2026-VIL-1131-P&H
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SGST High Court Cases

GST - Challenge to the Constitution validity of Section 16(2)(c) of the CGST Act, 2017 - Condition of actual payment of tax by supplier to Government - Petitioners contended that the provision is contrary to the maxim lex non cogit ad impossibilia, violates Articles 14, 19(1)(g), 21, 265 and 300A, and should be read down to cases of fraud, collusion or non-existent supplier - Whether Section 16(2)(c) is ultra vires or is to be read down - HELD - The condition that tax charged must actually be paid to the Government is not extraneous to the concept of ITC. ITC is a statutory concession available only upon fulfilment of the conditions subject to which it is conferred, and the competence of Parliament to prescribe such a condition is not in question - The challenge to vires is feeble, and the real grievance is directed against the manner in which the provision is invoked. The vice of an impossible act does not inhere in the text, as it arises when the provision is torn out of the statutory scheme and applied in a routine and mechanical manner. The possibility of improper or arbitrary application in individual cases is not a ground to invalidate the provision - The Gujarat High Court upheld validity in Maruti Enterprises, and the Special Leave Petition against it was dismissed in Bhandari Scrap Traders, so judicial discipline counsels against reading down the provision to cases of fraud, collusion or non-existent transactions - The challenge to the vires of Section 16(2)(c) read with Section 155 is repelled - Invocation of Section 16(2)(c) of GST Act, 2017 against purchasing dealer - Statutory scheme of matching and verification not implemented in entirety - Retrospective cancellation of supplier registration relied upon by Respondents - Whether Section 16(2)(c) can be invoked mechanically on default of the selling dealer - HELD - Section 16(2)(c) was part of a scheme containing provisions for matching and verification of returns, which enabled the purchasing dealer to know of the supplier's default. Sections 42 and 43 were never implemented and were later deleted, and provisional availment was done away with from 01.10.2022 - If treated as a standalone provision without any mechanism to ascertain deposit of tax, the maxim lex non cogit ad impossibilia would be attracted. Section 76 specifically deals with tax collected but not paid to Government and cannot be rendered otiose by indiscriminate invocation of Section 16(2)(c), which would spare the person liable to pay tax and impose the obligation on the purchasing dealer who has already paid tax - Prior to Rule 37A there was no provision for the purchasing dealer to re-avail the reversed ITC even if the supplier later deposited the tax. Rule 37A cannot be invoked as a general justification for retrospectively denying ITC merely because the registration of the selling dealer was cancelled - The incidence of tax ought not to be imposed on a person not liable to pay tax. The proper officer must examine, after hearing the purchasing dealer, the circumstances of the supplier's default, the genuineness of the transaction and the statutory mechanism for recovery against the supplier - Where there is collusion, fraud, a non-existent supplier or no actual receipt of goods or services, the consequences of Section 16(2)(c) follow in accordance with law - Section 16(2)(c) is to be read and invoked in consonance with the statutory scheme and the guidelines laid down. The writ petitions are disposed of with directions that the proper officer decide afresh by reasoned order after hearing, with liberty to file reply within eight weeks, no coercive recovery in the meantime - Starting point of inquiry against purchasing dealer - Cancellation of registration of supplier, nil or short tax liability in supplier's return and alerts - Section 16(2)(c) of GST Act, 2017 - Whether such circumstances are sufficient for denial or reversal of ITC - HELD - The subsequent cancellation, including retrospective cancellation, of the registration of the selling dealer, the reflection of nil or short tax liability in the return of the selling dealer, or the receipt of an alert, intimation or complaint may furnish a legitimate starting point for an inquiry. They shall not by themselves constitute the basis for denial or reversal of ITC. Before issuing a show cause notice founded on Section 16(2)(c), the proper officer shall apply his mind and record satisfaction as to the particulars of the selling dealer, invoices, tax periods and ITC involved, the precise nature of the default, the circumstances in which the selling dealer failed to deposit tax, and the proceedings against the selling dealer under Sections 73, 74, 75(12), 76 and 79 - Investigation should establish some direct link of the purchasing dealer with the suppliers. The notice shall disclose the material relied upon, including alert notices, inspection reports, panchnamas, statements, and e-way bill, vehicle, toll and banking data, which shall be supplied to the noticee. Where the denial is premised on retrospective cancellation of the supplier's registration, the officer shall examine the grounds and date of cancellation and whether they bear on the genuineness of the particular supply - The guidelines are held to govern all pending and future proceedings - Extended period under Section 74 of GST Act, 2017 against purchasing dealer - Foundational facts of fraud, wilful misstatement or suppression - Whether notice under Section 74 must itself disclose the facts leading to the inference of fraud and whether fraud of the selling dealer is attributable to the purchaser - HELD - Relying on G.R. Infra Projects and Tata Steel, where the Department invokes Section 74, the foundational facts leading to the inference of fraud, wilful misstatement or suppression must emanate from the notice itself, and the deficiency cannot be made good later by affidavit before the Court. Proceedings under Sections 73 and 74 can be initiated only on the satisfaction of the Assessing Officer, and mere mechanical recital of the words fraud, wilful misstatement or suppression does not indicate application of mind - The fraud of the selling dealer does not by itself become the fraud of the purchasing dealer, unless the notice discloses facts connecting the purchasing dealer with such fraud. The order shall record a specific finding as to the fraud, wilful misstatement or suppression attributable to the noticee. Deposit made by the purchasing dealer during investigation, whether through Form GST DRC-03 or otherwise, does not dispense with the requirement of the notice disclosing the foundational facts - Where a supplementary notice or corrigendum introduces a new ground, the noticee is at liberty to object and the objection shall be decided in the fresh order - A bald or mechanical recital of fraud or suppression does not suffice - Burden of proof under Section 155 of GST Act, 2017 - Purchasing dealer claiming ITC - Whether the burden of establishing eligibility lies on the purchasing dealer and how it may be discharged - HELD - Burden under Section 155 was placed on the person claiming ITC in view of the mechanism in the original scheme enabling the purchaser to know whether the supplier deposited the tax, and it lies upon the purchasing dealer to establish eligibility to ITC. The dealer may discharge the burden by producing the tax invoice and proof of receipt of goods or services, including e-way bills, transport receipts, weighbridge slips, and stock and consumption records. The proper officer shall consider such material and deal with it in the order, setting out relevant facts and the basis of decision under Section 75(6), dealing with the reply and documents, and recording a specific finding on each disputed condition of Section 16(2) - Where collusion or fraud is found, or goods or services were not actually received, or the purchasing dealer otherwise fails to establish entitlement, the conseque
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