Punjab & Haryana High Court: ITC Cannot Be Mechanically Denied to Bona Fide Purchaser Merely Because Supplier Failed to Deposit Tax or Its GST Registration Was Retrospectively Cancelled; Detailed Guidelines Issued Under Section 16(2)(c) of GST Act
Case Name: Shaurya Alloys Pvt. Ltd. v. State of Punjab and Another
Date of Judgment: 01 October 2026.
Citation: CWP-34296-2024
Bench: Hon’ble Chief Justice Ashwani Kumar Mishra and Hon’ble Mr. Justice Rohit Kapoor.
Held: The Punjab and Haryana High Court held that Section 16(2)(c) of the Goods and Services Tax Act, 2017 cannot be invoked against a purchasing dealer in a routine or mechanical manner merely because the selling dealer subsequently failed to deposit tax, disclosed nil or short tax liability, or suffered cancellation, including retrospective cancellation, of its GST registration. Such circumstances may legitimately trigger an inquiry, but cannot, by themselves, constitute sufficient grounds for denial or reversal of Input Tax Credit (“ITC”).
The Court held that before proceeding against the purchasing dealer, the proper officer must examine the material available, apply independent mind and ascertain the precise nature of the supplier’s default, the invoices and tax periods involved, the amount of ITC, the circumstances in which tax was not deposited and the action, if any, taken by the Department against the defaulting supplier. Investigation must disclose some material connecting the purchasing dealer with the alleged violation of Section 16(2), rather than proceeding merely on account of wrongdoing attributable to the supplier.
Where proceedings are initiated under Section 74 on allegations of fraud, wilful misstatement or suppression of facts, the foundational facts constituting such fraud or suppression must appear in the show-cause notice itself. A bald reproduction of statutory expressions is insufficient. Significantly, the Court held that fraud committed by a selling dealer cannot automatically be treated as fraud committed by the purchasing dealer unless the notice contains material connecting the purchaser with such fraud.
At the same time, the Court recognised that under Section 155 the burden of establishing eligibility to ITC remains upon the purchasing dealer. Such burden may be discharged by producing material including tax invoices, evidence of actual receipt of goods or services, e-way bills, transport receipts, weighbridge slips, stock records and consumption records. The proper officer is obligated to consider such evidence and deal with it in the adjudication order.
The Court further held that retrospective cancellation of the supplier’s GST registration is not conclusive proof that a particular transaction with the purchaser was non-genuine. The proper officer must examine why the supplier’s registration was cancelled, the effective date of cancellation and whether those circumstances actually affect the genuineness of the particular supply in question. Similarly, registration of the purchasing dealer itself cannot be cancelled, much less retrospectively, merely because ITC was availed on purchases from a supplier whose registration was later cancelled, unless an independent ground under Section 29(2) is established and the prescribed procedure is followed.
The Court also mandated compliance with Section 75(4) by providing an opportunity of personal hearing and held that where third-party statements constitute the basis of the proposed action and cross-examination is sought, such request must be considered and decided through a reasoned order. The final adjudication order must satisfy Section 75(6), consider the assessee’s reply and documents, record findings on the disputed conditions under Section 16(2), and, where Section 74 is invoked, specifically record the fraud, wilful misstatement or suppression attributable to the noticee.
The Court clarified that payment or deposit made during investigation through DRC-03 or otherwise does not dispense with the statutory obligation to issue a legally sustainable show-cause notice setting out the foundational facts. It further directed authorities to apply the statutory framework applicable to the relevant tax period and not retrospectively impose conditions or mechanisms introduced by subsequent amendments.
Summary: A Division Bench of the Punjab and Haryana High Court considered a batch of 424 writ petitions raising a common and significant question concerning Section 16(2)(c) of the GST Act, 2017: what obligation can legally be imposed upon a purchasing dealer, who has paid GST to its supplier, to ensure that the supplier actually deposits that tax with the Government when the purchasing dealer has no direct means of verifying such deposit. The petitioners challenged the manner in which Section 16(2)(c) was being applied and, inter alia, invoked the principle lex non cogit ad impossibilia—the law does not compel performance of an impossibility.
