The Hon’ble High Court of Tripura in M/s Malaya Rub-Tech Industries v. Union of India [WP (C) No. 849 of 2022 dated February 10, 2026] set aside the demand order and held that Input Tax Credit (“ITC”) cannot be denied to a bona fide purchasing dealer solely on the ground that the supplier has failed to deposit the GST collected from such purchaser, where there is no finding of fraud, collusion or non-bona fide conduct on the part of the purchaser.
Facts:
The petitioner, Malaya Rub-Tech Industries, is a partnership firm engaged in the rubber business and was duly registered under the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and the Tripura Goods and Services Tax Act, 2017 (“the TGST Act”).
The petitioner procured input materials from Respondent No. 7 during the period March 08, 2018 to November 30, 2018 for use in manufacturing of finished goods. The petitioner paid the applicable GST at the time of purchase and availed ITC on such purchases, being under a bona fide belief that the supplier had duly deposited the tax with the Government.
The sixth respondent, exercising powers under Section 73(1) of the CGST Act (i.e., proceedings for reasons other than fraud), issued a Show Cause Notice dated January 14, 2021 to the petitioner for the tax period August 2017 to July 2019, alleging wrongful availment/utilization of ITC amounting to Rs. 22,09,964.04/-, on the ground that the supplier had not deposited the corresponding tax with the Government.
After receiving the petitioner’s reply, the sixth respondent passed an order dated February 17, 2022 confirming the demand and directing recovery of the said amount. The petitioner challenged this order by way of the present writ petition.
Issue:
Whether ITC can be denied to a bona fide purchasing dealer under Section 16(2)(c) of the CGST Act solely on account of the supplier’s failure to deposit the GST collected from the purchaser, in proceedings initiated under Section 73 (non-fraud proceedings) without any finding of fraud, collusion, or non-bona fide conduct on the part of the purchaser?
Held:
The Hon’ble High Court of Tripura in WP (C) No. 849 of 2022 held as under:
- Observed that, Section 16(2)(c) of the CGST Act, as enacted, failed to distinguish between purchasing dealers who transacted with a supplier in good faith and those who colluded or acted fraudulently; this omission creates an onerous and impossible burden on a bona fide purchaser to ensure that the selling dealer actually deposits the GST collected from him — a task the purchaser has no legal mechanism to enforce.
- Noted that, the principle of reading down must be applied to Section 16(2)(c) to save it from the vice of unconstitutionality under Article 14 of the Constitution of India; the provision, if applied indiscriminately against bona fide purchasers, would visit disproportionate consequences on an innocent taxpayer who has already discharged his tax liability to the seller.
- Held that, since the proceedings against the petitioner were initiated under Section 73 of the CGST Act (i.e., non-fraud proceedings) and neither the Show Cause Notice nor the demand order contained any finding that the transaction between the petitioner and the supplier was non-bona fide, collusive, or fraudulent, the transaction must be treated as bona fide; consequently, Section 16(2)(c) cannot be invoked to deny ITC to the petitioner for the supplier’s default.
- Directed that, the impugned order dated February 17, 2022 be set aside and the respondents forthwith allow the petitioner ITC to the extent of Rs. 22,09,964/-.
Our Comments:
Relevant Provision — Section 16(2)(c) of the CGST Act:
Section 16(2)(c) of the CGST Act lays down one of the conditions for availment of ITC — that the tax charged in respect of the supply has been actually paid to the Government, either in cash or through utilization of ITC. In other words, even if the purchasing dealer has paid the full invoice value including GST to the supplier, the purchaser’s entitlement to ITC is made contingent on the supplier actually depositing such tax with the Government. This condition has been a major source of litigation because purchasing dealers have no direct mechanism under the Act to compel or monitor the supplier’s compliance with its deposit obligations.
Distinction between Section 73 and Section 74 of the CGST Act:
Section 73 of the CGST Act governs determination of tax not paid, short paid, or erroneously refunded, or ITC wrongly availed/utilized, for reasons other than fraud, wilful misstatement, or suppression of facts. Section 74, on the other hand, is triggered where such default arises by reason of fraud, wilful misstatement, or suppression of facts, and carries a higher penalty and an extended limitation period. The fact that the proceedings in the present case were initiated under Section 73 — and not under Section 74 — was treated by the Court as conclusive evidence that no allegation of fraud or collusion was ever made or established against the petitioner, thereby reinforcing the bona fide nature of the transaction.
Article 14 of the Constitution of India:
The Court reaffirmed that a fiscal provision which places an impossible or disproportionate burden on a law-abiding taxpayer is susceptible to challenge under Article 14 (Right to Equality). By reading down Section 16(2)(c), the Court harmonized the statutory condition with constitutional guarantees, ensuring that the provision operates only against non-bona fide, collusive, or fraudulent transactions.
Pari Materia Judgments:
The present judgment follows the ratio laid down by the Division Bench of the Tripura High Court in Sahil Enterprises v. Union of India [WP(C) No. 688 of 2022 dated January 06, 2026], which had extensively considered judgments from the Supreme Court, the Delhi High Court, and the Gauhati High Court before arriving at the principle of reading down Section 16(2)(c). Several other High Courts across the country have also adopted a similar protective approach for bona fide purchasers, recognizing that the GST framework cannot be used to doubly penalize a taxpayer who has already discharged his liability to the supplier.
Contrary View:
It must, however, be noted that some High Courts and adjudicating authorities have taken a strict literal view of Section 16(2)(c), holding that the condition of actual tax deposit by the supplier is a mandatory statutory requirement and non-compliance therewith disentitles the purchaser to ITC irrespective of bona fides. The issue of whether Section 16(2)(c) passes constitutional muster, and the extent to which it can be read down, therefore continues to be a matter of judicial debate pending a definitive pronouncement by the Supreme Court of India.
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