SCC ONLINE DELHI 13037 "39. Applying
the law explained in the above decisions, it can be
safely concluded in the present case that there is a
singular failure by the Legislature to make a
distinction between purchasing dealers who have


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bona fide transacted with the selling dealer by taking
all precautions as required by the DVAT Act and
those that have not. Therefore, there was need to
restrict the denial of ITC only to the selling dealers
who had failed to deposit the tax collected by them
and not punish bona fide purchasing dealers. The
latter cannot be expected to do the impossible. It is
trite that a law that is not capable of honest
compliance will fail in achieving its objective. If it
seeks to visit disobedience with disproportionate
consequences to a bona fide purchasing dealer, it
will become vulnerable to invalidation on the
touchstone of article 14 of the Constitution.
40. ... ...
41. The court respectfully concurs with the
above analysis and holds that in the present case,
the purchasing dealer is being asked to do the
impossible, i.e., to anticipate the selling dealer who
will not deposit with the Government the tax
collected by him from those purchasing dealer and
therefore avoid transacting with such selling dealers.
Alternatively, what section 9(2)(g) of the DVAT Act
requires the purchasing dealer to do is that after
transacting with the selling dealer, somehow ensure
that the selling dealer does in fact deposit the tax
collected from the purchasing dealer and if the
selling dealer fails to do so, undergo the risk of
being denied the ITC. Indeed section 9(2)(g) of the
DVAT Act places an onerous burden on a bona fide
purchasing dealer. ....... ...
53.. In light of the above legal position, the
Court hereby holds that the expression 'dealer or
class of dealers' occurring in Section 9 (2) (g) of the
DVAT Act should be interpreted as not including a
purchasing dealer who has bona fide entered into
purchase transactions with validly registered selling
dealers who have issued tax invoices in accordance
with Section 50 of the Act where there is no
mismatch of the transactions in Annexures 2A and
2B. Unless the expression 'dealer or class of
dealers' in Section 9 (2) (g) is 'read down' in the
above manner, the entire provision would have to be
held to be violative of Article 14 of the Constitution.


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54. The result of such reading down would be
that the Department is precluded from invoking
Section 9 (2) (g) of the DVAT to deny ITC to a
purchasing dealer who has bona fide entered into a
purchase transaction with a registered selling dealer
who has issued a tax invoice reflecting the TIN
number. In the event that the selling dealer has
failed to deposit the tax collected by him from the
purchasing dealer, the remedy for the Department
would be to proceed against the defaulting selling
dealer to recover such tax and not deny the
purchasing dealer the ITC. Where, however, the
Department is able to come across material to show
that the purchasing dealer and the selling dealer
acted in collusion then the Department can proceed
under Section 40A of the DVAT Act." (emphasis
supplied)

29) The aforesaid decision of the High Court was
challenged before the Supreme Court in Commissioner of
Trade and Tax Delhi v. M/s Arise India Ltd.4. The said
Special Leave petition was dismissed without interfering with
the order of the High Court. The Supreme Court held:
"On hearing learned Additional Solicitor General appearing
for the petitioner, we are not inclined to interfere with the
impugned order.
The Special Leave Petition is dismissed.
Learned Additional Solicitor General, however, submits that
a batch of petitions were decided by the impugned order and
there are some of the cases where the purchase
transactions are Special Leave to Appeal (Civil) No.36750 of
2017 dt. 10.1.2018 not bona fide like the present case and
those cases ought to have been remitted back to the
competent authority.
Learned Additional Solicitor General submits that the
petitioner would move the High Court with necessary
particulars for directions in this behalf for which liberty is
granted, as prayed for."

30) The same issue again arose in the Delhi High Court
in M/s Shanti Kiran India (P) Ltd v. The Commissioner Trade


