The Punjab and Haryana High Court in Shaurya Alloys Pvt. Ltd. upheld Section 16(2)(c) of the CGST Act but ruled that input tax credit cannot be reversed automatically on supplier default or registration cancellation - requiring an evidence-based inquiry and procedural safeguards.
The Punjab and Haryana High Court's judgment in Shaurya Alloys Pvt. Ltd. v. State of Punjab and Another (CWP-34296-2024, decided 1 October 2026) represents the most structured judicial articulation to date of the procedural constraints on ITC denial under Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The Court upheld the constitutional validity of Section 16(2)(c) - which conditions input tax credit on actual payment of tax to the Government - while simultaneously rejecting the mechanical or formulaic enforcement of that condition against purchasing taxpayers who had no control over their supplier's compliance.
The Court formulated 14 guidelines governing the exercise of the denial and reversal power. These guidelines require tax authorities to conduct an evidence-based inquiry into the specific transaction before denying credit, rather than relying solely on the supplier's default, the cancellation of the supplier's GST registration, or the absence of the supplier's return data in GSTR-2A or GSTR-2B. The guidelines also mandate procedural safeguards - notice, opportunity to respond, and a reasoned order - before any adverse action is taken against the recipient taxpayer. The ruling reflects the Court's recognition that supplier-side non-compliance cannot, without further examination, conclusively determine the recipient's entitlement to credit.
The practical significance of the judgment is substantial. GST authorities have routinely issued demand notices and recovery orders against recipients on the basis of GSTR-2A mismatches or supplier registration cancellations, without examining whether the recipient had actually received the goods or services, paid the consideration, and held a valid tax invoice. The Court's framework now requires authorities to document the factual basis for denial and to demonstrate that the procedural protections have been observed. Recipients facing ITC proceedings should assemble transaction-level evidence - purchase orders, invoices, payment records, e-way bills, and delivery documentation - and test whether the department has conducted the required inquiry.
The judgment also engages with Section 155 of the CGST Act, which places the burden of proof on the taxable person in certain circumstances. The Court's guidelines clarify that the burden-shifting provision does not displace the department's obligation to initiate proceedings on a proper factual foundation. The interplay between Section 16(2)(c) and Section 155 has been a persistent source of litigation, and the 14-point framework provides a structured basis for challenging proceedings that bypass the required inquiry.
For tax counsel and compliance teams, the judgment establishes a clear litigation checklist: verify whether the authority conducted an independent inquiry into the transaction, whether the recipient was given adequate notice and opportunity, and whether the order contains a reasoned analysis of the evidence rather than a bare reference to supplier default. The ruling also has implications for the design of GST audit and assessment procedures, signalling that systemic reliance on automated mismatch reports as a standalone basis for ITC denial is legally unsustainable.
The broader policy context is the tension between the GST system's design - which relies on supplier compliance to validate recipient credit - and the constitutional guarantee of procedural fairness. The Punjab and Haryana High Court's judgment does not resolve that structural tension, but it imposes meaningful procedural discipline on the enforcement mechanism, reducing the risk of arbitrary or disproportionate outcomes for compliant recipients caught in supplier-side failures.
