The Rajasthan High Court has reaffirmed that actual payment of GST by the supplier is an essential statutory condition for claiming Input Tax Credit (ITC). In a significant ruling concerning Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017, the Court held that ITC may be recovered from the purchaser where the supplier has not paid the corresponding tax to the Government.
The judgment has important implications for businesses claiming GST input tax credit, particularly where suppliers subsequently default on their tax obligations or become insolvent.
Background of the Case
The case arose from a writ petition filed by M/s Shree Karni Electrovision before the Rajasthan High Court. The petitioner had purchased electronic goods worth approximately ₹59.42 lakh from Techno Kart India Ltd. between December 2017 and January 2018.
GST amounting to approximately ₹13 lakh was payable on these transactions. The purchaser claimed the corresponding ITC, believing that the supplier would discharge its statutory obligation by depositing the GST collected from the purchaser with the Government.
Subsequently, the supplier became insolvent and insolvency proceedings were initiated against it. The tax authorities proceeded against the purchaser for recovery of the ITC on the ground that the supplier had not actually paid the corresponding tax to the Government.
The purchaser challenged the recovery order dated 24 November 2022 and also questioned the constitutional validity of Section 16(2)(c) of the CGST Act.
What Does Section 16(2)(c) Provide?
Section 16(2) prescribes conditions that must be fulfilled before a registered person can claim ITC.
One of the critical requirements under Section 16(2)(c) is that the tax charged on the supply must have been actually paid to the Government, either in cash or through utilisation of eligible ITC.
The petitioner argued that a purchaser ordinarily cannot determine whether a supplier has actually deposited the tax with the Government. According to the petitioner, once a genuine purchase has been made against a tax invoice and the purchaser has otherwise complied with the GST requirements, denying ITC because of the supplier’s subsequent default would cause undue hardship.
Rajasthan High Court’s Decision
A Division Bench comprising Justice Dr. Pushpendra Singh Bhati and Justice Praveer Bhatnagar rejected the challenge and upheld the Revenue’s position.
The Court held that the requirement contained in Section 16(2)(c) is mandatory. According to the Court, the purchaser cannot claim ITC merely because the supplier has issued a valid tax invoice. The statutory conditions prescribed for claiming credit must be fulfilled.
The Court observed that a purchaser who claims ITC must ensure that the statutory requirements have been satisfied. If the supplier has failed to discharge the corresponding GST liability, recovery of the ITC from the purchaser is legally permissible.
Conditions Under Section 16(2) Must Be Read Together
An important aspect of the ruling is the Court’s interpretation of Section 16(2)(a) to (d).
The Court held that these conditions cannot be treated as independent or optional requirements. They must be considered collectively while determining whether ITC is available.
Therefore, possession of a tax invoice and receipt of goods or services alone may not be sufficient if another mandatory statutory condition remains unfulfilled.
The Court also referred to Section 155 of the CGST Act, under which the burden of proving eligibility for ITC lies upon the person claiming such credit.
Impact of Supplier’s Insolvency
The petitioner relied upon the Supreme Court’s decision in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. It argued that the Revenue had failed to lodge its claim during the supplier’s insolvency proceedings and, therefore, any such claim stood extinguished upon approval of the resolution plan.
The Rajasthan High Court, however, rejected this argument.
It held that the Supreme Court’s decision in Ghanashyam Mishra deals with the legal consequences of an approved resolution plan under the Insolvency and Bankruptcy Code, 2016. It does not eliminate or override the statutory conditions governing entitlement to ITC under the GST law.
Thus, insolvency of the supplier does not, by itself, create an unconditional right in favour of the purchaser to retain ITC where the statutory requirement under Section 16(2)(c) has not been satisfied.
Key Takeaways for GST Taxpayers
The ruling highlights the need for businesses to exercise greater caution while claiming ITC.
Taxpayers should maintain proper documentation, undertake appropriate vendor due diligence and regularly reconcile purchase records with GST returns and other available compliance information.
The judgment also reinforces the principle that ITC is a statutory benefit subject to prescribed conditions, rather than an unconditional entitlement arising merely from a genuine purchase transaction.
Businesses dealing with suppliers who have a history of GST defaults, cancelled registrations, return-filing irregularities or financial distress may face increased exposure to ITC-related disputes.
Conclusion
The Rajasthan High Court’s decision in M/s Shree Karni Electrovision v. Union of India provides an important interpretation of Section 16(2)(c) of the CGST Act.
By upholding the recovery of ITC from the purchaser where the supplier failed to pay the corresponding GST, the Court has emphasised strict compliance with the statutory conditions governing input tax credit.
For businesses, the ruling serves as a reminder that claiming ITC requires more than possessing a tax invoice and receiving the goods or services. Compliance with the conditions prescribed under Section 16 of the CGST Act remains crucial, particularly where the supplier subsequently defaults or becomes insolvent.
Case Details
Case Title: M/s Shree Karni Electrovision v. Union of India
Court: Rajasthan High Court
Decision Date: 17 August
Bench: Justice Dr. Pushpendra Singh Bhati and Justice Praveer Bhatnagar