Maruti Enterprises vs. Union of India & ors. [TU-IDT-08-HC-2026]
Background of the Case
A batch of writ petitions was filed before the Gujarat High Court challenging the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, which mandates that Input Tax Credit (ITC) can be availed only if the tax charged on supply has actually been paid to the Government. The appellants, including Maruti Enterprise and other dealers, contended that despite fulfilling all conditions such as possession of valid invoices, receipt of goods, and reflection of transactions in GSTR-2A/2B, they were denied ITC solely due to default by the supplier in depositing tax. The core issue before the Court was whether such denial of ITC to bona fide purchasers, for reasons beyond their control, was arbitrary and violative of constitutional provisions. The appellants also sought reading down of the provision to exclude genuine transactions from its scope.
Arguments by the Appellant (Assessee)
The appellants argued that Section 16(2)(c) imposes an impossible burden on purchasing dealers, as they have no mechanism to verify whether the supplier has actually deposited tax with the Government. It was contended that once conditions like possession of invoice, receipt of goods, and reflection in GSTR-2A/2B are fulfilled, the genuineness of transaction stands established and ITC should not be denied. The appellants further submitted that the provision treats bona fide purchasers and fraudulent dealers alike, thereby violating Article 14 of the Constitution. It was also argued that denial of ITC results in double taxation and effectively shifts the tax burden from supplier to recipient, contrary to Section 9 of the CGST Act. Reliance was placed on various judicial precedents including the Delhi High Court decision in On Quest Merchandising and subsequent approvals by the Supreme Court.
Respondent’s Response (Revenue)
The Revenue contended that ITC is not a vested or fundamental right but a statutory benefit subject to conditions prescribed under the CGST Act. It was argued that Section 16(2)(c), read with Section 41(2) and Section 155, clearly mandates that tax must be actually paid to the Government before credit can be availed. The Department emphasized that the GST framework is destination-based and involves inter-State credit transfers, and allowing ITC without actual tax payment would result in revenue leakage and fiscal imbalance. It was further submitted that the law already provides safeguards, including reversal and re-availment of ITC once the supplier pays tax, and therefore no permanent prejudice is caused to the purchaser. The Revenue also distinguished VAT-era judgments and argued that the GST scheme is fundamentally different.
Court Findings and Decision
The Gujarat High Court upheld the constitutional validity of Section 16(2)(c) of the CGST Act and rejected the challenge made by the petitioners. The Court held that ITC is a statutory entitlement subject to fulfillment of prescribed conditions, including actual payment of tax to the Government, and cannot be claimed as a matter of right. It observed that the GST framework, particularly in inter-State transactions, requires strict compliance to maintain fiscal balance, and allowing ITC without tax payment would disrupt the system. The Court further held that denial of ITC in such circumstances does not amount to double taxation, as credit is intrinsically linked to tax being received by the Government. While refusing to read down the provision, the Court acknowledged the practical hardships faced by bona fide purchasers and emphasized that authorities should actively proceed against defaulting suppliers under Sections 73 and 74 of the Act.
The Court also referred to the principle laid down in Axel Kittel, noting that denial of ITC should ideally be linked to cases involving knowledge or involvement in fraud, and urged the Government to consider policy and technological reforms to safeguard genuine taxpayers. Accordingly, the petitions were dismissed, with an expectation that the concerns of honest purchasers would be addressed through appropriate legislative or administrative measures.
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