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and Tax, Delhi.5 i.e whether the benefit of ITC is available to
the registered purchaser dealers who paid taxes to the
registered seller dealer(s) in terms of invoice(s) raised by
them even though those seller dealers did not deposit the
collected tax with the Government. The Delhi High Court
held in favour of the purchaser dealers and against State.
31) This judgment was again challenged in the Supreme
Court in The Commissioner Trade and Tax, Delhi v. M/s
Shanti Kiran India (P) Ltd6. The Supreme Court followed the
decision of the Delhi High Court in Quest Merchandising
India Pvt.Ltd ( 3 supra) as affirmed by the Supreme Court in
M/s Arise India (4 supra) and held:
"In light thereof, as we find that there is no dispute
regarding the selling dealer being registered on the date of
transaction and neither the transactions nor invoices in
questions have been doubted, based on any inquiry into their
veracity, we do not find a good reason to interfere with the
order of the High Court directing for grant of ITC benefit after
due verification. The appeals lack merit and are, accordingly,
dismissed."
32) The contention of the Dy. Solicitor General of India
that the judgments of the Supreme Court in M/s Arise India
(4 Supra) and in Commissioner Trade and Tax, Delhi ( 6
supra) are not binding precedents, cannot be countenanced.
33) This is because in the former case, the Solicitor
General, who is the law officer of the Union of India, himself
wanted to pursue cases pending in the Delhi High Court
where the transactions were not bona fide, thus implying that
the Government had accepted the basis of the judgment. In
the latter case, the Supreme Court applied to the facts of the
said case the principle that if the transactions are not
doubted, ITC cannot be denied. When the principle is


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actually applied by the Supreme Court to the facts of the
case, it has to be taken that the view in Quest Merchandising
India Pvt.Ltd ( 3 supra) has been approved by the Supreme
Court and it cannot be contended that it's judgment is not a
precedent.
34) We are of the view that the same reasoning as
adopted by the Delhi High Court in Quest Merchandising
India Pvt.Ltd ( 3 supra) and M/s Shanti Kiran India (P) Ltd ( 5
supra) as approved by the Supreme Court, should be
adopted to the interpretation of Section 16(2) (c) of the Act.
35) It ought not to be interpreted to deny ITC to
purchasers in a bona fide transaction and should be read
down and applied only where the transaction is found to be
not bona fide or is a collusive transaction or fraudulent
transaction to defraud the revenue.
36) The Gauhati High Court in National Plasto Moulding
v.State of Assam7, where the constitutionality of Section
16(2) (c) of the Act was (2024) 8 TMI 836= 2024(89) GSTL
82 (Gau) challenged, observed that the controversy was
squarely covered by the decision of the Delhi High Court in
On Quest Merchandising India Private Limited ( 3 supra) as
approved by the Supreme Court in Arise India (4 supra), and
also read down the said provision and declined to apply it to
a purchasing dealer, who had bona fide entered into
purchase transactions with validly registered selling dealers.
It set aside the show cause notices and the consequential
orders challenged in the batch of the Writ Petitions. It held
that the Department is free to act in the said cases where
purchase transactions are not bona fide.


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37) It reiterated the same in M/s McLeod Russel India
Ltd. V. Union of India and 3 others8.
38) It is stated across the bar that the SLP filed against
the judgment in National Plasto Moulding (7 supra ) was
dismissed by a non-speaking order and that no SLP had
been filed by the Union of India against the judgment in M/s
McLeod Russel India Ltd ( 8 supra).
39) No doubt some High Courts have upheld the
constitutionality of Section 16(2) (c) of the Act without
reading it down. They are:
(a) Kerala High Court in M.Trade Links v. Union of India,
Nahasshukoor and another v. Assistant Commissioner9
(b) Patna High Court in Aastha Enterprises v. State of
Bihar10
(c) Madhya Pradesh High Court in M/s Shree Krishna
Chemicals v.Union of India11 (2025) 3 TMI 59 (Gau) 2023
SCC online Ker 11369 2023 SCC Online Pat 4395 2025 (2)
TMI 1006 (M.P)
(d) Madras High Court in M/s Baby Marine (Eastern) Exports
v. Union of India and others12
(e) Andhra Pradesh High Court in Thirumalakonda Plywoods
v. assistant Commissioner13
40) In the opinion of these High Courts, the legislature
must enjoy a wide and flexible power to enable it to adjust its
system of taxation in proper and reasonable ways, though it
is permissible to declare a taxation statute as
unconstitutional if it infringes the fundamental rights
guaranteed under part III of the Constitution; that input tax
credit is in the nature of a benefit or concession extended to


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the dealer under the statutory scheme ; even if it held to be
an entitlement, this entitlement is subject to the restrictions
as provided under the scheme or the statute; and that claim
to input tax is not an absolute right, but it can be said that it is
an entitlement subject to the conditions and restrictions as
envisaged in Section 16(2) to 16(4), Section 43 , and the
Rules made thereunder. They hold that as per the scheme of
the Act only tax paid and collected and paid to the
Government could be given as ITC; and when the
Government has not received the tax, a dealer cannot be
given ITC.
According to some of them, taxation legislation may not be
easily interfered with and Court must show judicial restraint
to interfere with tax legislation unless it is shown and proved
that such taxing statute is manifestly unjust or glaringly
unconstitutional; that challenge to it on ground of violation of
Art.14 is vague; and that the remedy of the purchasing seller
is to sue the seller for recovery of the tax he had paid which
the latter had not paid to the Government.
2025 (8) TMI 791(Madras) 2023 SCC Online AP 1476
41) But none of the above High Courts have looked at the
practical impossibility for a purchaser to ensure that the
seller pays the GST to the Government particularly when he
has no means of checking the said fact.
42) While there can be no dispute about the principles
mentioned in their judgments, their failure to appreciate the
above important aspect, does not persuade us to follow their
view.


