The single most litigated issue in GST — now reshaped by the Supreme Court’s July 2026 ruling on Section 16(2)(c). Here’s the current legal position, the case law, and how to structure a defence.
The Core Dispute — Section 16(2)(c)
A recipient claims Input Tax Credit on a genuine purchase — valid invoice, goods received, supplier paid in full including GST. Months later, a Show Cause Notice arrives demanding reversal of that ITC with interest, because the supplier never deposited the tax with the government. This single fact pattern, arising from Section 16(2)(c) of the CGST Act, has generated more GST litigation than almost any other provision.
Section 16(2)(c) makes one of the conditions for ITC that the tax charged on a supply must actually have been paid to the government by the supplier — holding a valid invoice, receiving the goods, and paying the supplier is not, by itself, enough. For years, taxpayers argued this was fundamentally unfair, punishing an honest buyer for a default entirely outside their control.
The Supreme Court Has Now Settled It JULY 2026
Bhandari Scrap Traders v. Union of India & Ors.
A Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva upheld the Gujarat High Court’s ruling that Section 16(2)(c) is constitutionally valid and does not need to be read down. The Court held that the GST framework is fundamentally different from the old VAT regime, so precedents protecting bona fide buyers under VAT law cannot be directly transplanted. Critically, the Court noted the buyer is not without recourse — Sections 41, 73, and 74 allow the department to recover tax from the defaulting supplier, after which the buyer can re-avail the reversed credit under Rule 37A.
What this changes for practitioners
The argument that Section 16(2)(c) should be read down to protect honest buyers — previously accepted by the Tripura High Court in Sahil Enterprises v. Union of India — now stands effectively overtaken. Constitutional challenges to Section 16(2)(c) itself are no longer a viable line of defence. The focus of ITC litigation now shifts to factual defences: proving the transaction was genuine, and pursuing re-availment once the supplier’s default is eventually cured.
GSTR-2A/2B Mismatch Disputes
Distinct from outright non-payment by the supplier, a large share of ITC notices arise from timing or reporting mismatches between what the recipient claimed and what appears in GSTR-2A/2B — a fundamentally different, and often more defensible, fact pattern.
Timing mismatches are not fatal
Where a supplier reports an invoice in a later return period than the recipient claimed it, and eventually files and pays, courts have consistently held that a procedural timing difference doesn’t extinguish a substantive ITC entitlement once the tax has genuinely reached the government.
GSTR-2B is now the primary reference
Since 1 January 2022, Rule 36(4) treats GSTR-2B — not GSTR-2A — as the operative document for ITC eligibility, since it is a static, month-end statement rather than a continuously updating one.
The department must pursue the supplier, not just the recipient
Where a genuine mismatch traces back to a supplier’s failure to file returns despite having collected tax, courts have repeatedly held the department must proceed against the defaulting supplier — reversing the recipient’s credit as a first resort has been struck down.
Rule 86A — Blocked Credit
Rule 86A empowers an officer not below the rank of Assistant Commissioner to block a taxpayer’s electronic credit ledger where they have “reasons to believe” the credit was fraudulently availed or is otherwise ineligible — a provisional, pre-emptive power distinct from the adjudication process itself.
Key procedural safeguards to check first
- The one-year cap: Rule 86A does not empower blocking for more than one year — the department is bound to unblock the credit once that period expires, even if adjudication hasn’t concluded.
- Reasons to believe, recorded in writing: A block imposed without documented, specific reasons — rather than a generic template — is vulnerable to challenge.
- Post-decisional hearing: Courts have held that while a pre-decisional hearing may not be feasible given the provisional nature of a Rule 86A block, a post-decisional hearing must be offered.
- Distinct from Section 73/74 adjudication: A hearing must be granted before an SCN is issued under Section 73 or 74 — Rule 86A blocking cannot substitute for that separate adjudicatory process.
Case Law Reference Table
| Case | Court | Key Holding |
|---|---|---|
| Bhandari Scrap Traders v. UOI | Supreme Court | Section 16(2)(c) constitutionally valid; not to be read down |
| Union of India v. Bharti Airtel Ltd. | Supreme Court | GSTR-2A is a facilitation tool, not a determinant of ITC eligibility on its own |
| Suncraft Energy Pvt. Ltd. | Calcutta HC | Decisive test is whether tax reached the government — procedural timing differences don’t defeat substantive ITC entitlement |
| Canon India Pvt. Ltd. | Delhi HC | Rule-based restrictions cannot override the substantive conditions of Section 16(2) |
| M/s Aryan Trade Link | Karnataka HC | Rule 86A block exceeding one year must be lifted regardless of adjudication status |
Case names and holdings are paraphrased summaries for reference — always pull and verify the full judgment before citing in a pleading.
Building Your Defence Strategy
Classify the fact pattern precisely first
Is this a Section 16(2)(c) non-payment case (now governed by Bhandari Scrap Traders), a timing mismatch case (Suncraft Energy line of reasoning), or a Rule 86A provisional block (procedural safeguards apply)? Each calls for a different defence.
Document the transaction’s genuineness exhaustively
Invoice, e-way bill, delivery challan, goods receipt note, bank payment trail to the supplier, and correspondence — the stronger this file, the harder it is for the department to sustain an allegation of a bogus or paper transaction.
Track the supplier’s eventual compliance
Where a supplier was initially non-compliant but later files and pays, this directly supports a Rule 37A re-availment claim — keep monitoring the supplier’s GSTR-2B status even after an initial reversal.
For Rule 86A cases, challenge the block procedurally first
Check the recorded reasons, the one-year cap, and whether a post-decisional hearing was offered before engaging with the substance of the fraud allegation — procedural defects here are often the fastest route to relief.
Common Questions
Can I still argue Section 16(2)(c) is unconstitutional after Bhandari Scrap Traders?
The Supreme Court has upheld its constitutional validity, so a fresh constitutional challenge on the same ground is very unlikely to succeed. Defence strategy should shift to factual and procedural grounds instead.
If my supplier eventually pays the tax, do I automatically get my reversed ITC back?
Rule 37A provides a re-availment mechanism once the defaulting supplier’s tax payment is reflected — but this typically requires monitoring and a fresh claim rather than an automatic restoration, so track it actively rather than assuming it happens on its own.
How long can my credit ledger remain blocked under Rule 86A?
Rule 86A does not permit blocking beyond one year — the department is required to unblock the credit once that period lapses, regardless of whether the underlying adjudication has concluded.
Does a GSTR-2A/2B mismatch alone justify reversing my ITC?
Not automatically. Courts have consistently required the department to pursue the defaulting supplier and to establish, with evidence, that the transaction itself was not genuine — a bare mismatch is a starting point for inquiry, not conclusive proof of ineligibility.