GST Landmark Ruling: Buyer Not Expected to Do the Impossible — High Court Allows Input Tax Credit (ITC)
In a significant judgment impacting bona-fide taxpayers under the Goods and Services Tax (GST) regime, a High Court recently ruled that a purchasing dealer who has paid tax to a supplier cannot be held responsible for the supplier’s failure to deposit that tax into Government accounts — and has allowed the purchaser to retain Input Tax Credit (ITC).
Facts and Issue of the Case
Before the High Court, the petitioner was a registered dealer who had legitimately purchased goods or services from a supplier and paid GST on those purchases. The taxpayer had valid tax invoices, made payments through banking channels, and complied with statutory conditions under the Central Goods and Services Tax (CGST) Act, 2017 — all of which are prerequisites to claim ITC under Section 16 of the CGST Act.
However, during scrutiny by the GST authorities, it was found that the supplier failed to deposit the GST collected with the Government and did not comply fully with return filing requirements. In consequence, the tax authorities issued a show-cause notice under Section 16(2)(c) of the CGST Act, alleging that the purchaser should not be allowed to claim ITC because, in the department’s view, the tax had not been “actually paid to the Government” by the supplier — even though the purchaser had discharged his liability in good faith to the supplier.
The petitioner contended that they acted in good faith — purchasing only from a validly registered supplier, paying GST as charged, and fulfilling all compliance obligations on their end. The petitioner argued that there is no mechanism or legal duty on a buyer to ensure that the seller actually deposits the tax with the Government, and hence, it would be unreasonable and unjust to deny ITC on this ground.
Observation by the Court and Tribunal
The High Court closely examined Section 16(2)(c) of the CGST Act — the statutory provision that conditions the availability of Input Tax Credit on the actual payment of tax to the Government by the supplier. While the Court acknowledged that this provision is part of the statutory regime and is constitutionally valid, it stressed that the law cannot demand the impossible from a buyer — i.e., that a purchaser should monitor or enforce compliance by the supplier.
The Court referred to well-settled principles of law, including the legal maxim “lex non cogit ad impossibilia” — the law does not compel a person to do that which is impossible. It observed that there is no statutory machinery under GST that enables a purchasing dealer to verify whether a supplier has filed returns or deposited taxes with the Government. For a buyer to take on such a role would be impractical and unreasonable.
Further, the Court noted that if a genuine purchaser is penalized for the supplier’s default, it leads to double taxation — the buyer has already paid GST and now is being denied the right to adjust that tax. It pointed out that the core purpose of ITC under GST is to avoid cascading tax and ensure neutrality, and the denial of credit in such scenarios would frustrate that objective.
The Court also placed reliance on earlier judicial precedents where similar provisions under the erstwhile VAT regime were read down by courts to protect honest buyers, including decisions where the judiciary clarified that bona-fide purchasers cannot be expected to anticipate supplier defaults and avoid transactions accordingly.
Law Applicable
The central statutory provision in this matter was Section 16(2)(c) of the CGST Act, 2017, which states that ITC is available only if “the tax charged in respect of such supply has been actually paid to the Government.”
While this is a clear condition on its face, the High Court recognized that such a condition, if applied literally in all cases, would unfairly penalize bona-fide buyers who have discharged their obligations. The Court, therefore, adopted a principle of “reading down” the provision — meaning the condition must be applied only in cases involving collusion, fraud, or non-genuine transactions, but not in situations where the buyer has acted honestly and without any default.
This approach aligns with constitutional fundamentals, including the principles of equality and fairness under Article 14 of the Indian Constitution. It ensures that innocent buyers are not unduly punished for events beyond their control.
The broader legal rationale also draws support from judicial principles that a statute should not be interpreted so as to impose impossible obligations on a taxpayer. Courts have repeatedly held that the legislature could not have intended to make compliance contingent on the buyer’s ability to monitor the supplier’s compliance actions, which are entirely outside the buyer’s control.
Conclusion by the Tribunal or Court
After considering submissions and relevant statutory provisions, the High Court concluded that a purchaser who has paid GST to a validly registered supplier, received correct invoices, and complied with all other conditions under the GST law cannot be denied Input Tax Credit merely because the supplier failed to deposit the tax with the Government. The Court held that it would be unreasonable and arbitrary to require the buyer to ensure tax deposit by the seller — a task which is practically impossible and not mandated by law.
Therefore, the impugned order denying ITC on the basis of supplier default was set aside, and the High Court allowed the taxpayer to retain ITC claimed. In doing so, the Court reiterated that enforcement action should target the defaulting supplier instead of an innocent purchasing dealer who has complied with the law in good faith.
For GST taxpayers across India, this ruling brings clarity and relief — reinforcing that a bona-fide purchaser cannot be made to suffer for the statutory non-compliance of a supplier and that ITC remains a valuable right when all lawful conditions are fulfilled by the purchaser.
