The Punjab and Haryana High Court has ruled that a buyer’s GST input tax credit (ITC) cannot be reversed automatically just because the supplier failed to pay tax or had its GST registration cancelled. The court upheld Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, but said tax officers must examine the transaction and the buyer’s eligibility rather than treating supplier default alone as proof against the buyer.
The 1 October 2026 decision covers 424 writ petitions led by Shaurya Alloys Pvt Ltd v. State of Punjab and Another, CWP-34296-2024 (O&M). It sets out how officers should investigate and decide these disputes, but does not cancel every existing demand or order a blanket refund.
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What the High Court decided
A Division Bench comprising Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor upheld the constitutional validity of Section 16(2)(c) of the CGST Act. That provision makes ITC eligibility conditional on the tax charged on a supply having actually been paid to the Government. The court did not remove that statutory condition.
It did, however, reject applying the condition in isolation from the rest of the GST framework or using it mechanically. As the judgment put it: “The vice complained of, namely, that the purchasing dealer is called upon to perform an impossible act, does not inhere in the text of Section 16(2)(c). It arises when the provision is torn out of the statutory scheme of which it is an integral part and is applied in a routine and mechanical manner.”
In practical terms, the supplier’s tax default remains relevant, but the officer must examine the particular supply, the buyer’s claim and the evidence before deciding whether ITC is admissible.
When a supplier’s default is not enough by itself
A supplier’s nil or short return, alleged non-payment, later cancellation of registration—including retrospective cancellation—or an alert or complaint may prompt an inquiry. None, standing alone, proves that a purchaser’s ITC must be denied or reversed.
The officer must investigate the relevant transaction and establish a direct link between the buyer and supplier relevant to the alleged breach. A buyer is not given blanket immunity: the outcome may differ if evidence points to collusion or fraud, a non-existent supplier, non-receipt of goods or services, or another reason the claim fails the statutory conditions.
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What buyers may need to prove
Section 155 places the burden of proving ITC eligibility on the claimant. The judgment identifies transaction records that may help show that a genuine supply took place; their relevance depends on the goods or services and the facts of the case.
- For the purchase: invoices and related purchase records.
- For movement or delivery of goods: e-way bills, transport receipts and weighbridge slips.
- For what happened after delivery: stock records, consumption records or other records showing how the goods were used.
- For services: retain records that substantiate the service received and its connection to the transaction. The judgment does not prescribe a single document set for every service.
These records address different factual questions: whether the supplier and supply were real, whether the buyer received what was invoiced, and whether the buyer’s claim meets the applicable statutory conditions. A document list alone cannot establish eligibility if the underlying transaction or other required conditions are disputed.
What a tax notice and inquiry must address
Before issuing a notice based on Section 16(2)(c), the proper officer must apply their mind to the supplier, the relevant invoices and tax periods, the ITC amounts, the nature and circumstances of the alleged default, and the status of recovery proceedings against the supplier. The notice must state its factual basis and disclose the material relied on, subject to lawful privilege.
If the department alleges fraud, wilful misstatement or suppression, the notice itself must set out the foundational facts. A bare recital of those terms—or an attempt to supply the missing basis later in a counter-affidavit—is insufficient.
The judgment also directs officers to consider why a supplier’s registration was cancelled and the cancellation’s effective date, and to assess how that bears on the particular supply. They must consider proceedings against the supplier and avoid recovering the same tax twice. The guidelines address personal hearings, requests to cross-examine third-party witnesses, cancellation of the purchaser’s own registration and the need for specific findings on disputed statutory conditions.
How the ruling affects pending and decided cases
The High Court did not set aside every notice or order in the 424-petition batch. Its directions depend on where an individual matter stood:
- Show-cause notice issued, no final order: the petitioner may file a reply, which the officer must decide under the court’s guidelines.
- An order has already been passed: the officer must revisit the matter and issue a fresh, reasoned decision after giving a hearing.
The individual merits remain open for examination under the statutory framework applicable to the tax period. Amounts already deposited or recovered, including through ITC reversal, are subject to that decision and to any adjustment or refund warranted by law. The judgment itself is therefore not an automatic refund order.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why the tax period matters
The judgment distinguishes among changes to the GST ITC framework. It discusses periods before 1 October 2022, the period after changes to Section 41 and omission of Sections 42 and 43, and the period beginning 26 December 2022, when Rule 37A was inserted. Officers must apply the provisions in force for the tax period under examination; a later procedure should not simply be applied retroactively to an earlier period.
The court also considered that the original matching and reconciliation mechanism contemplated by the legislation was not implemented as planned. That context informs the practical difficulty a buyer may face in knowing whether a supplier paid tax. It does not erase the statutory eligibility conditions or shift away the buyer’s burden of proof.
A practical way to assess an ITC dispute
For a buyer responding to a notice—or assessing the significance of a supplier’s cancellation—the central questions are transaction-specific:
- Was the supply actually received? Identify what was delivered or performed and when.
- What records corroborate it? Match invoices with movement, transport, stock, consumption or service records as relevant.
- What does the department allege about the buyer’s connection to the default? Distinguish evidence of buyer involvement or collusion from a supplier’s default alone.
- When and why was the supplier’s registration cancelled? Compare the cancellation grounds and effective date with the transaction dates.
- What happened in recovery proceedings against the supplier? The status is relevant to the inquiry and to avoiding double recovery.
- Which version of the GST framework applied to the supply period? Check the statutory provisions and rules in force for that period.
These are the factual and legal issues the ruling directs officers to examine; they are not a substitute for assessing a particular notice and tax period on its own record.
What the ruling does not establish
- It does not strike down Section 16(2)(c) or remove the condition that tax be paid to the Government.
- It does not guarantee ITC where the buyer cannot establish eligibility or where evidence supports fraud, collusion, non-receipt or another ground for denial.
- It does not invalidate every notice or final order in the batch or direct refunds without further decisions.
- It does not make post-amendment procedures applicable to tax periods governed by earlier rules.
The judgment also commended for consideration policy suggestions such as portal alerts when supplier-cancellation proceedings begin and invoice-level verification of supplier tax payments. It did not order those measures to be implemented.
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