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43) Yet another important aspect is that in none of the
above decisions rendered by the other High Courts referred
to in para 39 (supra) , the decisions of the Delhi High Court
in Quest Merchandising India Pvt.Ltd and others( 3 supra)
approved by the Supreme Court in M/s Arise India ( 4 supra)
and in M/s Shanti Kiran (5 supra) also approved by the
Supreme Court in Commissioner of Trade and Tax ( 6 supra)
were noticed or considered. Had those High Courts been
made aware of these decisions, may be they would have
taken the same view as the Delhi High Court and the
Supreme Court did.
44) Moreover, it is a fundamental rule of law of taxation
that, unless otherwise expressly provided, income cannot be
taxed twice (Laxmipat Singhania v. CIT14). There cannot be
dispute that the concept of Input Tax credit is introduced to
ensure that there is no burden of double taxation on a tax
payer. In Mahaveer Kumar Jain v. CIT15, the Supreme Court
held:
"21. Further, in a decision of this Court in Jain Bros. v.
Union of India16, it has been held as under: (SCC pp. 315-16,
para 6) "6. It is not disputed that there can be double taxation if the
legislature has distinctly enacted it. It is only when there are
general words of taxation and they have to be interpreted, they
AIR 1969 SC 501 (2018) 6 SCC 527 : (2018) 404 ITR 738, at
page 532 : (1969) 3 SCC 311 cannot be so interpreted as to tax
the subject twice over to the same tax.... If any double taxation is
involved, the legislature itself has, in express words, sanctioned it.
It is not open to any one thereafter to invoke the general principles
that the subject cannot be taxed twice over."
22. The above referred cases make it clear that there is no
prohibition as such on double taxation provided that the legislature
contains a special provision in this regard. Now, the only question
that remains to be decided is whether in fact there is a specific
provision for including the income earned from the Sikkim lottery
ticket prior to 1-4-1990 and after 1975, in the income tax return or
not. We have gone through the relevant provisions but there
seems to be no such provision in the IT Act wherein a specific
provision has been made by the legislature for including such an


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income by an assessee from lottery ticket. In the absence of any
such provision, the assessee in the present case cannot be
subjected to double taxation."
(emphasis supplied)
45) We do not find anything in the language of the Act
which expressly enables the respondents to tax a purchaser,
who has already paid tax to the seller, a second time, by
denying him ITC, in all situations. If that were to be so, there
would be no concept of giving ITC at all in the Act.
46) We are of the view that the other High Courts have
also overlooked this important principle that ITC is introduced
to avoid double tax burden on a tax payer under the GST
regime. The Parliament, in our opinion, though intended it to
be a benefit/concession, it had not intended to punish a tax
payer by denying him ITC if the transaction entered into by
him with a seller/supplier is bona fide.
47) The view taken by the Delhi High Court in the
judgments rendered by it under the DVAT Act, which contain
similar provision under section 9(2) (g), which have been
accepted by the Supreme Court, commends to us and we
are of the opinion that this is a better way to view the issue
and Section 16(2)(c) has to be read down as the Delhi High
Court had done. If this issue had been looked at by the other
High Courts too mentioned supra in the manner the Delhi
High Court had done in the cases under the DVAT Act, while
upholding the constitutionality of the provision, maybe they
would have read it down as well, in the manner we had done.
48) Reliance placed by the Dy.SGI on the decision of the
Supreme Court in Chief Commandant of Central Goods and
Service Tax and others v. Safari Retreats Pvt.Ltd17 is of no
avail as validity of Section 16(2) (c) of the Act did not fall for


