[Order of the Division Bench of the Hon'ble High Court of Punjab & Haryana, dated 01.10.2026, in a batch of 424 WPs]

While holding that Section 16(2)(c) ibid does not suffer from any constitutional infirmity warranting its invalidation, Section 16(2)(c) ibid read with Section 155 ibid cannot be construed as a standalone provision so as to mechanically saddle liability on the purchasing dealer to reverse ITC on the failure of the selling dealer to deposit tax with the Government, without the proper officer first examining (after affording due opportunity of hearing to the purchasing dealer) the circumstances in which the selling dealer has failed to deposit the tax, the genuineness of the transaction, and the statutory mechanism available for recovery of such tax in the relevant period.

Therefore, Section 16(2)(c) ibid shall be invoked in accordance with the following guidelines:

(1) The said provision shall not be invoked against a purchasing dealer in a routine or mechanical manner. The subsequent cancellation, including retrospective cancellation, of the registration of the selling dealer; the reflection of 'nil' or short tax liability in the return of the selling dealer; or the receipt of an alert or intimation from some source or complaint etc., may furnish a legitimate starting point for an inquiry, but shall not, by themselves, constitute the basis for denial or reversal of ITC availed by the purchasing dealer.

(2) Before issuing a SCN to a purchasing dealer founded upon Section 16(2)(c), the proper officer shall apply his mind to the material available and record his satisfaction as to factors such as:

(a) the particulars of the selling dealer, the invoices, the tax periods and the amount of ITC involved;

(b) the precise nature of the default, i.e., whether the tax charged has not been paid at all, has been short paid, or has been discharged through utilisation of ITC which is itself inadmissible;

(c) the circumstances in which the selling dealer has failed to deposit the tax; and

(d) the proceedings, if any, initiated against the selling dealer for recovery of such tax, including under Sections 73, 74, 75(12) read with Section 79, or Section 76 of the Act of 2017, and the status thereof.

(3) Investigation leading to issuance of SCN should be carried out in order to establish some direct link of the petitioner with the suppliers in order to satisfy the violation of conditions mentioned in Section 16 (2).

(4) The SCN shall disclose the aforesaid particulars, the material on which the proposed denial or reversal of ITC is founded, the details of the supplier(s) from whom ITC is alleged to have been wrongly availed, and the manner in which it is alleged to have been wrongly availed. The documents relied upon, such as alert notices, inspection reports, panchnamas, statements recorded during investigation, and eway bill, vehicle registration, toll and banking data, shall be supplied to the noticee, subject to any privilege lawfully claimed.

(5) Where mens rea (viz., grounds of fraud, wilful misstatement or suppression of facts) is invoked, the notice shall itself contain the foundational facts from which the inference of fraud, wilful misstatement or suppression of facts on the part of the noticee is drawn, in terms of the SC's recent decisions in re: G.R. Infra Projects and Tata Steel. A bald or mechanical recital of these expressions shall not suffice, and the deficiency cannot be supplied by a counter affidavit or by subsequent explanation. The fraud of the selling dealer shall not be attributed to the purchasing dealer unless the notice discloses the facts connecting the purchasing dealer with such fraud.

(6) The burden under Section 155 ibid lies upon the purchasing dealer to establish its eligibility to ITC. The purchasing dealer may discharge the burden by producing material such as the tax invoice; proof of receipt of goods or services, including e-way bills, transport receipts, weighbridge slips and stock and consumption records etc. The proper officer shall consider such material and deal with it in the order.

(7) Where the denial of ITC is premised upon the retrospective cancellation of the registration of the selling dealer, the proper officer shall examine the grounds on which, and the date from which, the registration has been cancelled, and whether such grounds have any bearing on the genuineness of the particular supply made to the purchasing dealer.

(8) The existence of the statutory remedy against the selling dealer is a relevant consideration which cannot be rendered toothless. The proper officer shall ascertain and record the status of the proceedings against the selling dealer and, where the selling dealer falls within the jurisdiction of another authority, whether Central or State, shall communicate with the jurisdictional officer concerned. Where tax in respect of the same supply has been recovered from, or deposited by, the selling dealer, that fact shall be taken into account so that the same tax is not realised twice, and the purchasing dealer shall be entitled to avail or re-avail the credit to the extent permissible under the proviso to Section 41(2) ibid and Rule 37A of the CGST Rules, subject to Section 17(5)(i) ibid, the applicability of which shall be examined on the facts of each case.

(9) The proper officer shall apply the statutory framework as it stood during the tax period in question, bearing in mind the distinct phases of the scheme, namely,

(a) the period prior to 01.10.2022, when the original Section 41 was in force and Sections 42 and 43, though on the statute book, were never operationalised, and when no mechanism for re-availment of reversed credit existed;

(b) the period from 01.10.2022, when Section 41 was substituted, Sections 42 and 43 were omitted and clause (ba) was inserted in Section 16(2); and

(c) the period from 26.12.2022, when Rule 37A was inserted in the CGST Rules. A condition or mechanism introduced by a later amendment, including clause (aa) of Section 16(2) with effect from 01.01.2022, shall not be applied to a period prior to its coming into force. In respect of the period prior to 26.12.2022, the absence of a re-availment mechanism shall be borne in mind while determining the consequence of the default of the selling dealer.

(10) The registration of a purchasing dealer shall not be cancelled, much less with retrospective effect, merely because ITC has been availed on purchases made from a selling dealer whose registration has subsequently been cancelled, without independent satisfaction as to the existence of a ground under Section 29(2) ibid and compliance with the procedure prescribed therefor.

(11) An opportunity of personal hearing shall be afforded in terms of Section 75(4) ibid. Where the statements of third persons are relied upon and the noticee seeks their cross examination, the request shall be considered and decided by a reasoned order, having regard to whether such statements form the basis of the proposed action.

(12) The order shall set out the relevant facts and the basis of the decision, as mandated by Section 75(6) ibid, deal with the reply and the documents produced by the noticee, and record a specific finding on each of the conditions of Section 16(2) which is in dispute. Where Section 74 has been invoked, the order shall also record a specific finding as to the fraud, willful misstatement or suppression of facts attributable to the noticee.

(13) The fact that the purchasing dealer has deposited an amount during the course of investigation, whether through Form GST DRC-03 or otherwise, shall not, by itself, dispense with the requirement of the show cause notice disclosing the foundational facts. The character of such deposit and its effect shall be determined by the proper officer on the facts of each case.

The aforesaid guidelines shall govern all proceedings pending before the proper officers as well as proceedings initiated hereafter.