Supreme Court Clarifies ITC Rules Under GST: Bhandari Scrap Traders v. Union of India (2026) Explained

The Supreme Court's decision in Bhandari Scrap Traders v. Union of India & Ors. has become one of the most significant GST judgments of 2026. The ruling settles a long-standing dispute regarding Input Tax Credit (ITC) and the liability of buyers when suppliers fail to deposit GST with the Government.

The Court upheld the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, making it clear that a recipient can claim ITC only if the supplier has actually paid the GST to the Government.

Background of the Case

Many genuine businesses had purchased goods or services, paid GST to their suppliers, and claimed Input Tax Credit (ITC).

However, during departmental verification, it was discovered that certain suppliers had not deposited the GST collected from buyers with the Government.

The GST Department denied ITC to the purchasers under Section 16(2)(c), which requires that the tax charged on a supply must actually be paid to the Government before the recipient becomes eligible to claim ITC.

The petitioners argued that:

• They had already paid GST to the supplier.
• They had valid tax invoices.
• They had no control over whether the supplier deposited the tax.
• Denial of ITC to an innocent buyer was unfair and unconstitutional.

These arguments ultimately reached the Supreme Court.

Legal Issue Before the Supreme Court

The primary question before the Court was:

Can a genuine purchaser claim ITC if the supplier fails to deposit GST with the Government?

The petitioners also challenged the constitutional validity of Section 16(2)(c) of the CGST Act.

Supreme Court's Decision

The Supreme Court dismissed the Special Leave Petitions and affirmed the Gujarat High Court's judgment.

The Court held that:

• Section 16(2)(c) is constitutionally valid.
• ITC is a statutory benefit and not an absolute right.
• A purchaser becomes eligible for ITC only when all conditions under Section 16 are fulfilled.
• One of these mandatory conditions is that the supplier must have actually paid the GST to the Government.
• The GST law cannot be interpreted on the basis of earlier VAT laws because the GST framework is fundamentally different.

What is Section 16(2)(c)?

Section 16(2)(c) of the CGST Act states that a registered person can claim Input Tax Credit only if:

• Goods or services are received.
• A valid tax invoice is available.
• The supplier has furnished the invoice.
• The supplier has actually paid the tax to the Government.

Failure of the supplier to deposit GST can result in denial or reversal of ITC.

Why is this Judgment Important?

This decision changes how businesses manage vendor compliance.

Earlier, many taxpayers believed that payment of GST to the supplier was sufficient.

After this judgment, businesses must also ensure that suppliers comply with GST payment requirements because supplier default can directly affect the buyer's ITC eligibility.

Practical Impact on Businesses

Businesses should now strengthen their GST compliance process.

1. Vendor Due Diligence

Before dealing with suppliers, businesses should verify:

• GST Registration Status
• Return Filing History
• Compliance Rating (where available)
• Business authenticity

2. Regular Reconciliation

Businesses should periodically reconcile:

• Purchase Register
• GSTR-2B
• GSTR-3B
• Supplier invoices

3. Vendor Compliance Monitoring

Regular follow-up with suppliers regarding:

• Timely GSTR-1 filing
• GSTR-3B filing
• GST payment

can reduce ITC risks.

4. Strong Vendor Agreements

Purchase agreements should include clauses requiring suppliers to:

• File GST returns on time.
• Deposit GST promptly.
• Compensate the purchaser if ITC is denied due to supplier default.

Key Takeaways

✔ The Supreme Court upheld Section 16(2)(c) of the CGST Act.

✔ ITC is available only if the supplier has deposited GST.

✔ Payment of GST to the supplier alone does not guarantee ITC.

✔ Businesses should strengthen vendor due diligence.

✔ Regular GST reconciliations are now more important than ever.

✔ Proper documentation and supplier monitoring can significantly reduce ITC disputes.

Frequently Asked Questions (FAQs)

Q1. Can ITC be denied even if I have paid GST to my supplier?

Yes. If the supplier fails to deposit the GST with the Government, ITC may be denied under Section 16(2)(c).

Q2. Is this rule applicable to genuine buyers?

Yes. The Supreme Court held that even bona fide purchasers must satisfy the statutory conditions prescribed under Section 16.

Q3. Does this judgment make vendor verification mandatory?

While the law does not prescribe a specific verification procedure, businesses are now expected to conduct stronger vendor due diligence to protect their ITC.

Q4. Can ITC be reclaimed if the supplier later deposits GST?

The statutory framework allows re-availment in appropriate situations once the supplier discharges the tax liability, subject to the applicable provisions and conditions.

Conclusion

The Bhandari Scrap Traders v. Union of India (2026) judgment is a landmark decision in GST law. It reinforces that Input Tax Credit is subject to strict statutory compliance, and businesses cannot rely solely on possession of tax invoices or payment to suppliers.

Going forward, vendor selection, GST reconciliation, and continuous compliance monitoring should become an integral part of every business's GST strategy to safeguard valuable Input Tax Credit.