Namaste DOST.

Imagine doing everything right under GST — paying tax, receiving goods, keeping invoices — and still losing your Input Tax Credit because someone else slipped.

This judgment from the Gauhati High Court pauses at that exact discomfort and asks a question many taxpayers quietly carry: should a buyer suffer for a supplier’s default?

Summary

In M/s McLeod Russel India Limited v. Union of India, the Gauhati High Court examined the validity and application of Section 16(2)(aa) of the CGST and AGST Acts. This provision makes Input Tax Credit (ITC) conditional upon the supplier uploading invoice details in GSTR-1 and their reflection in the recipient’s records. The petitioner argued that this condition unfairly penalises a bona fide buyer for lapses entirely within the supplier’s control. While the Court did not strike down Section 16(2)(aa) as unconstitutional, it found the condition to be onerous and inequitable in its rigid application. The Court therefore read down the provision, holding that before denying ITC, authorities must allow the buyer an opportunity to prove bona fides through invoices and other documents. This reading down effectively protected ITC for genuine taxpayers.

Facts of the Case (Background)

The petitioner, M/s McLeod Russel India Limited, is a public limited company engaged in the production, blending, and supply of tea in India and abroad.

The company approached the Gauhati High Court challenging the operation of Section 16(2)(aa) of the CGST Act and the corresponding AGST provision.

Under GST law, ITC is available only when certain statutory conditions are fulfilled. One such condition, introduced through Section 16(2)(aa), requires that the supplier must upload invoice details in GSTR-1, and those details must be communicated to the recipient as prescribed under Section 37.

The petitioner’s grievance was simple yet serious.

Even where tax had been paid to the supplier, goods had been received, and valid invoices were in place, ITC was being denied solely because the supplier failed to upload invoice details correctly or on time in GSTR-1.

According to the petitioner, this resulted in denial of ITC to a bona fide taxpayer for reasons completely beyond its control.

Legal Issue

The central legal issue before the Court was:

Can a bona fide recipient be denied Input Tax Credit solely because the supplier failed to upload invoice details in GSTR-1, even when tax has been paid, and goods or services have been received?

Closely linked to this was a constitutional concern — whether such denial shifts the tax burden unfairly from the supplier to the buyer and defeats the core objective of GST.

Arguments

Arguments of the Petitioner

The petitioner argued that:

• Section 16(2)(aa) imposes an arbitrary and impossible condition on the buyer.

• Section 37 does not provide any mechanism for the buyer to compel the supplier to upload invoices.

• Denial of ITC despite tax payment to the supplier is irrational and inequitable.

• Such denial effectively makes the buyer pay GST twice — once to the supplier and again by disallowance of ITC.

• In the alternative, if not struck down, the provision must be read down to protect bona fide purchasers.

Arguments of the Department

The department contended that:

• ITC is a concession subject to conditions under Section 16.

• Section 16(2)(aa) was introduced to curb fraudulent ITC claims and improve compliance.

• Linking ITC to supplier compliance is a valid legislative choice.

• The provision does not discriminate and should not be interfered with.

Court’s Decision

The Gauhati High Court delivered its judgment on 9 December 2025.

The Court made an important distinction.

It refused to declare Section 16(2)(aa) unconstitutional, recognising that the legislative intent behind the provision was to prevent fake ITC and promote supplier compliance.

However, the Court closely examined the practical impact of the provision.

It observed that:

• GST is designed to tax only value addition and avoid cascading.

• Denying ITC to a buyer due to supplier default shifts the tax incidence unfairly.

• The condition under Section 16(2)(aa) places an onerous burden on the purchasing dealer, over whom the buyer has no real control.

The Court concluded that mechanical denial of ITC merely because an invoice does not appear in GSTR-2A/2B would defeat the object of the Act.

Legal Reasoning & Analysis (Reading Down Explained)

Here, the Court invoked the doctrine of reading down.

What does “reading down” mean?

Reading down is a judicial technique where a provision is not struck down but is interpreted in a narrower, fairer manner so that it remains constitutional and workable.

The Court explained that while exemptions and concessions can be conditional, such conditions cannot operate in a way that defeats the statute’s purpose.

In this case, the Court held that:

• Section 16(2)(aa) cannot be applied rigidly to deny ITC to a bona fide buyer.

• Before denying ITC, authorities must give the buyer an opportunity to prove bona fides.

• Such bona fides can be verified through tax invoices and other documents.

Accordingly, the Court read down Section 16(2)(aa) to this limited extent.

This reading down will apply until CBIC provides a practical solution for the problem created by making ITC contingent on supplier actions alone.

In effect, while the law remains, its harsh edge has been softened.

Important Takeaways for Business Owners

📌 Key Lessons from the Judgment

• Bona fide buyers are protected: ITC cannot be denied automatically for supplier lapses.

• Opportunity of proof is mandatory: Authorities must allow taxpayers to establish genuineness.

• Documents matter: Invoices, payment records, and books of accounts are crucial.

• GST is not meant to punish honesty: The objective is value-added taxation, not double burden.

• Judicial remedy works: Courts continue to act as a balancing force in GST administration.

Why This Matters (Broader Impact)

This ruling sends a clear signal that GST compliance must be fair as well as firm.

While the system may insist on discipline, it cannot do so by penalising parties who have no control over another’s default. The judgment strengthens trust in judicial oversight within the GST framework.

Conclusion

Section 16(2)(aa) was designed to protect the GST system from misuse.

But in its rigid application, it began hurting the very taxpayers who complied in good faith.

The Gauhati High Court did not break the law.

It simply taught us how to read it correctly.

By reading down Section 16(2)(aa), the Court restored balance — between compliance and fairness, between discipline and justice.

And that balance is what keeps GST honest.

“📞 Need help with ITC denial or supplier-related GST disputes?  Reach out to GST DOST for structured, litigation-ready support.

FAQ

Q1: What was the dispute in this case?

A: ITC was denied to a buyer because the supplier failed to upload invoice details in GSTR-1.

Q2: Did the Court strike down Section 16(2)(aa)?

A: No. The Court upheld the provision but read it down to protect bona fide buyers.

Q3: Can ITC be denied merely due to GSTR-1 mismatch?

A: Not automatically. The buyer must first be allowed to prove genuineness.

Q4: What documents can prove bona fides?

A: Tax invoices and other supporting records, as recognised by the Court.

Q5 Can a buyer’s ITC be denied due to the supplier’s default?

A: No. If the buyer is bona fide and is able to establish the genuineness of the transaction through supporting documents, ITC cannot be denied merely because of the supplier’s lapse.

References

• Case: M/s McLeod Russel India Limited v. Union of India
  Gauhati High Court, WP(C) No. 5725 of 2022, Judgment dated 09-12-2025

• Statutory Provision: Section 16(2)(aa), Central Goods and Services Tax Act, 2017

Written by CA Vikash Dhanania | Reviewed by GST DOST Legal Research Team | Updated on 12/12/2025.

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