ITC Cannot Be Denied to Buyer for Supplier’s Failure to Upload Invoices: Gauhati HC

In a significant ruling addressing one of the most litigated issues under the Goods and Services Tax regime, the Gauhati High Court has held that Input Tax Credit (ITC) cannot be denied to a bona fide purchaser merely because the supplier failed to upload invoices or file accurate returns, observing that shifting the consequences of a supplier’s default upon a buyer is arbitrary and runs contrary to the architecture of GST.

The Court held that Section 16(2)(aa) requires a purchaser to be given an opportunity to demonstrate bona fides before ITC is refused, ensuring that genuine buyers are not penalised for supplier defaults.

The judgment, delivered on 9.12.2025 by a bench of Chief Justice Ashutosh Kumar and Justice Arun Dev Choudhury, came in a challenge filed by M/s McLeod Russel India Limited, which argued that the statutory condition requiring the purchaser to ensure that the supplier duly uploads invoice details in GSTR-1 is impossible to fulfil and results in denial of ITC despite full compliance by the buyer.

The Court recorded the petitioner’s central grievance that Section 16(2)(aa) makes the buyer’s entitlement to ITC contingent entirely upon the supplier’s actions, even though the buyer has no mechanism under the Act to compel the supplier to file GSTR-1 correctly or on time.

The company pointed out that a purchaser who has received goods or services and paid GST to the supplier cannot control whether the supplier uploads the invoice in its outward supplies return under Section 37.

Denying ITC despite tax already having been paid, the petitioner submitted, leads to a situation where the same transaction is taxed twice, creating an impermissible cascading effect that contradicts the core design of GST.

The Court noted that legitimate purchasers routinely face denial of ITC where the supplier either fails to file GSTR-1, makes errors in reporting, or delays filing, and that the statutory framework presently offers no remedial mechanism to buyers even in cases where suppliers have paid tax through GSTR-3B but not uploaded corresponding invoices.

It observed that the provision, as it stands, imposes an “onerous burden” on a purchasing dealer and exposes genuine recipients to tax liability triggered solely by supplier non-compliance.

The Bench accepted that the cascading effect produced in such cases undermines the entire philosophy of taxing only value addition, which is the bedrock of the GST system.

In support of reading down the provision, the petitioner relied on earlier precedents, including the Calcutta High Court decision in Suncraft Energy, later affirmed by the Supreme Court, and decisions recognising that ITC denial cannot occur where the buyer has acted in good faith, received goods or services, and paid GST to a registered supplier.

The Bench also referred to the Top Court’s affirmation of the Delhi High Court’s ruling in Shanti Kiran India (P) Ltd., where bona fide recipients were protected from adverse consequences when the seller had collected but failed to deposit tax.

On the government’s side, the CGST authorities defended the amendment as necessary to curb fraudulent ITC and enforce supplier compliance, arguing that ITC is a concession subject to statutory conditions and that linking credit to reflection in GSTR-2A/2B is a deliberate policy move.

The Court accepted that combating fraud is a legitimate legislative objective. However, it emphasised that such objectives cannot justify penalising honest purchasers for conduct entirely outside their control.

The Court reasoned that GST being a destination based consumption tax, the incidence is intended to fall on the buyer, with the seller acting merely as a collection conduit. Therefore, when the buyer has discharged tax to the seller and possesses valid documentation, the State cannot deny ITC solely due to mismatches arising from supplier side lapses.

Finding the restriction “iniquitous”, the Court held that although the Legislature may impose conditions for availing ITC, those conditions must not defeat the purpose of the Act itself.

It therefore declined to invalidate Section 16(2)(aa) but read it down to clarify that ITC cannot be mechanically denied. Instead, where a supplier has acted in default, the buyer must be given an opportunity to demonstrate bona fides through invoices and supporting records.

The Court added that this reading down would operate until the CBIC formulates a workable mechanism to avoid punishing buyers for supplier-side non-compliance.

The judgment provides relief to taxpayers across sectors who have faced repeated ITC denials due to supplier mismatches and is likely to influence the broader national debate on balancing fraud prevention with protecting bona fide recipients.

Case Title: M/s McLeod Russel India Ltd. v. Union of India & Ors.

Judgment Date: 09.12.2025

Bench: Chief Justice Ashutosh Kumar and Justice Arun Dev Choudhury