Tax Vista

Your weekly tax recap

Edn. 288 - 3rd August 2026

Kasi Viswanathan V

Section 16(2)(c): Re-avail as an Answer?

The Supreme Court has dismissed the special leave petitions against the Gujarat High Court decision [2026-VIL-432-GUJ]. The challenge before the Gujarat High Court was directed against Section 16(2)(c) of the CGST Act and the argument that a bona fide purchasing dealer should not be denied ITC merely because the supplier has failed to discharge the tax liability.

The Supreme Court noted the submission that a special leave petition had been entertained against the decision of the Tripura High Court in Sahil Enterprises [2026-VIL-15-TRI]. However, it observed that the exercise undertaken by the Gujarat High Court was not undertaken by Tripura and proceeded to examine the matter on that basis.

The Court accepted the Gujarat High Court's reasoning that there is no parity between the GST regime and DVAT regime considered by the Delhi High Court. The Court also noted that purchasing dealer under CGST regime is entitled to re-avail the credit after the supplier-dealer is made liable to discharge the tax liability.

On that basis, the Supreme Court held that the Gujarat High Court was justified in concluding that there were no grounds either to declare Section 16(2)(c) unconstitutional or to read down the provision. Expressing complete agreement with the views of the Gujarat High Court, the Court affirmed and upheld the impugned judgment and dismissed the special leave petitions.

As leave has not been granted, the doctrine of merger does not apply despite the Supreme Court affirming and upholding the Gujarat High Court decision. At the same time, the order is not a mere dismissal of the special leave petitions. Applying the principles laid down in Kunhayammed and Ors, [2000-VIL-31-SC] the statement of law contained in the order would constitute a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. In particular, the conclusions that there is no parity between the DVAT Act and the CGST Act for this purpose and that the GST regime permits re-availment of reversed credit once the supplier discharges the liability would be binding declarations of law.

At present, there appears to be only Diary No. 33460 of 2026 in respect of Tripura matter. Whether the special leave petition has in fact been entertained is therefore not entirely clear. One would hope that the matter does not travel down the route seen in Aerocom Cushions [2026-VIL-46-SC] and subsequently in GIDC [2026-VIL-68-SC], where later matters were dismissed observing that a similar SLP had already been dismissed.

The observation that the Tripura High Court did not undertake a similar exercise and the conclusion that there is no parity between the DVAT and GST regimes will have a significant bearing if and when the matter is considered. If the issue is revisited, it may require consideration by a larger Bench, particularly since these observations constitute a declaration of law and the Tripura decision largely proceeded on the basis of similarity between the two regimes.

That said, some aspects may still require closer examination. The Gujarat High Court itself records that the Delhi High Court was persuaded principally by two considerations. First, a purchasing dealer may be able to verify whether a supplier exists or whether registration stands cancelled, but cannot monitor whether the supplier has actually deposited the tax collected from customers. Secondly, the purchasing dealer does not have access to the supplier's returns. Those concerns exist under GST as well.

One important aspect, however, is that the expression "dealers or class of dealers" in Section 9(2)(g) of the DVAT Act contemplated action both against purchasing dealers and selling dealers. It was this expression that ultimately came to be curtailed through the process of reading down so as not to apply to bona fide purchasing dealers. As discussed earlier in Tax Vista Edition No. 271, the expression "dealers or class of dealers" in Section 9(2)(g) of the DVAT Act, read with the Cabinet Note explaining the provision, was aimed at addressing purchases from bogus dealers. That aspect was central to the reading down undertaken in the DVAT context. How far that reasoning can be transplanted into GST was always a distinct question.

The Gujarat High Court also placed reliance on Section 53 of the CGST Act and the reasoning in M Trade Links [2024-VIL-559-KER]. The inter-State settlement mechanism under GST was considered a relevant distinction from the VAT regime, as allowance of credit despite supplier default could have revenue implications across States.

