2026-VIL-1019-RAJ
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SGST High Court Cases

GST - Constitutionality of Section 16(2)(c) of the CGST Act, 2017 – Eligibility to input tax credit to bonafide purchasers - Contingent nature of ITC entitlement – Availment of input tax credit on strength of purchases made from registered suppliers whose registrations were subsequently cancelled – Issue of show cause notice under Section 74 of the CGST Act alleging wrongful availment of input tax credit on purchases from certain suppliers - Petitioner challenged the Constitutional validity or, alternately, reding down of Section 16(2)(c) - Whether Section 16(2)(c) of the CGST Act is ultra vires the Constitution and whether the provision should be read down to protect bona fide purchasers - HELD – The provisions of Section 16(2)(c) indicate a deliberate allocation of risk. Parliament has chosen to place the risk of supplier default on the recipient, while simultaneously providing a mechanism for restoration of the credit once the default is cured. Whether that allocation is wise or harsh is a question of legislative policy and not a question of Constitutional validity. Particularly, in view of the fact that benefit of ITC is a contingent statutory entitlement, rather than a vested right, much less a constitutional right - The Supreme Court in Bhandari Scrap Traders v. Union of India has rejected plea to read down the provision and has expressly negated alternative prayer to declare Section as unconstitutional or read down, distinguishing and rejecting decisions of High Courts of Tripura, Karnataka and Gauhati to extent they read down Section 16(2)(c) - The finding of bonafides in those cases rested on specific factual foundation where Department had invoked only Section 73 and not disputed that purchaser had paid tax to supplier. The present case is converse where Department invoked Section 74 alleging fake invoices and bogus supplies involving chain of multi-layered paper transactions in which no goods moved which is precisely the class of case which the reading down does not protect - Section 16(2)(c) suffers from no constitutional infirmity. Further, the existence of the reversal and re-availment mechanism under Section 41, read with Sections 73 and 74, is a sufficient answer to the charge of arbitrariness - The Constitutional challenge to Section 16(2)(c) fails. The plea for reading down is not available in facts of present case – All contentions on the merits, including the contention that the transactions in question are bona fide, are kept open for consideration by the appellate authority in accordance with law - The writ petition is disposed of - Whether dismissal of Special Leave Petitions in Bhandari Scrap Traders case constitute a binding declaration of law – HELD - The petitioner contends that the Hon’ble Supreme Court order being one dismissing special leave petitions, it does not constitute a binding declaration of law. The petitioners’ contention is untenable. The order is a speaking order. It records reasons, expresses “complete and respectful agreement” with the High Court of Gujarat. In no uncertain terms it affirms and upholds the impugned judgment in Maruti Enterprise v. Union of India case. The constitutional challenge to Section 16(2)(c), is thus water under the bridge and no more an issue which is res integra - Jurisdictional Foundation for Invoking Section 74 – Whether show cause notice contains adequate allegation to invoke Section 74 - HELD - The show cause notice running into thirty three pages sets out in detail how multi-layered transactions were routed between bogus suppliers with whom Petitioner dealt, depicts chain of layering in graphic detail and alleges credit was availed on strength of fake invoices and bogus supplies involving paper transactions unaccompanied by any movement of goods which if established would squarely constitute fraud and suppression to evade tax within meaning of Section 74 - Plea of breach of natural justice - Pre-notice intimation requirement under Rule 142(1A) - Non-issuance of Form GST DRC-01A - Whether non-issuance of pre-notice intimation vitiated proceedings, whether same officer conducting investigation and adjudication constitutes bias, and whether inadequate consideration of reply filed by Petitioner amounts to breach of natural justice – HELD - The Rule 142(1A) was amended by Notification dated 15.10.2020 substituting word shall with may, meaning pre-notice intimation is now enabling facility not condition precedent, and non-issuance does not by itself vitiate notice. Petitioner suffered no prejudice as it had already been summoned under Section 70, Director's statement was recorded, records produced and it knew precisely what was alleged and replied on merits - Parliament has consciously placed investigation and determination within competence of same statutory office under scheme of Act and where statute itself confers both functions on same authority, Rule against bias stands displaced to that extent unless material exists suggesting closed mind, animus or personal interest which is not pleaded here - Alleged inadequacy in appreciation of reply filed by Petitioner stands on entirely different footing being arguendo an error within jurisdiction if at all, with appellate authority under Section 107 having plenary power to examine it including power to make further inquiry. Petitioner has been heard at every stage with all contentions remaining fully available in appeal and no prejudice of kind justifying bypass of statutory remedy is made out.
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