A client called me last week, a hardware dealer from Sanganer. His question was simple but worried: "My supplier had been filing returns for a year, I got proper invoices every time, and the department still reversed my ITC. Is that even legal?" I gave him the same answer most tax portals are giving out right now. Yes, it's legal, and the Supreme Court just made it final.
This piece is about that judgement, the one that's been dominating GST discussions for the past few weeks. If you're a trader, MSME owner, or GST practitioner in Rajasthan or anywhere else in India, this is worth reading slowly because it changes how you should treat your supplier relationships from here on.
The Case: Bhandari Scrap Traders vs Union of India
On May 1, 2026, the Supreme Court dismissed a batch of Special Leave Petitions in M/s Bhandari Scrap Traders vs. Union of India & Ors. The bench, comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva, fully affirmed an earlier Gujarat High Court ruling in Maruti Enterprise vs. Union of India.
The facts are straightforward. Bhandari Scrap Traders had purchased goods from registered suppliers, held valid tax invoices, paid GST through proper banking channels, and had the transactions reflected in GSTR-2A/2B. Their ITC was still denied, purely because the suppliers hadn't deposited that tax with the government. The buyer challenged the underlying provision, Section 16(2)(c), first at the Gujarat High Court and lost, then at the Supreme Court, and lost again.
This is exactly the kind of scenario where a routine ITC notice from the department can turn into a real financial hit, even when the buyer did nothing wrong.
What Section 16(2)(c) Actually Says
Section 16(2) of the CGST Act sets out four conditions for claiming ITC:
A valid tax invoice or debit note is required
The goods or services must have actually been received
The tax charged must actually have been paid to the government (Section 16(2)(c))
The return must have been filed
The buyer argued that the first three conditions, clauses (a), (aa), and (b), already establish that the transaction is genuine. Clause (c) hinges on something the buyer has no visibility into, since a supplier's GSTR-3B isn't accessible to the recipient. It sounds like a fair point on paper. The court didn't buy it.
The petitioners also raised a related issue tied to timing. Under Section 16(4), ITC on any invoice has to be claimed by a fixed deadline, generally the November return of the following financial year, or the annual return, whichever comes first. The court kept this argument separate from the main issue, since 16(4) is about when you can claim ITC, not whether you're entitled to it once the supplier defaults. That distinction matters, and we'll come back to it later.
Why the Delhi VAT Argument Didn't Hold Up
The petitioners leaned on Section 9(2)(g) of the Delhi VAT Act, 2004. There, the Delhi High Court had read down a similarly worded provision in On Quest Merchandising India Pvt. Ltd., protecting bona fide buyers from being punished for a seller's default. The Supreme Court had even declined to interfere with that ruling back in 2018, so the petitioners assumed the same logic would carry over to GST.
Gujarat High Court and the Supreme Court after it, rejected the comparison outright. The reasoning goes like this: GST doesn't run on the same mechanics as Delhi VAT. Under GST, ITC moves across state lines through the IGST settlement mechanism. If a recipient could claim ITC without the supplier ever depositing the tax, the originating state would end up transferring revenue it never actually received. That would undermine the entire destination-based structure of GST, where tax revenue is meant to accrue to the state of consumption, not the state of origin.
The court effectively said that Delhi VAT was a single-state tax with a different accounting logic, while GST is a dual, multi-state system with money physically moving between governments based on what's actually been collected. You can't borrow a precedent built for one system and apply it wholesale to the other. That's why the Delhi VAT logic doesn't translate here.
Is There Any Relief Left for Buyers?
Most coverage of this judgement stops at the bad news, but there's a part worth knowing about. Gujarat High Court read Section 41 alongside Sections 73 and 74. Together, these give buyers a mechanism to re-avail reversed ITC once the supplier eventually settles its outstanding tax liability.
In plain terms: the ITC gets reversed first, the buyer has to pay it out of pocket or through cash ledger, but if the supplier later deposits that tax, whether voluntarily or after a demand notice under Section 73 or 74, the buyer can claim the credit back. It's a slow process that needs active follow-up on the buyer's part. Nobody automatically restores your credit; you have to track it, and in most cases you'll want professional help navigating the ITC reversal and re-availment process so nothing falls through the cracks.