Central to the Gujarat High Court's reasoning, and now noticed by the Supreme Court, is the ability of the purchasing dealer to reclaim the reversed credit once the supplier discharges the tax liability (in terms of Section 41 read with Rule 37A). In this context, it may be worthwhile to examine whether the principle recognised in Bhawani Cotton Mills that the possibility of refund at a later stage does not by itself justify collection at an earlier point has any relevance here. If that principle is applied, the fact that the credit can subsequently be re-availed may likewise not answer the concern arising from requiring the recipient to first reverse the credit and only thereafter seek restoration upon supplier compliance. This assumes significance when the Gujarat High Court itself notes that filing of GSTR-3B does not inherently establish that the corresponding tax has been paid in full and that the purchaser can at best verify filing of returns and reporting of invoices.

The Gujarat High Court also notes that contractual protections against the supplier are available, while eventually recognising that such remedies are cumbersome.

Considering that the difficulties identified in the DVAT decisions continue to exist and that no effective mechanism presently exists to verify payment of tax on a transaction-specific basis, the Statement of Objects and Reasons and Section 155 may justify a higher burden on the taxpayer, but do not by themselves dilute the onerous nature of the condition. Significantly, even while declining to read down Section 16(2)(c), the Gujarat High Court in its concluding observations recognised the difficulties faced by genuine purchasers, observed that the statutory framework provides sufficient powers to proceed against defaulting suppliers, and expressed the expectation that the Government would address the issue through suitable legislative, administrative and technological measures. The real test for any argument of reading down may arise in a case where GSTR-3B has been filed, particularly after introduction of Rule 37A, but tax has nevertheless not been discharged in respect of the concerned invoice, requiring examination of Rule 88B and other provisions designed to address supplier defaults and tax recovery. [2026-VIL-69-SC]

The Time Gap Question:

The Madras High Court was concerned with a challenge to an adjudication order on the ground that Section 73 contemplates a mandatory three-month gap between issuance of the show cause notice and passing of the order. The petitioner relied on a line of decisions which had proceeded on the basis that the statutory scheme envisaged a minimum period between the notice and adjudication.

The Court examined Section 73(2) in the context of Section 73(10), which prescribes the limitation for passing the adjudication order. It observed that Section 73(2) is intended to ensure that a show cause notice is issued sufficiently before expiry of the limitation period under Section 73(10). The purpose of the provision is to avoid a situation where a notice is issued at the last moment and adjudication is rushed through before the limitation period expires.

According to the Court, it does not follow from Section 73(2) that there must necessarily be a three-month interval between issuance of the notice and passing of the adjudication order merely because the notice was issued more than three months before expiry of the limitation period. The Court observed that there should be a reasonable interval between the show cause notice and the order so as to afford a meaningful opportunity to respond and contest the proposals. However, a mandatory three-month requirement cannot be read into the provision.

The Court expressly recorded that it was unable to endorse the view taken by the Bombay High Court [2026-VIL-54-BOM] on this aspect. The writ petition ultimately succeeded on a different ground, namely that the two orders under challenge proceeded on inconsistent assumptions regarding the nature of supplies and availment of input tax credit.

The issue has also arisen under Section 74. In 2026-VIL-775-TEL, the Telangana High Court held that the requirement in Section 74(2) that notice should be issued six months prior to the limitation for passing the order does not appear to be mandatory merely because the provision uses the word "shall". The Court observed that no consequence is provided for non-compliance and that the question must also be tested from the standpoint of prejudice caused to the assessee.

A similar approach can be seen in 2026-VIL-756-RAJ. There, the grievance was that inadequate time had been afforded during personal hearing. The Rajasthan High Court declined to interfere, observing that an opportunity of hearing had in fact been granted. The extent of time to be afforded during personal hearing was considered to be within the discretion of the adjudicating authority. The Court also observed that it could not conduct a mini trial to determine whether additional time ought to have been granted.

Thus, the real issue may not always be the number of days separating the notice and the adjudication order, but whether the assessee was afforded a reasonable opportunity to respond and whether any prejudice can be demonstrated.

As discussed earlier in Tax Vista Edition No. 272, the statute itself provides a thirty-day window under Section 73(8). Beyond that, the issue may largely depend on the facts of the case and whether the interval afforded was reasonable. Courts are unlikely to interfere unless prejudice arising therefrom is demonstrated [2026-VIL-757-MAD]

[Read previous edition dated 27.07.2026]

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