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consideration in the said judgment though other provisions
i.e Section 17(5) (d) and Section 17(5) (c) of the CGST
Act,2017 were considered there.
49) We do not deem it necessary to advert to and discuss
all the other judgments cited before us as our view balances
the interest of both the tax payer and the State.
50) To complete the narrative, we may point out that this
Court in an order dt.16-5-2023 had directed the CGST
Department to file an affidavit indicating as to whether any
proceeding has been initiated against Respondent no.4 and
the outcome thereof, and whether the GST registration of the
said respondent still stands or it has been revoked.
51) In reply thereto, on 13.8.2024, the respondents 2 and
3 have filed an affidavit stating that proceedings were
initiated against the respondent no.4 under the Act by the
Tripura State GST authorities and it was found liable to
(2025) 2 SCC 523 pay Rs.19,74,32,052.63/- on account of
tax, interest and penalty under SGST and CGST Acts and an
amount of Rs.53,93,605/- each of SGST and CGST was
recovered for the period August 2017 to February 2018 and
Rs.4,86,901/- towards CGST and Rs.5,86,126/- towards
SGST was recovered for the period April, 2018 to
August,2018. It is stated that this recovery was done till 6-7-
2020.
52) The respondent no.4 has also filed a counter affidavit
on 22.8.2023 stating that it's GST registration has been
suspended/cancelled since 21.1.2020 and criminal cases
have also been filed against it.


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53) Importantly, the Assistant Commissioner (Respondent
no.3) had invoked only Section 73 of the Act against the
petitioner and issued a Show Cause notice to petitioner on
7.1.2021 which resulted in the impugned order dt.17.5.2022.
Section 73 lays down the procedure for determination of tax
not paid or short paid or erroneously refunded or input tax
credit wrongly availed or utilised for any reason other than
fraud or any wilful misstatement or suppression of facts.
54) The fact that Section 74 of the Act which lays down
the procedure for determination of tax not paid or short paid
or erroneously refunded or input tax credit wrongly availed or
utilised by reason of fraud or any wilful misstatement or
suppression of facts, is not invoked by respondent No.3 is
very significant.
55) Thus the respondents are not disputing that the
petitioner did pay the GST of Rs.1,11,60,830/- to respondent
no.4, the supplier, though they contend that the latter has not
passed over the same to the Government. There is no
allegation by the respondents that petitioner had failed to
discharge its liability towards tax on the purchases made by
it. It is their case that the respondent no.4 has fraudulently
retained the GST paid by petitioner to it.
56) Consequently, it has to be held that the transaction
between the petitioner and the respondent no.4 is a bona
fide transaction and not a collusive transaction tainted by
fraud etc., and that the conduct of respondent no.4 is
blameworthy. Petitioner therefore cannot be penalised by
invoking Section 16(2) (c) of the Act and denied the ITC.


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57) For all the aforesaid reasons, the Writ Petition is partly
allowed as under:
(a) Section 16(2) (c) of the Act is held not violative of Art.14,
19(1) (g) or 265 or 300-A of the Constitution of India;
(b) But Section 16(2) (c) of the Act ought not to be
interpreted to deny ITC to purchasers in a bona fide
transaction like the petitioner and it should be read down and
applied only where the transaction is found to be not bona
fide or is a collusive transaction or fraudulent transaction to
defraud the revenue.
(c) The order dt.7.5.2022 passed by respondent no.3 is set
aside.
(d) The respondents are directed to forthwith allow the
petitioner ITC to the extent of Rs.1,11,60,830/- denied to it.
(e) No costs.
All pending applications are disposed of.”

17. I am in respectful agreement with the view taken by the
Division Bench of the Tripura High Court in the case of M/s Sahil
Enterprises Vs. Union of India and others – W.P.(C) 688/2022
dated 06.01.2026 and I am of the considered opinion that the
present petition also deserves to be disposed of in terms of the
said judgment as well as the earlier judgment of the Gauhati High
Court in National Plasto Moulding’s case supra.


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18. In the result, I pass the following:
ORDER
(i) Petition is hereby disposed of in terms of the judgment of
the Gauhati High Court in the case of National Plasto Moulding
Vs. State of Assam – (2024) 21 CENTAX 182(Gau) and the
judgment of the Tripura High Court in the case of M/s Sahil
Enterprises Vs. Union of India and others – W.P.(C) 688/2022
dated 06.01.2026.
(ii) The impugned provisions contained in Section
16(2)(C) of the CGST / KGST Act and Rule 36(4) of the CGST /
KGST Rules are hereby read down in a manner that allows the
benefit of ITC to bonafide recipients such as the petitioner, which
has complied with all other conditions under Section 16(2) of the
CGST / KGST Act despite any fault / lapse or non-payment of tax
to the government by the suppliers.

Sd/-
(S.R.KRISHNA KUMAR)
JUDGE

DH / SV
List No.: 3 Sl No.: 2