ITC Denial for Supplier’s GSTR-1 Default Iniquitous: Gauhati HC Reads Down S.16(2)(aa) CGST/AGST in Mcleod Russel Case to Safeguard Bona Fide Purchasers [Read Order]

The Gauhati High Court has held that denial of Input Tax Credit (ITC) under Section 16(2)(aa) of the Central Goods and Services Tax Act, 2017 (CGST Act) and Assam Goods and Services TaxAct, 2017(AGST Act) to a purchaser due to a supplier’s failure to file GSTR‑1 is inequitable, though not unconstitutional.

In a recent ruling, the Court read down Section 16(2)(aa) of the CGST and AGST Acts, directing that bona fide buyers must be allowed to prove their entitlement before ITC is denied.

The case arose from a petition filed by M/s McLeod Russel India Limited, a leading tea producer, challenging the validity of the provision that ties ITC entitlement of a purchaser to the supplier’s compliance in filing outward supplies in GSTR‑1.

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The petitioner argued that the condition imposed by Section 16(2)(aa) is arbitrary and irrational, as it penalises bona fide purchasers for defaults committed by suppliers. Once a buyer has paid GST to the supplier, denial of ITC merely because the supplier failed to upload invoice details in GSTR‑1 results in double taxation.

The company contended that such a denial shifts the incidence of tax from the supplier to the buyer, contrary to the fundamental design of GST, which is intended to tax only value addition and prevent cascading.

Counsel for the petitioner relied on precedents including Suncraft Energy Pvt. Ltd. (Calcutta High Court, affirmed by the Supreme Court), Diya Agencies (Kerala High Court), and Shanti Kiran India Pvt. Ltd. (Delhi High Court, affirmed by the Supreme Court). These judgments consistently protected bona fide purchasers who had paid tax in good faith, even where suppliers defaulted in depositing or reporting tax.

The petitioner also pointed to CBIC Circulars issued in 2022 and 2023, which had temporarily allowed ITC despite supplier non‑reporting, arguing that similar relief should extend beyond 2021.

Opposing the plea, the Commissioner of CGST, Guwahati, submitted that ITC is a concession subject to statutory conditions. Section 16(2)(aa) was introduced to curb fraudulent ITC claims and ensure supplier compliance.

Linking ITC entitlement to supplier filings was a deliberate policy choice to strengthen transparency and integrity in the GST system. The respondent argued that the provision does not discriminate and applies uniformly to all registered persons.

After hearing both sides, the Division bench of Chief Justice Ashutosh Kumar and Justice Arun Dev Choudhury observed that while exemptions and concessions in tax law are always subject to conditions.

The court quoted,

“15. After hearing the learned counsel for the parties, we are of the view that a tax imposed by the Government is a tax on the buyer; making the seller a mere collecting agency, so that the tax must always remain outside the sale price.

16. The law is well settled that a person, who claims exemption or concession, has to establish that he is entitled to that exemption or concession.”

It was observed that,

“20. In our estimation, the restriction is quite iniquitous because an onerous burden is placed on purchasing deals…”

The Court noted that the purchaser has no control over supplier compliance, yet denial of ITC forces the buyer to bear tax twice on the same transaction. Such a result undermines the very object of GST, which is to avoid cascading taxation.

However, the Court stopped short of striking down the provision. Instead, it adopted the doctrine of “reading down,” narrowing the scope of Section 16(2)(aa).

The Bench held that before denying ITC to a bona fide purchaser, authorities must provide an opportunity to prove bona fides through invoices and supporting documents.

The Court clarified that this reading down will operate until the CBIC devises a practical solution to address the problem of supplier‑linked ITC denial.

The petition was accordingly disposed of, with the Court affirming the validity of Section 16(2)(aa) but limiting its application to prevent inequitable outcomes.

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