Gauhati High Court: ITC Cannot Be Denied to Genuine Buyers for Supplier’s Lapse
Court reads down Section 16(2) (aa) of GST Act to protect bona fide purchasers
Ruling ensures buyers are not punished for supplier’s non-compliance
By Our Legal Correspondent
New Delhi: December 15, 2025:
In a landmark judgment, the Gauhati High Court has ruled that Input Tax Credit (ITC) cannot be denied to bona fide buyers merely because their suppliers failed to upload invoices or file accurate GST returns. The Court read down Section 16(2) (aa) of the Central GST Act, which had made ITC contingent on supplier compliance.
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This ruling is expected to have a major impact on businesses across India, as ITC is a crucial mechanism that prevents double taxation and ensures smooth functioning of the GST regime.
Background: What Is Section 16(2) (aa)?
- Section 16 of the GST Act deals with eligibility for ITC.
- Sub-section (2) (aa), introduced in 2021, required that ITC could only be claimed if the supplier uploaded invoices in GSTR-1 and they were reflected in the buyer’s GSTR-2B.
- This meant that even if a buyer had paid GST to the supplier and possessed valid invoices, ITC could be denied if the supplier failed to comply.
Businesses argued that this provision was unfair, as buyers have no control over supplier compliance.
The Case Before Gauhati High Court
The case involved M/s McLeod Russel India Limited v. Union of India, where the petitioner challenged denial of ITC due to supplier-side lapses.
The Court held that:
- Bona fide buyers cannot be penalized for supplier’s default.
- ITC is a statutory right if the buyer has paid tax and holds valid invoices.
- Section 16(2) (aa) must be read down to avoid injustice.
Court’s Observations
The Gauhati High Court made several key points:
- Principle of fairness: Taxpayers who have complied with the law should not suffer due to third-party lapses.
- Natural justice: Buyers must be given an opportunity to prove genuineness of transactions before ITC is denied.
- Purpose of GST: The system was designed to simplify taxation, not punish honest taxpayers.
The Court described automatic denial of ITC as “iniquitous”, stressing that shifting supplier-side consequences onto buyers is unjust.
Impact of the Ruling
1. On Businesses
- Relief for genuine taxpayers: Buyers who pay GST and hold valid invoices are protected.
- Reduced litigation: Thousands of disputes over ITC mismatches may now be resolved.
- Improved trust: Businesses gain confidence in the fairness of GST enforcement.
2. On Government Revenue
- While the ruling may reduce immediate revenue from penalties, it strengthens long-term compliance by encouraging genuine transactions.
3. On Suppliers
- Suppliers remain responsible for uploading invoices and filing returns.
- However, buyers will not automatically lose ITC due to supplier negligence.
Expert Opinions
- Tax consultants hailed the ruling as a “game-changer” for GST compliance.
- Industry associations said it will reduce harassment of businesses.
- Legal experts noted that the judgment sets a precedent for other High Courts and possibly the Supreme Court.
Challenges Ahead
- Uniformity: Other High Courts may need to adopt similar interpretations to ensure consistency.
- Policy clarity: The GST Council may issue guidelines to align with the judgment.
- Supplier accountability: Authorities must still ensure suppliers comply with filing obligations.
Broader Context: ITC Litigation in India
ITC has been one of the most litigated issues under GST. Common disputes include:
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- Mismatches between GSTR-2A/2B and purchase records.
- Supplier non-compliance leading to denial of ITC.
- Excessive reliance on technicalities rather than substance of transactions.
The Gauhati High Court’s ruling addresses these concerns by focusing on substance over form.
Conclusion
The Gauhati High Court’s decision to read down Section 16(2) (aa) marks a turning point in GST jurisprudence. By ruling that ITC cannot be denied to bona fide buyers for supplier-side lapses, the Court has ensured fairness, reduced litigation, and strengthened trust in the tax system.
This judgment reinforces the principle that taxpayers who comply with the law should not suffer due to others’ defaults. It sets a strong precedent for protecting genuine businesses and upholding the spirit of GST.
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