The court treated this statutory recovery mechanism as proof that the law isn't leaving buyers with no options at all; it's just shifting the burden of chasing the outstanding tax onto them instead of writing it off entirely.
Is This Issue Fully Settled?
Here's a nuance most articles skip. The Supreme Court itself noted in its order that a separate SLP is pending from the Tripura High Court's decision in Sahil Enterprises v. Union of India, where the challenge to Section 16(2)(c) is still being examined, and where the Tripura High Court hadn't gone through the same detailed exercise as Gujarat.
Alongside that, the Gauhati High Court recently gave relief to a bona fide purchaser in a separate case, holding that a buyer shouldn't be punished for a seller's default when the transaction is genuine and statutory conditions are met. Calcutta High Court has taken a similar line in another matter, directing the department to process the buyer's ITC and pursue recovery from the supplier instead of denying credit outright.
So at the High Court level, the picture is still a bit mixed, and it's fair to say the law hasn't fully settled into one uniform national position. But the reasoning affirmed by the Supreme Court in Bhandari Scrap Traders is, as of now, the strongest and most authoritative precedent on the books, because it comes from the apex court and directly engages with the constitutional challenge. Until the GST Council legislates the decoupling mechanism it discussed at its 53rd meeting, which would make GSTR-2B reflection sufficient on its own regardless of the supplier's payment status, the risk stays with the buyer.
Don't Confuse This With Section 16(4)
A lot of people search for "latest Supreme Court judgement on GST 16(4)" assuming it's the same issue as this case. It isn't, and mixing the two up leads to wrong conclusions.
Section 16(4) is a completely different provision. It sets the time limit for claiming ITC on an invoice, generally the November return of the following financial year or the annual return, whichever comes first. Miss that window and the credit is gone, regardless of whether the supplier paid their tax or not.
Section 16(2)(c), the one this judgement is about, deals with whether the supplier actually deposited the tax they charged you. You could be well within the 16(4) time limit and still lose your ITC under 16(2)(c) if your supplier defaults. These are two independent gates the credit has to pass through, and clearing one doesn't clear the other.
Practical Steps for Buyers
Working with traders across Rajasthan, I keep seeing that a small business can avoid most of this risk just by building a few habits into their monthly routine:
Verify before you buy. Check a new supplier's GST filing status before placing a large order. This is publicly available on the GST portal under "Search Taxpayer," and it takes two minutes.
Reconcile monthly, not annually. Download GSTR-2B every month and match it against your purchase register. Waiting until year-end means discovering a problem long after you can do anything about the supplier relationship.
Restructure risky supplier terms. For suppliers who consistently file late or show up flagged in any compliance rating tools, consider adjusting how much you pay upfront versus on delivery.
Track recovery status actively. If ITC gets reversed, don't just write it off. Keep tabs on whether the department has initiated recovery against the supplier under Section 73/74, so you can re-avail credit the moment the supplier pays up.
Make reconciliation a system, not a scramble. Bring purchase-side reconciliation with GSTR-3B and GSTR-1 into your monthly closing routine instead of doing it once a quarter or during audit season.
Keep documentation tight. Bank payment proofs, e-way bills, delivery challans, and correspondence with the supplier all help if you ever need to demonstrate genuine transaction intent during a notice reply, even though the court has made clear that genuineness alone won't save your ITC if 16(2)(c) isn't met.
If reconciliation and supplier tracking sound like more than your accounts team can handle month after month, that's usually the point where outsourcing your GST return filing and compliance to a dedicated team starts paying for itself, simply in terms of ITC you don't end up losing.
What This Means If You're Just Starting Out
If you're a newer business still going through the GST registration process, this judgement is worth internalizing early rather than learning the hard way. Supplier due diligence isn't just a large-enterprise concern anymore. The moment you start claiming ITC, you're exposed to your supplier's compliance behavior, and that exposure doesn't shrink just because your business is small.
It also changes how you should think about vendor contracts. Some businesses are now building GST compliance clauses into their purchase agreements, making it explicit that non-deposit of tax by the supplier is a breach that triggers cost recovery from the supplier's side, separate from whatever the department does on the buyer's ITC. It's not a perfect solution, since you'd still need to litigate or negotiate to actually recover that cost, but it at least creates a paper trail and a contractual basis to push back.
