You bought goods, got a proper tax invoice, received the goods and paid the supplier through the bank, GST included. Then the supplier never deposited that GST. Can the department take back your input tax credit?
After the Supreme Court's judgment in Bhandari Scrap Traders v. Union of India (24 July 2026, 2026 LiveLaw (SC) 725), the answer is yes. The Court upheld Section 16(2)(c) of the CGST Act and turned down the argument that an honest buyer should be protected. Here is what that means for your business, and what to change this month.
What Section 16(2)(c) says
Section 16(2) lists the conditions a buyer must meet to claim ITC. Clause (c) says the tax charged on the supply must have been actually paid to the government by the supplier, in cash or through the supplier's own ITC. The other conditions are that you hold a tax invoice, the invoice appears in your GSTR-2B (clause (aa)), you have received the goods or services, and you have filed your own return.
The problem with clause (c) is obvious. The buyer can check the invoice, receive the goods and pay the supplier, but cannot make the supplier file GSTR-3B or pay the tax.
What the Supreme Court decided
- The provision is valid. The Court dismissed the petitions against the Gujarat High Court's ruling and refused to read Section 16(2)(c) down so that it would apply only to buyers who colluded with the supplier.
- No "bona fide purchaser" defence. Buyers relied on cases decided under the Delhi VAT Act, where honest purchasers had been protected. The Court said the VAT law and the CGST Act work under fundamentally different schemes, so those rulings don't carry over.
- ITC is a conditional benefit, not a right. If a statutory condition isn't met, the credit can be denied, whatever the buyer's good faith.
- The credit isn't lost forever. The Court pointed out that the Act already lets a buyer re-avail reversed ITC once the supplier pays the tax, subject to the prescribed conditions.
In practice: the buyer pays GST to the supplier once, and may have to pay it again to the government when the credit is reversed, until the supplier pays up.
What this changes from the earlier position
Several High Courts had been protecting genuine buyers. In Suncraft Energy (2023), the Calcutta High Court held that the department must first take action against the defaulting supplier before denying credit to a buyer with proper documents. Many businesses relied on that approach in replies to notices. After Bhandari Scrap Traders, that argument is much weaker: the Supreme Court has now said the condition itself is constitutional and applies to genuine buyers too.
One protection still stands. A week earlier, in Safecon Lifesciences (17 July 2026), the Supreme Court let stand an Allahabad High Court ruling that the department can't use the extended fraud-period provisions against a buyer without proof of the buyer's own fraud, just because the supplier's registration was later cancelled. So a genuine buyer may still lose the credit, but should not be treated as a fraudster.
Rule 37A: the deadline built into the law
- If a supplier reported your invoice in GSTR-1 but did not file GSTR-3B for that period by 30 September of the following financial year, you must reverse that ITC.
- The reversal has to be made in your GSTR-3B by 30 November of the following year. Reverse late and interest applies.
- When the supplier later files the return and pays the tax, you can re-claim the credit.
For FY 2025-26 purchases, those dates are 30 September 2026 and 30 November 2026. The second one is next month.
What to do this month
- Reconcile with GSTR-2B every month, not at year-end. Track invoices that are in GSTR-1 but where the supplier's GSTR-3B status is pending. Our note on GSTR-2B reconciliation explains the monthly routine.
- Check FY 2025-26 suppliers now. Any supplier who hasn't filed GSTR-3B for a period by 30 September 2026 triggers a Rule 37A reversal by 30 November 2026.
- Hold back the GST portion for suppliers who are not filing regularly. Pay the taxable value, and release the tax once it appears as filed.
- Add GST clauses to vendor contracts: a warranty that the supplier will file returns and pay tax on time, a right to withhold or set off GST if they don't, and an indemnity for ITC, interest and penalty lost because of their default.
- Vet new suppliers. Before the first order, check their GSTIN status and return-filing history on the GST portal. Recheck big suppliers every quarter.
- Keep the paper trail: invoices, e-way bills, transport proof and bank payments. If a notice comes, this is what shows you are a genuine buyer, which still matters for penalties and for the extended limitation period.
Is it fair?
Legally, the judgment follows the words of the Act: the credit depends on tax reaching the government. Commercially, it makes every buyer partly responsible for collecting tax from its suppliers, with no power to make them pay. The department has full visibility of who filed and who didn't. Many in the profession will argue that recovery should begin with the defaulting supplier, and that the law should change to say so. Until it does, buyers have to protect themselves through process and contracts.
How Vitt-Marg helps
We run monthly ITC reconciliation against GSTR-2B and supplier filing status, flag defaulting suppliers early, handle Rule 37A reversals and re-claims, draft GST clauses for vendor contracts, and reply to notices denying credit. For ongoing work, see our GST services in Noida.
General information, current as of October 2026, not advice for a specific case. GST and income-tax rules change often — check with us before acting on it.