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The Punjab and Haryana High Court has upheld the GST law’s requirement that tax charged on a supply be paid to the Government for input tax credit (ITC) to qualify. But it ruled that officers cannot automatically reverse a purchaser’s ITC merely because the supplier failed to pay tax or had its GST registration cancelled. They must examine the transaction, the buyer’s eligibility and the evidence in the individual case.
What the High Court decided
On 1 October 2026, a Division Bench of Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor pronounced judgment in 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 judgment had been reserved 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 court did not remove that condition or hold that a purchaser is entitled to credit regardless of whether tax was paid.
Instead, the court rejected applying Section 16(2)(c) in isolation or in a routine, mechanical way. It said supplier default can prompt an inquiry, but cannot by itself establish that the buyer’s credit must be denied. The Bench explained: “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.”
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When supplier default is not enough to reverse ITC
A supplier’s failure to deposit tax, a nil or short return, an alert or complaint, or cancellation of the supplier’s registration—including cancellation with retrospective effect—may be relevant to an inquiry. None of those facts alone proves that a purchaser’s ITC claim is ineligible.
Officers must examine the supply and the purchaser’s eligibility rather than treating the supplier’s conduct as automatic proof against the buyer. The court’s ruling does not mean every credit claim must be allowed: evidence of collusion or fraud, a non-existent supplier, non-receipt of goods or services, or another statutory disqualification may support denial of credit.
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What a purchaser should be ready to establish
Section 155 places the burden of proving ITC eligibility on the person claiming the credit. A purchaser responding to a dispute should organize records that show both the transaction and receipt of the relevant goods or services. The judgment identifies evidence such as the following as potentially relevant:
- Tax invoices and records identifying the supplier and the supplies claimed.
- E-way bills, transport receipts and weighbridge slips that support movement and delivery of goods.
- Stock, consumption or other business records that corroborate receipt or use of the goods.
- For services, records that substantiate the service received and its connection to the transaction.
The evidence needed depends on the facts and the statutory conditions for the period. The court did not create a checklist that automatically proves eligibility, nor did it relieve buyers of their burden of proof.
What officers must do before relying on Section 16(2)(c)
The judgment directs proper officers to apply their minds to the circumstances before issuing a notice founded on Section 16(2)(c). A notice and ensuing decision should address the case-specific basis for alleging that the purchaser’s credit is inadmissible.
- Identify the relevant supplier, invoices, tax periods and ITC amounts.
- Examine the precise nature and circumstances of the alleged tax default and the status of recovery proceedings against the supplier.
- Investigate the connection between the purchaser and supplier that is relevant to the alleged breach, rather than relying on supplier status alone.
- Disclose the factual basis and materials relied on, subject to lawful privilege.
- For allegations of fraud, wilful misstatement or suppression, state the foundational facts in the notice. A bare recital of those terms, or an attempt to supply the missing foundation later in a counter-affidavit, is insufficient.
- Consider why the supplier’s registration was cancelled and the cancellation’s effective date, including how it bears on the particular supply.
- Make specific findings on disputed statutory conditions and avoid recovering the same tax twice.
The court’s directions also address personal hearings, requests to cross-examine third-party witnesses and cancellation of the purchaser’s own registration. Those matters must be dealt with under the applicable law and the facts of the case; the judgment does not make every request for cross-examination or every challenge to registration cancellation automatically succeed.
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Why the tax period changes the analysis
The judgment traces changes in the GST ITC framework and instructs officers to apply the provisions and procedures that governed the tax period under examination. Its discussion distinguishes these periods:
| Tax period | Framework point relevant to the judgment |
|---|---|
| Before 1 October 2022 | The earlier statutory framework applies; later procedures should not simply be treated as if they governed these supplies. |
| From 1 October 2022, before 26 December 2022 | Changes to Section 41 and omission of Sections 42 and 43 are relevant to the framework for this period. |
| From 26 December 2022 | Rule 37A had been inserted and is part of the framework to consider for supplies in this period. |
The High Court also noted that the original matching and reconciliation mechanism contemplated by the GST 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 the statutory conditions for credit or the purchaser’s burden under Section 155. The judgment does not make later procedures retroactive.
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What happens to the petitions, notices and amounts already paid
The Bench did not set aside every notice or order in the 424-petition batch, and it did not order a blanket refund of reversed ITC. Petitioners whose matters were still at the show-cause stage were allowed to file replies for decision 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 merits of individual claims remain open.
Amounts deposited or recovered—including amounts recovered through ITC reversal—are subject to those decisions. An adjustment or refund may follow where warranted by law, but it is not automatic under this judgment.
Practical questions to organize in an individual dispute
The ruling points to factual and legal issues that may distinguish one case from another. A purchaser reviewing a notice or order can organize the response around these questions:
- Were the goods or services actually received, and what records corroborate receipt?
- Do the invoices and supporting movement, transport, stock, consumption or service records match the supplies and amounts in dispute?
- Does the notice identify evidence connecting the purchaser to supplier fraud, collusion or another reason the claim is inadmissible?
- Why was the supplier’s registration cancelled, when did cancellation take effect, and how does that timing relate to the supply?
- What tax default is alleged, and what recovery steps were taken against the supplier?
- Which statutory framework applied to the tax period in question?
These are questions drawn from the judgment, not a substitute for advice on a particular assessment or tax period. The ruling was pronounced on 1 October 2026; whether a later appeal, stay or clarifying order has changed its operation is not established here.
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