On 24 July 2026, the Supreme Court brought a long-running constitutional battle close to an end. Dismissing a batch of special leave petitions led by Bhandari Scrap Traders v. Union of India [SLP(C) No 23931/2026], a Bench of Justice Sanjay Kumar and Sanjeev Sachdeva affirmed a Gujarat High Court decision and upheld the validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 ("CGST Act").
In its own words, the Court found itself "in complete and respectful agreement with the views expressed by the High Court of Gujarat" and dismissed the petitions.
The everyday problem behind the Section
Consider an honest business. It buys goods from a registered supplier, pays the full price along with the GST charged on the invoice, and receives the goods. It has the tax invoice, it has taken delivery, and it has filed its returns. Months later, the department knocks on its door not because the buyer did anything wrong, but because the supplier never deposited the collected tax with the Government.
Under Section 16(2)(c), the buyer's input tax credit (ITC) is reversed, and it is asked to pay the tax again out of its own pocket. This is the injustice, real or perceived, that has been litigated across the country.
What Section 16(2)(c) actually requires
Section 16 of the CGST Act lists the conditions a registered person must satisfy to claim the ITC. Clause (c) of sub-Section (2) allows credit only if "the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit."
In other words, the buyer's right to credit is made to depend on an act that lies entirely in the supplier's hands. The buyer has no independent machinery to verify whether the seller has paid the tax, which is why the provision has repeatedly been attacked as arbitrary and as offending Articles 14, 19(1)(g), 265 and 300A of the Constitution of India.
A country divided: Two lines of High Court rulings
Before the Supreme Court stepped in, the High Courts had split into two camps. One line of decisions borrowed the reasoning developed under the Delhi Value Added Tax regime, particularly the Delhi High Court's ruling in On Quest Merchandising India Pvt. Ltd 2018 (10) G.S.T.L. 182 (Del.), which held that a bona fide buyer "cannot be expected to do the impossible" and that the department's remedy lies against the defaulting seller, not the innocent purchaser.
Following this reasoning, the Tripura, Karnataka and Gauhati High Courts read down Section 16(2) (c) so that it would bite only where the transaction was fraudulent or collusive. The other view, taken by the Gujarat High Court, refused to import the VAT-era logic into GST.
The competing positions are summarised below:
| High Court | Party and Citation | Decision on section 16(2)(c) | Outcome |
| Tripura | Sahil Enterprises (2026) 38 Centax 116 (Tripura) | Valid, but read down to apply only to fraudulent or collusive transactions | For the buyer |
| Karnataka | Instakart Services Pvt. Ltd. (2026) 42 Centax 48 (Kar.) | Read down, following Tripura and Gauhati | For the buyer |
| Gujarat | Maruti Enterprise (2026) 42 Centax 256 (Guj.) | Valid; refused both to strike down and to read down | For the revenue |
| Gauhati | Metal Syndicate (2026) 43 Centax 239 (Gau.) | Applied the read-down precedent to protect a bona fide buyer | For the buyer |
Why the Gujarat High Court held the line
In its judgment in Maruti Enterprise v. Union of India (2026) 186 taxmann.com 90 dated 1 May 2026, the Gujarat High Court refused both to strike down and to read down the provision. Its reasoning rested on a few clear pillars.
First, ITC is "not a constitutional or vested right, but a statutory concession, subject to the conditions and restrictions prescribed under the Act". A concession must be availed strictly on the terms attached to it. Since the scheme deliberately links credit to "taxes paid," the condition in clause (c) is a legitimate feature of that scheme, not an aberration.
Second, the court rejected the charge of double taxation. Section 41(2), read with Rule 37A, requires the buyer to reverse the credit if the supplier does not pay, but expressly permits the buyer to re-avail that very credit once the supplier subsequently deposits the tax. There is therefore reversal followed by restoration, not permanent loss, so "the plea of double taxation would fail."
Third, the buyer is not left remediless. The department can recover the unpaid tax from the defaulting supplier under Sections 73 and 74, and the purchaser can protect itself commercially, for instance through an indemnity clause in its contract.
Crucially, the Gujarat High Court distinguished the Delhi VAT precedents. The VAT law had no equivalent of the reversal and re-availment mechanism and no destination-based settlement system like GST.
Reading down the provision, the Court warned, "would trigger cascading fiscal consequences" and unsettle the architecture of GST. It expressly disagreed with the Tripura High Court in Sahil Enterprises, observing that Tripura had not examined the interplay of Sections 41 and 53 read with Rule 37A. Even while ruling in favour of the revenue, however, the Court urged the Government to ease the burden on honest buyers by building a real-time, technology-driven payment-verification mechanism and by acting promptly against erring suppliers.
The Supreme Court's reasoned dismissal
What makes the Supreme Court's order of 24 July 2026 significant is that it did not merely turn the petitioners away. Although the special leave petitions were dismissed without formally granting leave, the Court gave reasons. It noted that the detailed exercise undertaken by the Gujarat High Court had not been undertaken by the Tripura High Court in Sahil Enterprises.
On that footing, it held that there was "no possibility of drawing parity" between a purchasing dealer under the CGST Act and a bona fide purchasing dealer under the Delhi VAT Act. The court agreed that the buyer could re-avail the reversed credit once the supplier discharged the liability, and affirmed and upheld the impugned judgment.
Conclusion: how much does a reasoned SLP dismissal bind?
This is where the doctrine of merger becomes important. When the Supreme Court dismisses a special leave petition without granting leave, it exercises only its discretionary power under Article 136 of the Constitution of India, not its appellate jurisdiction.
As settled in Kunhayammed v. State of Kerala 2001 (129) E.L.T. 11 (S.C.) and reaffirmed by a larger Bench in Khoday Distilleries Ltd. 2019 (104) taxmann.com 25, the High Court's judgment does not merge into such a dismissal.
The Gujarat judgment therefore remains, technically, a High Court judgment rather than a Supreme Court one. But that is not the end of the matter. The Supreme Court in Kunhayammed and Khoday Distilleries Ltd held that where the dismissal is a speaking order - one that records reasons - the statement of law it contains is a declaration of law under Article 141 of the Constitution of India, binding on all courts, tribunals and authorities throughout India, and its findings bind the parties by way of judicial discipline.
The 24 July order is exactly such a speaking order. It endorses the Gujarat High Court's reasoning on merits. The practical effect, therefore, is that even without a formal merger, the validity of Section 16(2)(c) now stands settled by the Supreme Court, and the contrary read-down rulings of the Tripura, Karnataka and Gauhati High Courts can no longer be relied upon.
At this stage, it is also pertinent to note that the matter of Shail Enterprises is currently pending before the Supreme Court. Therefore, unless and until the Supreme Court pronounces a contrary decision in Shail Enterprises, the constitutional validity of Section 16(2)(c) remains settled and continues to hold the field in view of the Supreme Court's speaking order in Bhandari Scrap Traders.
For businesses, the message is sober. Choosing suppliers carefully, tracking their compliance, and building indemnity protection into contracts are no longer a good practice but they are a commercial necessity. And the ball is now in the Government's court: having won the legal argument, it would do well to heed the Gujarat High Court's own plea and spare the honest buyer from paying for another's default.
* Views are personal
