Mechanical ITC Reversal for Supplier Default Section 16(2)(c) {Shaurya Alloys Pvt. Ltd. & Ors. v. State of Punjab & Another & connected matters CWP-34296-2024 (O&M) 2026 LLBiz HC(P&H) 58}
Facts:
A batch of 424 writ petitions was filed by purchasing dealers whose ITC was denied/reversed because their suppliers had failed to deposit GST, filed nil/short returns, or had their GST registrations cancelled, including retrospectively. The purchasers claimed to have paid the suppliers, possessed tax invoices and received the goods/services.
Issue:
Whether Section 16(2)(c) read with Section 155 of the CGST Act permits automatic reversal of ITC from a genuine purchaser merely because the supplier failed to deposit the tax with the Government, and whether the provision is constitutionally valid.
Held:
The High Court upheld the constitutional validity of Section 16(2)(c) but held that it cannot be applied mechanically or in isolation to reverse ITC merely due to the supplier’s default. The Department must examine the genuineness of the transaction, actual receipt of goods/services, circumstances of the supplier’s default, recovery action against the supplier and any material connecting the purchaser with fraud/collusion, after giving the purchaser an opportunity of hearing
The Court further held that fraud of the supplier cannot automatically be attributed to the purchaser, and directed fresh consideration of the affected cases in accordance with the prescribed guidelines.
