a bona fide purchaser is not liable for a supplier’s failure to deposit GST (Tripura High Court)

Background

• The case is M/s Sahil Enterprises vs. Union of India (Tripura High Court, January 2026).
• The purchaser (Sahil Enterprises) bought goods and paid GST to the supplier between July 2017 and Jan 2019.
• The supplier reflected sales in GSTR-1 but filed ‘Nil’ GSTR-3B returns, thus not depositing the tax collected with the government.
• Tax authorities denied Input Tax Credit (ITC) to the purchaser, blocked its credit ledger, and issued demands for tax, interest, and penalty.

Core Legal Issue

Whether a bona fide purchaser (one acting in good faith and without fraud/collusion) can be denied ITC solely because the supplier failed to remit the GST collected to the government under Section 16(2)(c) of the CGST Act, 2017.

Court’s Key Findings

• Unrealistic Burden: The court observed that a purchaser has no control or statutory method to verify whether the supplier actually deposited the tax. Imposing such a burden would be impossible and unfair.
• Reading Down Section 16(2)(c): The court applied the legal principle of “reading down” to interpret Section 16(2)(c) in a way that protects bona fide transactions.
  This means the provision should not be used to deny ITC to honest buyers, but only to situations involving fraud, collusion, or non-genuine transactions.
• Precedent Support: The decision relied on prior judicial interpretations, particularly a Delhi High Court ruling in On Quest Merchandising India Pvt. Ltd., which was implicitly approved by the Supreme Court, as authority for protecting bona fide purchasers.
• No Constitutional Invalidity Held: The court did not strike down Section 16(2)(c) as unconstitutional per se, but clarified its limited application so as not to penalize honest taxpayers.

Outcome

• The Tripura High Court set aside the demand and denial of ITC against the petitioner.
• It directed authorities to allow the claimed ITC that had previously been denied.

Practical Impact

This judgment ensures that:

• A genuine purchaser who paid GST cannot be penalized for a supplier’s subsequent non-deposit of tax — provided there is no fraud or collusion.
• Section 16(2)(c) must be interpreted in a manner that doesn’t place an impossible compliance burden on honest businesses.