Recent judicial developments have strengthened the legal position of bona fide purchasers facing Input Tax Credit (“ITC”) disputes involving supplier-side defaults under Section 16 of the CGST Act.
In M/s McLeod Russel India Ltd. vs Union of India (Gauhati High Court, 09.12.2025), the Court examined the application of Section 16(2)(aa) concerning invoice reporting in GSTR-1/GSTR-2B. The Court held that mechanical denial of ITC due to the supplier’s failure to upload invoices imposes an impossible and inequitable burden on the buyer, who has no statutory mechanism to enforce compliance. Accordingly, while the provision was upheld, it was read down to ensure that bona fide purchasers are first afforded an opportunity to establish transaction genuineness through invoices and supporting documentation. The interpretation will operate until a practical reconciliation mechanism is introduced by CBIC.
Shortly thereafter, in M/s Sahil Enterprises vs Union of India (Tripura High Court, 06.01.2026), the Court considered Section 16(2)(c) where the supplier failed to deposit GST with the Government despite collecting it from the purchaser. The Court upheld the constitutionality of the provision but read down its application to prevent denial of ITC to bona fide purchasers, except in instances involving fraud, collusion or non-genuine transactions. The Court further emphasized that bona fide purchasers cannot be subjected to double taxation, as GST is fundamentally a value-added tax, and supplier non-compliance lies beyond the control of the recipient.
Both decisions align with the Delhi VAT jurisprudence in Quest Merchandising and Arise India (affirmed by the Supreme Court), reinforcing the principle that statutory ITC conditions must not defeat the architecture of GST or impose impossible compliance burdens on honest taxpayers.
Key Takeaways for Taxpayers & Compliance Teams:
• Supplier defaults alone may not justify ITC denial
• Genuineness & documentation gain primacy over strict mismatch
• Litigation position for compliant taxpayers materially strengthens
• Collusive and fraudulent cases remain excluded from relief
• Greater policy clarity & system improvements anticipated from CBIC
These rulings reflect an evolving judicial trend towards ensuring fairness and proportionality in GST compliance, particularly in cases involving supplier-side defaults.
Case Law References:
• M/s McLeod Russel India Ltd. vs Union of India & Ors., Gauhati High Court (WP(C) No. 5725/2022, decided on 09.12.2025) — [Read Case Law]
• M/s Sahil Enterprises vs Union of India & Ors., Tripura High Court (WP(C) No. 688/2022, decided on 06.01.2026) — [Read Case Law]