In a landmark judgment that offers significant relief to honest businesses, the Tripura High Court has ruled that the provision in the Central Goods and Services Tax (CGST) Act for claiming Input Tax Credit (ITC) was not designed to punish taxpayers for the failures of their suppliers.
A Ruling in Favor of Bona Fide Transactions
The court, comprising a division bench of Justices M S Ramachandra Rao and S Datta Purkayastha, delivered this crucial verdict on January 6, 2026. The bench was hearing a petition filed by a trader dealing in rubber products, who challenged the constitutional validity of Section 16(2)(c) of the CGST Act, 2017.
The petitioner's ordeal began when tax authorities, following an investigation into one of his suppliers, blocked his ITC and slapped him with a demand for tax reversal, interest, and penalties. The investigation by the Agartala CGST commissionerate's enforcement branch revealed that the supplier, despite collecting over Rs 1.11 crore in GST from the trader between 2017 and 2019, had failed to deposit this amount into the government treasury.
The Core Issue: An Impossible Burden on Purchasers
The court scrutinized Section 16(2)(c), which makes a recipient's eligibility to claim ITC conditional upon the supplier actually paying the collected tax to the government. The bench observed that this places an "onerous burden" on a bona fide purchasing dealer.
"It is impossible for the purchaser to check whether the supplier has deposited the tax paid by him to the government and then avail input credit tax," the court stated emphatically. It highlighted the practical reality that a buyer has no control or mechanism to verify if a seller has fulfilled its tax liability, making compliance with this provision an unrealistic expectation.
Judicial Safeguard Against Double Taxation
The court underscored that the fundamental purpose of the Input Tax Credit mechanism is to avoid double taxation. Denying ITC to an honest purchaser who has already paid tax to their supplier effectively results in taxing the same transaction twice.
"We do not find anything in the language of the Act which expressly enables the state and the supplier to tax a purchaser who has already paid tax to the seller a second time, by denying him ITC in all situations," the judgment read. The bench warned that a law imposing such "disproportionate consequences" on bona fide parties could be vulnerable to being struck down as unconstitutional under Article 14 (Right to Equality).
To save the provision from invalidity, the court applied the principle of "reading down." It ruled that Section 16(2)(c) should not be interpreted to deny ITC in transactions that are bona fide. Instead, it should only be invoked where a transaction is collusive, fraudulent, or not bona fide, aimed at defrauding the revenue.
Broader Implications for India's GST Regime
This judgment marks a pivotal interpretation of GST law, shifting the focus of enforcement from penalizing the downstream buyer for an upstream supplier's default to protecting honest commercial participants. The court clarified that while the supplier's conduct was blameworthy, the petitioner, who entered into a genuine transaction, cannot be penalized for it.
By invoking the Supreme Court's principle from the Laxmipat Singhania case—that income cannot be taxed twice unless expressly provided—the Tripura High Court has reinforced a foundational rule of tax jurisprudence. This decision is expected to provide a robust legal shield to countless businesses operating in good faith within India's complex GST ecosystem, ensuring they are not unfairly punished for circumstances beyond their control.
