Punjab and Haryana High Court Lays Down Guidelines Against Mechanical Reversal of Input Tax Credit

Kaustav Chowdhury

1 day ago

5 min read

Background and Facts

A buyer who paid its supplier in full, took delivery and claimed credit can still lose that credit because the supplier never paid the tax over. The Punjab and Haryana High Court has held that this cannot be done by reflex. Deciding a batch of 424 writ petitions, the Court upheld the provision that makes credit conditional on the tax having been paid to the Government, but ruled that the mechanical reversal of input tax credit is not open to the authorities merely because a supplier defaulted or its registration was later cancelled. The judgment in Shaurya Alloys Pvt. Ltd. v. State of Punjab is dated October 1, 2026.

The scale is the first thing to notice. A single judgment disposing of 424 petitions is a signal that the issue had become systemic: notices were issuing on the strength of a mismatch alone, and the purchaser was being treated as the collection point of last resort.

The Court did not strike anything down. It left the condition intact and directed attention to how the condition is applied, which is the harder and more useful question.

Key Legal Issue

Whether the condition that the tax must have been paid to the Government permits an assessing authority to deny or reverse credit in the hands of a purchasing dealer on the footing of the supplier's default alone, without examining the genuineness of the transaction or the purchaser's own conduct.

What the Court Held

Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 was upheld. The Court then held that it cannot be invoked mechanically or in isolation merely because a supplier has defaulted in payment of tax or because its registration was subsequently cancelled.

Two consequences were spelt out. Retrospective cancellation of a supplier's registration does not by itself invalidate the purchaser's credit. And a supplier's failure to file returns, to pay tax or to remain traceable justifies an investigation rather than an automatic demand against the buyer.

The Enquiries the Authority Must Actually Make

The practical content of the judgment is the list of matters an officer has to consider before reversing credit. The genuineness of the transaction comes first: whether the goods or services were in fact received and put to use in the business. Then the purchaser's evidence, which the Court described in terms of invoices, transport documents, electronic way bills, stock records and the payment trail.

Then the nature of the default itself, which is to say whether the tax was unpaid, partly paid or paid late. Then what the department did about the person who actually defaulted. And finally, where fraud is alleged, whether there is material showing the purchaser's own participation or knowledge, as distinct from material showing only the supplier's misconduct.

Validity and Application Are Different Questions

It is worth separating the two holdings, because they pull in opposite directions and both will be cited. The condition survives: credit remains contingent on the tax reaching the Government, and the burden of establishing eligibility is not on the department. What does not survive is the practice of treating the mismatch as the end of the enquiry.

A notice that recites the supplier's default and nothing else is therefore vulnerable, not because the provision is bad, but because the officer has not done the work the provision requires. That is an argument about the order rather than about the statute, and it is the stronger of the two to run.

What the Purchaser Still Has to Prove

Section 155 places the burden squarely on the claimant: where any person claims that he is eligible for input tax credit, the burden of proving such claim lies on him. The judgment does not move that burden. It defines what discharging it looks like and bars the department from disregarding the discharge.

Two further protections were recorded. Tax cannot be recovered twice over, from the supplier and again from the recipient, for the same default. And natural justice has to be substantive rather than formal, which means disclosure of the adverse material and a real opportunity to answer it. Section 75(4) of the Act requires an opportunity of personal hearing where one is requested in writing or where an adverse decision is contemplated.

Practice Notes

In practice, the judgment changes what a reply to this kind of notice should contain:

Answer the five enquiries in order, in the reply: Genuineness, documents, the nature of the default, departmental action against the supplier, and the absence of any material against the purchaser. A reply organised that way maps onto the judgment and is harder to brush aside.
Lead with the documents, not the law: Invoices, transport records, electronic way bills, stock records and the payment trail are what the Court said the officer must look at. Assemble them before drafting a word of argument.
Separate retrospective cancellation from non-payment: They are different defects with different answers, and the judgment deals with them separately. A reply that treats them as one invites a single short response.
Ask what was done about the defaulter: Whether the department pursued the supplier is now a relevant consideration. A specific request for that information belongs in the reply.
Press the double recovery point where it arises: If the supplier has since paid, or is being pursued for the same amount, say so with particulars. Recovering the same tax twice is not open to the department.
Insist on the hearing and on the material: A personal hearing is required where an adverse decision is contemplated, and the adverse material has to be disclosed. An order passed without either is challengeable on that ground alone.

Key Provisions Discussed

Section 16 of the Central Goods and Services Tax Act, 2017: Eligibility and conditions for taking input tax credit, including the condition in sub-section (2)(c) that the tax charged in respect of the supply has been actually paid to the Government.
Section 155 of the Act: Where any person claims that he is eligible for input tax credit under the Act, the burden of proving such claim lies on that person.
Section 75 of the Act: General provisions relating to the determination of tax, including the requirement in sub-section (4) of an opportunity of personal hearing where it is requested in writing or where an adverse decision is contemplated.

Case Details

Case: Shaurya Alloys Pvt. Ltd. v. State of Punjab
Court: High Court of Punjab and Haryana
Date: October 1, 2026
Scope: A batch of 424 writ petitions decided together
Upheld: The condition that input tax credit is available only where the tax has been actually paid to the Government
Held: That condition cannot be invoked mechanically or in isolation merely because a supplier defaulted in payment or its registration was later cancelled
Directions: Retrospective cancellation of a supplier's registration does not by itself invalidate the purchaser's credit; a supplier's default justifies investigation rather than an automatic demand on the buyer; the same tax may not be recovered twice; and the adverse material must be disclosed with a real opportunity to answer it

Sources and References

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.