In this guide
A major Supreme Court order has clarified one of GST’s most disputed Input Tax Credit issues: can a genuine buyer retain ITC when the supplier collected GST but failed to deposit that tax with the Government?
The controversy concerns Section 16(2)(c) of the CGST Act, which makes actual payment of the tax to the Government a condition for ITC.
On 24 July 2026, the Supreme Court dismissed the SLPs in Bhandari Scrap Traders v. Union of India and expressly affirmed the Gujarat High Court’s decision upholding Section 16(2)(c). The Supreme Court’s official records identify the matter as SLP(C) No. 23931/2026.
The decision is important—but it is not a blanket waiver of ITC reversal for genuine purchasers.
What Section 16(2)(c) Actually Requires
Section 16 contains the basic conditions for claiming GST ITC.
Among other requirements, the recipient must have received the goods or services and satisfy the documentation and return-filing conditions. Section 16(2)(c) additionally requires that the tax charged on the supply must actually have been paid to the Government, subject to Section 41.
Therefore, having:
- A genuine purchase;
- A valid tax invoice;
- Payment through banking channels;
- Goods actually received; and
- Invoice appearing in the GST system
does not, by itself, eliminate the statutory tax-payment condition.
What the Supreme Court Decided
The taxpayers argued that a bona fide purchaser should not lose ITC because of something entirely outside its control—the supplier’s failure to deposit GST.
They relied partly on judicial principles developed under the Delhi VAT regime.
The Supreme Court rejected that comparison. It agreed with the Gujarat High Court that the GST framework is materially different from the Delhi VAT law and specifically referred to the GST mechanisms involving Section 41 and recovery against defaulting suppliers under Sections 73 and 74.
The Court concluded that there was no basis to declare Section 16(2)(c) unconstitutional or read it down and expressly affirmed the Gujarat High Court judgment.
So the key result is:
Section 16(2)(c) remains valid, and supplier tax payment continues to matter for the recipient’s ITC.
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Where Is the Relief for the Buyer?
The important relief lies in the reversal-and-reavail mechanism.
Section 41 was substituted with effect from 1 October 2022. Under the substituted Section 41(2), where ITC has been availed but the supplier has not paid the corresponding tax, the recipient must reverse the credit in the prescribed manner. If the supplier subsequently pays the tax, the recipient can re-avail that credit.
The substituted provision became effective through Notification No. 18/2022-Central Tax.
Rule 37A then provides the practical mechanism.
How Rule 37A Works
For an invoice appearing through the supplier’s GSTR-1/IFF, Rule 37A broadly looks at whether the supplier has furnished the corresponding GSTR-3B by 30 September following the end of the financial year.
If not, the recipient must reverse the relevant ITC in GSTR-3B on or before 30 November following that financial year. If the supplier later files the relevant GSTR-3B, the recipient may re-avail the credit.
For example:
| Particular | FY 2025-26 |
|---|---|
| ITC availed | During FY 2025-26 |
| Supplier GSTR-3B test date | 30 September 2026 |
| Recipient’s reversal deadline | 30 November 2026 |
| Supplier subsequently files relevant GSTR-3B | ITC may be re-availed |
This is more accurate than saying that the supplier must “pay tax in the September 2026 GSTR-3B.” The test is whether the corresponding return has been furnished by the prescribed cut-off.
Does the Judgment Cancel ITC Demands Before October 2022?
No automatic conclusion of that kind follows from the Supreme Court order.
This is the most important correction.
Section 41 was substantially changed from 1 October 2022 and Rule 37A introduced a clearer reversal/re-avail mechanism. But Section 16(2)(c) itself existed in the CGST framework before October 2022.
The Supreme Court did not hold that Section 16(2)(c) was legally ineffective from July 2017 to September 2022, nor did it declare all pre-October-2022 ITC reversal demands invalid. Instead, it upheld the validity of Section 16(2)(c).
Therefore, using this judgment to argue that “no ITC reversal can ever be made for 2017-18 to 2021-22” would be risky.
Historical-period disputes may involve separate issues such as the law then in force, evidence of supplier payment, retrospective amendments, limitation, recovery from suppliers and other judicial precedents.
What Genuine Businesses Should Do Now
The ruling makes vendor-compliance monitoring even more important.
Businesses should:
- Reconcile GSTR-2B with purchase records regularly.
- Identify suppliers whose GSTR-3B compliance is doubtful.
- Follow up before the Rule 37A cut-off.
- Preserve invoices, e-way bills, payment records and receipt evidence.
- Maintain vendor indemnity/recovery clauses where commercially possible.
- Track ITC reversed under Rule 37A separately.
- Reclaim eligible ITC once the supplier subsequently files the required return.
The GST Council’s own material explains that the reversal-and-reavail framework was introduced to implement Section 41(2) while addressing practical supplier-default situations.
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Frequently Asked Questions
Did the Supreme Court strike down Section 16(2)(c)?
No. It did the opposite: the Supreme Court affirmed the Gujarat High Court and upheld the provision.
Can ITC be denied even if my purchase is genuine?
Section 16(2)(c) makes actual payment of the tax to the Government a statutory ITC condition. Genuine transaction evidence remains important, but genuineness alone does not erase that condition.
Is ITC permanently lost when the supplier does not file GSTR-3B?
Not necessarily. Under Section 41(2) and Rule 37A, qualifying credit that has been reversed can be re-availed after the supplier subsequently furnishes the relevant GSTR-3B.
For FY 2025-26, when should Rule 37A reversal be checked?
The relevant supplier-return cut-off is 30 September 2026, with reversal generally required by 30 November 2026 where the Rule applies.
Did the Supreme Court say Section 16(2)(c) applies only from October 2022?
No. The October 2022 date relates to the substituted Section 41 framework. The Supreme Court did not restrict Section 16(2)(c) itself to periods beginning from October 2022.