Bottom Line
The Supreme Court has been clear: Section 16(2)(c) is constitutional and won't be read down. If your supplier collected GST from you and didn't deposit it with the government, your ITC can be denied, no matter how correctly you did everything on your end, no matter how clean your invoices and payment trail look. There's a way back, re-availing credit under Section 41/73/74, but it's a reactive fix, not a preventive one.
The businesses that come out ahead here won't be the ones with the best legal arguments after the fact. They'll be the ones who built supplier verification and monthly reconciliation into their process before a notice ever landed. If you're dealing with an active ITC reversal notice right now, or you want a compliance check-up before it becomes a problem, that's exactly the kind of situation worth getting a second set of eyes on.
FAQs
1. What did the Supreme Court decide on GST ITC in 2026?
The Supreme Court upheld the constitutional validity of Section 16(2)(c) in the Bhandari Scrap Traders case. It's now settled that a buyer's ITC can be denied if the supplier doesn't deposit the tax, even if every other condition is met.
2. Is the buyer's ITC lost permanently if the supplier defaults?
Not necessarily. Under Sections 41, 73, and 74, if the supplier eventually settles the outstanding tax liability, the buyer can re-avail the reversed ITC.
3. What's the difference between Section 16(2)(c) and Section 16(4)?
Section 16(2)(c) sets a condition that the tax must actually be paid by the supplier. Section 16(4) sets the deadline by which ITC on an invoice must be claimed. They're two separate issues, and satisfying one doesn't satisfy the other.
4. Where can I download the latest Supreme Court judgement on GST ITC PDF?
The judgement copy is available on the Supreme Court's official website (main.sci.gov.in) or through subscription-based legal databases like Taxmann, CAclubindia, or SCC Online, after verifying the exact judgement number and date.
5. How has the Supreme Court judgement for ITC taken by the buyer played out overall?
With Bhandari Scrap Traders, the Supreme Court's stance now goes against the buyer where the supplier hasn't deposited tax. That said, some High Courts, like Gauhati and Calcutta, have granted relief to bona fide purchasers in individual cases, so outcomes can still vary depending on the facts and the forum.
6. Will GST ITC be given to the purchaser even if tax is not deposited by the seller?
After Bhandari Scrap Traders, the answer is no. This is a common misconception carried over from the older Delhi VAT-era cases. GST works differently, and the Supreme Court has now confirmed that.
7. What should I do if my ITC gets reversed because of a supplier's default?
Start by reconciling your GSTR-2B against your purchase register, follow up with the supplier to get the tax deposited, and once they do, apply to re-avail the credit under Section 73/74. Get a professional to draft the notice reply if the department has already issued one.
8. Can I check a new supplier's GST compliance before onboarding them?
Yes, the GST portal's "Search Taxpayer" feature makes GSTIN status and filing history publicly visible. This kind of check has become a necessary business practice after this judgement.
9. What recent Supreme Court judgements on GST have come out in 2026?
2026 has seen Supreme Court orders on ITC blocking, the validity of Section 16(2)(c), GSTAT appeal procedures, and various SLPs arising from High Court rulings. Bhandari Scrap Traders is the one getting the most attention right now.
10. Is this judgement riskier for small traders and MSMEs specifically?
Yes, because MSMEs typically don't have a dedicated compliance team tracking every supplier's filing history the way larger companies do. That makes monthly reconciliation and supplier verification even more important for smaller businesses.
11. Can this judgement still be challenged through a review petition or further appeal?
Technically, a review petition can be filed, but the Supreme Court's dismissal order already came with detailed reasoning, so the odds of reversal are low. The parallel SLP from the Tripura High Court is still pending, and its outcome is worth watching.
12. Which are the most important ITC-related GST judgements till date?
On Quest Merchandising (the Delhi VAT-era case), Bhandari Scrap Traders/Maruti Enterprise (2026, on Section 16(2)(c) validity), and various High Court rulings that treat GSTR-2A/2B as a facilitation tool rather than conclusive proof of ITC eligibility.
Author: This article was researched and published by Sanju Meena, Digital Marketer and SEO Executive at LegalDev Tax India Pvt. Ltd., who works on GST compliance content and search strategy for gstfilling.co.