P&H HC Bars Mechanical ITC Reversal Under Section 16(2)(c)

No Automatic ITC Reversal for Supplier Default: P&H HC

The Punjab & Haryana High Court in Shaurya Alloys v. Union of India upheld the constitutional validity of Section 16(2)(c) of the CGST Act but ruled that input tax credit (ITC) cannot be mechanically reversed solely because a supplier has defaulted. The Court laid down 14 comprehensive guidelines to prevent arbitrary denial of ITC.

The Court observed that ITC reversal must be linked to the recipient’s own conduct or misuse, not just the supplier’s default. Factors such as the recipient’s bonafides, documentary compliance, and actual receipt of goods/services must be examined before initiating any reversal action.

Key Guidelines Include

• Proper officer must conduct independent inquiry into recipient’s bona fides
• ITC reversal not justified merely by GSTIN cancellation of supplier
• Opportunity of personal hearing must be given before final action
• Rules 42 and 43 reversals must be applied only after detailed verification

This judgment marks a significant safeguard against automated denial of ITC via GST portal mismatches. Tax professionals should cite this precedent when challenging mechanical reversals and ensure their clients are not denied credit without a reasoned inquiry.