The Court examined the architecture of ITC under the GST regime and noticed that in a considerable number of cases Section 16(2)(c) was being invoked mechanically once the supplier’s registration was cancelled or the supplier defaulted in depositing tax. According to the Court, a bona fide purchaser cannot automatically be exposed to reversal of ITC merely because of a subsequent default committed by the supplier. The consequence is materially different where there is evidence of collusion, fraud, a non-existent supplier, absence of actual receipt of goods or services, or other circumstances rendering the purchaser’s claim itself inadmissible.
The Court consequently formulated an extensive set of guidelines governing proceedings under Section 16(2)(c). A supplier’s retrospective cancellation, nil or short tax liability or departmental alert can furnish the starting point for investigation, but cannot constitute the sole basis of ITC denial. Before issuing notice, the officer must identify the particular supplier, invoices, tax period and ITC involved; ascertain the precise default; examine proceedings taken against the supplier; and investigate whether material exists linking the purchasing dealer to the alleged contravention.
The show-cause notice must disclose the material relied upon and the manner in which ITC is alleged to have been wrongly availed. Documents such as alert notices, inspection reports, panchnamas, statements, e-way bills, vehicle data, toll records and banking information relied upon against the taxpayer must ordinarily be supplied. In cases invoking fraud under Section 74 or, where applicable, Section 74A, the notice itself must contain the foundational facts from which fraud, wilful misstatement or suppression is inferred. The Department cannot repair a fundamentally defective notice afterwards through a counter-affidavit or subsequent explanation.
A particularly significant aspect of the ruling is the Court’s direction that the tax administration must also consider whether proceedings have been taken against the defaulting supplier. If tax relating to the same supply has subsequently been recovered from or deposited by the supplier, the authorities must take that fact into account so that the same tax is not realised twice, subject to the statutory scheme governing re-availment of credit.
The Court also differentiated between the successive statutory regimes governing ITC, including the period prior to 01 October 2022, the amendments effective from 01 October 2022 and the introduction of Rule 37A from 26 December 2022. It made clear that a statutory condition introduced subsequently cannot be applied to an earlier tax period.
The judgment therefore does not give blanket immunity to purchasers. A purchaser claiming ITC remains required to prove its entitlement under Section 155, and the Department remains fully competent to deny ITC where transactions are sham, goods or services were never received, collusion is established or other statutory conditions are not met. What the judgment prohibits is automatic attribution of the supplier’s default or fraud to the purchaser without an independent factual inquiry.
Decision: The High Court disposed of the entire batch of writ petitions by directing the respective proper officers to reconsider the proceedings in accordance with the guidelines formulated in the judgment. Where matters were still at the show-cause notice stage, the petitioners were granted eight weeks to file replies or supplementary replies together with supporting material, following which the proper officer was directed to pass a reasoned and speaking order after granting an opportunity of hearing. Where the existing notice did not disclose the necessary particulars or relied-upon material, the same was directed to be supplied to the noticee.
In cases where adjudication orders had already been passed, the proper officer was directed to revisit the matter, grant a personal hearing and pass a fresh reasoned order in accordance with law. Importantly, the Court did not formally set aside the impugned orders; instead, it directed that they would abide by the fresh decisions to be taken pursuant to the judgment.
Any amount already deposited or recovered from the petitioners, including ITC reversal or debit from electronic credit/cash ledgers, was made subject to the fresh adjudication and was directed to be adjusted or refunded, together with admissible interest wherever warranted. The Court further restrained the Department from taking fresh coercive recovery action pursuant to the impugned notices or orders until the fresh decision of the proper officer. All pleas on facts and law were kept open, and the Department’s right to proceed independently against defaulting selling dealers was expressly preserved.