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The Punjab and Haryana High Court has ruled that a buyer’s GST input tax credit (ITC) cannot be reversed automatically just because the supplier failed to deposit tax or later had its GST registration cancelled. The court upheld the underlying statutory condition that tax must be paid to the Government, but said officers must examine the transaction, the buyer’s eligibility and the evidence before denying credit.
What did the High Court decide?
On 1 October 2026, a Division Bench of the Punjab and Haryana High Court decided a consolidated batch of 424 writ petitions led by Shaurya Alloys Pvt Ltd v. State of Punjab and Another, CWP-34296-2024 (O&M). The Bench comprised Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor; it had reserved judgment on 21 August 2026.
The court upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. That provision makes payment of the tax charged on a supply to the Government a condition of ITC eligibility. The ruling did not remove that condition. Instead, it held that Section 16(2)(c) cannot be applied in isolation from the wider GST framework or used mechanically to make a purchaser bear the consequences of a supplier’s default without examining the relevant facts.
“The vice complained of, namely, that the purchasing dealer is called upon to perform an impossible act, does not inhere in the text of Section 16(2)(c). It arises when the provision is torn out of the statutory scheme of which it is an integral part and is applied in a routine and mechanical manner.”
The court’s point is that the provision remains valid, but its application must account for the transaction and the statutory framework governing the tax period.
Does a supplier’s non-payment or registration cancellation automatically cancel ITC?
No. A supplier’s failure to pay tax, nil or short return, later registration cancellation—including retrospective cancellation—or an alert or complaint may prompt an inquiry. None of those facts, standing alone, proves that the purchaser’s credit must be denied or reversed. The proper officer must investigate the supply and the buyer’s eligibility rather than treating a supplier-side warning or default as conclusive against the purchaser.
The result can differ if the evidence indicates collusion or fraud, that the supplier did not exist, that goods or services were not actually received, or another reason the claim is inadmissible. The judgment is therefore not blanket immunity for buyers. It requires an evidence-based decision in the individual case.
What evidence should a buyer keep or submit?
Section 155 places the burden of proving ITC eligibility on the person claiming the credit. The judgment identifies invoices and corroborating transaction records as potentially relevant evidence. What matters will depend on the supply and the dispute; a document list is not a guarantee that credit will be allowed.
- For the purchase: tax invoices and records identifying the supplier, supply and tax period.
- For movement or receipt of goods: e-way bills, transport receipts and weighbridge slips, where applicable.
- For what happened after delivery: stock, consumption or other business records that help show receipt and use of the goods.
- For services: records that substantiate the service ordered, performed and received, as relevant to the transaction.
The practical question is whether the records support a genuine supply and the purchaser’s eligibility, and whether evidence connects the buyer to any alleged supplier fraud or collusion.
What must tax officers do before denying credit?
Before issuing a notice founded on Section 16(2)(c), the proper officer must apply their mind to the supplier, relevant invoices, tax periods and ITC amounts; the nature and circumstances of the alleged tax default; and the status of recovery proceedings against the supplier. The inquiry must establish a direct link between the purchaser and supplier that is relevant to the alleged breach.
A notice must disclose the factual basis for the proposed action and the materials relied on, subject to lawful privilege. If fraud, wilful misstatement or suppression is alleged, the notice must state the foundational facts; simply reciting those labels, or trying to supply the missing foundation later in a counter-affidavit, is not enough.
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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchOfficers must also examine why the supplier’s registration was cancelled and the cancellation’s effective date, then assess its bearing on the particular supply. They must consider proceedings against the supplier and avoid recovering the same tax twice. The guidelines also address personal hearings, requests to cross-examine third-party witnesses, cancellation of the purchaser’s own registration and the need for specific findings on disputed statutory conditions.
What happens to the 424 petitions and amounts already paid?
The court did not set aside every notice or order in the batch. Petitioners who were still at the show-cause stage were allowed to file replies for determination under the court’s guidelines. Where an order had already been passed, officers were directed to revisit the matter and issue a fresh, reasoned decision after hearing the affected party.
The individual merits remain open for that examination. Amounts already deposited or recovered—including through ITC reversal—are subject to the resulting decisions and any adjustment or refund warranted by law. The judgment is not an automatic refund order.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why does the tax period matter?
The judgment recounts changes to the GST ITC framework and directs officers to use the rules that applied to the period under examination. Its discussion distinguishes three periods:
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1Scan for outdated or missing drivers - takes under a minute2Clear out junk files and repair common Windows errors3Fix the driver behind crashes, sound loss and screen glitches| Tax period | Framework distinction noted by the court |
|---|---|
| Before 1 October 2022 | The earlier framework, before the changes to Section 41 and omission of Sections 42 and 43 described in the judgment. |
| From 1 October 2022 to before 26 December 2022 | The period after those Section 41 changes and the omission of Sections 42 and 43, but before Rule 37A was inserted. |
| From 26 December 2022 | Rule 37A had been inserted; the applicable framework must be assessed for the relevant period. |
The court also noted that the original matching and reconciliation mechanism contemplated by the legislation was not implemented as planned. That history informs its discussion of a purchaser’s practical ability to know whether a supplier paid tax; it does not erase statutory eligibility conditions or the purchaser’s burden of proof. Later procedures should not be applied retroactively without a legal basis.
What should a buyer do if ITC is challenged on this ground?
- Identify the period and legal basis. Check the tax period, invoices, amount of credit at issue and the statutory provisions cited in the notice or order.
- Read the stated evidence and allegations. Determine whether the officer has explained the alleged supplier default and disclosed the materials relied on, and whether any allegation of fraud or collusion is supported by stated facts.
- Assemble transaction records. Gather invoices and the relevant evidence of movement, receipt, stock, consumption or services, as well as records that address any alleged connection to supplier misconduct.
- Address supplier cancellation carefully. If registration cancellation is relied on, examine its stated grounds and effective date in relation to the supply and tax period.
- Respond through the applicable process. Submit a reasoned reply and supporting records, and use the opportunity for a hearing where available. The judgment calls for consideration of individual facts; it does not decide a buyer’s particular claim merely because the buyer is among the affected petitioners.
The court also commended policy suggestions for consideration, including portal alerts when supplier cancellation proceedings begin and invoice-level verification of supplier tax payments. It did not order those changes to be implemented.
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