Tax Vista Your weekly tax recap Edn. 271 - 19th January 2026 Kasi Viswanathan V

 

 

Section 16(2)(c) and the limits of enforceability

The decision of the Tripura High Court revisits a question that has repeatedly troubled the GST regime, namely, whether a purchasing dealer can be denied input tax credit merely because the supplier, after collecting tax, fails to remit it to the Government.

 

In the facts of the case, ITC of Rs.7.32 lakh available in the petitioner's electronic credit ledger was blocked in May 2020 following investigation at the supplier's end, which revealed that though the supplier had disclosed the outward supply to the petitioner in GSTR-01, it had filed Nil GSTR-3B and had not discharged the tax liability. This culminated in a show cause notice under Section 73 issued in January 2021 proposing a demand of Rs.1.12 Crore. The petitioner initially challenged the blocking and show cause notice by way of WP(C) No.531/2021 filed in August 2021. Though the High Court ordered release of the blocked credit on the ground that one year had elapsed, no stay was granted on adjudication. The proceedings were thereafter concluded by order dated 17.05.2022 confirming the demand, which led to withdrawal of the earlier writ and filing of the present petition challenging the adjudication order.

 

The High Court noted certain undisputed practical limitations faced by a purchasing dealer:

 

-    There is no statutory mechanism available to a recipient to verify whether the supplier has actually discharged tax to the Government.

-     It is not possible for a purchaser to monitor or control the statutory compliances of its supplier.

 

Against this backdrop, the Court holds that Parliament, while enacting section 16(2)(c), failed to distinguish between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those who have not. Section 16(2)(c) of the Act places an onerous burden on a bona fide purchasing dealer. Rather than striking the provision down, the Court read it down and limited its application to cases involving non-bona fide, collusive or fraudulent transactions to defraud the Revenue. For this purpose, reliance was placed on Quest Merchandising [2017-VIL-544-DEL], where a similar provision under the DVAT Act was read down to exclude bona fide purchasers, and in the subsequent trajectory of that decision through Shanti Kiran [2013-VIL-04-DEL; 2025-VIL-83-SC].

 

An important aspect of the judgment is the manner in which it deals with contrary High Court decisions that have upheld section 16(2)(c) without reading down. The Court notes that none of them engaged with the issue of practical impossibility faced by the purchaser, nor were they apprised of the Delhi VAT decisions and the Supreme Court's treatment of those cases.

 

While acknowledging that ITC may be characterised as a benefit or concession, the judgment emphasises that its purpose is to prevent double taxation.

 

The department's affidavit showed that proceedings had in fact been initiated against the supplier, partial recovery effected, registration cancelled/suspended, and criminal proceedings had been launched. Combined with the fact that 73 was invoked against the petitioner in the present case, the Court found no basis to treat the transaction as anything other than bona fide. Denial of ITC in such a situation was therefore set aside.

 

The decision has direct relevance for proceedings under section 73 involving denial of ITC for contravention of section 16(2)(c). The choice of section 73 itself lends weight to the recipient's bona fides. For Section 74 cases, however, the burden will be heavier; recipients will be required to demonstrate bonafides to bring themselves within the protective fold of this ruling.

 

At the same time, caution is required in reading the High Court's view in the present case that Supreme Court approved Quest Merchandising through Shanti Kiran. As noted in Tax Vista Edition No.258, the Shanti Kiran decision would be applicable only to Delhi VAT matters prior to 2010 i.e. pre insertion of material provision section 9(2)(g) in DVAT Act. Further, the expression "class of dealers" in section 9(2)(g) and the cabinet note explaining the proposal aimed at discouraging purchases from bogus dealers. How far that context (DVAT) can be seamlessly transplanted into GST will likely invite further scrutiny.

 

The Court's view that ITC is introduced to avoid double tax burden on a tax payer under the GST regime, contrasts this with views such as that of the Patna High Court [2023-VIL-546-PAT], which treated denial as justified since the Government never received the tax from the supplier, and the Kerala High Court, which highlighted inter-State settlement complications if credit were allowed despite upstream default.

 

The High Court's recognition of practical impossibility is a key factor, which cannot be subordinated to the proposition that ITC is a concession. [2026-VIL-15-TRI]

 

Refund of statutory pre-deposit and a conscious narrowing of Section 54

The controversy arose from a refund claim of statutory pre-deposit made pursuant to a favourable appellate order dated 09.02.2022. The refund claim was filed on 11.09.2024. The department rejected the claim as time barred by applying Section 54 of the CGST Act and Circular No. 125/44/2019-GST dated 18.11.2019, taking the view that the claim had been made beyond the prescribed period of two years.

 

The Jharkhand High Court [2025-VIL-103-JHR] examined the rejection and relied upon the decision of the Madras High Court in Lenovo [2023-VIL-799-MAD], wherein it was held that the expression "may" used in section 54 is directory and not mandatory. Proceeding on this basis, and placing reliance on Article 265 of the Constitution and Supreme Court precedents on expression 'may' being directory, the High Court held that refund of statutory pre-deposit is a vested right that accrues once the appeal is allowed. It observed that such a pre-deposit cannot be forfeited by invoking section 54 and that such an outcome could not have been the intent of GST law. Accordingly, the High court directed department to of the refund claim along with interest in terms of section 54

 

The department carried the matter in SLP. Before the Supreme Court, the State took a position that refund of statutory pre-deposit is governed by section 107(6) read with section 115 of the CGST/JGST Act, 2017 and not by section 54. On this submission, it was argued that the High Court had erred in embarking upon an interpretation of section 54, which was not required at all in the present case.

 

The Supreme Court accepted this submission and disposed of the appeal by holding that the refund in question was relatable to section 107(6) read with section 115 and that the exercise undertaken by the High Court in interpreting section 54 was unnecessary. While directing that the refund be granted with interest, the Supreme Court set aside the High Court's interpretative exercise on section 54, thereby taking the refund of statutory pre-deposit outside the scope of section 54 altogether.

 

The manner in which the appeal was argued and decided assumes significance. By carving out refunds of statutory pre-deposits from section 54, the State effectively avoided a binding pronouncement on whether the expression "may" in section 54 is directory. This approach preserves the possibility of the department contending, in an appropriate future case, that section 54 timelines are mandatory in other refund situations.

 

As a corollary, and in line with the approach under the earlier indirect tax regime, refund of statutory pre-deposit ought to be processed on the basis of a simple application without insisting on filing of Form RFD-01. The open issue then is the relevance of Explanation (d) to section 54, which fixes the relevant date as the date of communication of an appellate or judicial order, and the circular No.125/44/2019-GST dated 18.11.2019, which requires furnishing proof of payment of pre-deposit under the refund category relating to appeal, if such refunds are not governed by section 54 at all.

 

The sufficiency of the Jharkhand High Court's reliance on Article 265 and the Lenovo ruling, and the implications of treating section 54 timelines as directory, have been examined separately in Tax Vista Edition No.264 in a similar matter. The present decision, however, settles the limited point that refund of statutory pre-deposit stands on a distinct footing and is not subject to the time-limits under section 54. It would be beneficial if a clarificatory circular is issued on the procedure for refund of statutory pre-deposit that a plain application would suffice for claiming such refund. [2026-VIL-04-SC].

 

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)