| Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt. Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London
Published: 3 October 2026 | Last reviewed: 3 October 2026 |
| This article states the law under the Central Goods and Services Tax Act, 2017 (the CGST Act) and the Central Goods and Services Tax Rules, 2017 (the CGST Rules) as at 3 October 2026, including section 41 as substituted from 1 October 2022, rule 37A from 26 December 2022 and section 74A from 1 November 2024. Cancellation of a supplier’s registration raises separate questions and is not covered. |
| Short answer. Yes. In Bhandari Scrap Traders v Union of India, decided on 24 July 2026, the Supreme Court left section 16(2)(c) of the CGST Act intact: the buyer’s credit depends on the supplier actually paying the tax. But the order settled entitlement, not recovery. The department can still take back a buyer’s credit only through a demand under section 73, 74 or 74A, each with its own ingredients and time limit. |
Index of Topics
- What Bhandari Scrap Traders Decided, and What It Did Not
- What Section 16(2)(c) and Section 155 Require of the Buyer
- Two Gates: Entitlement and Recovery
- The Self-Reversal Route Under Section 41(2) and Rule 37A
- The Gap Rule 37A Leaves: The Supplier Who Filed but Did Not Pay
- Why the Tax Period Matters
- Section 74 Is Not the Default Route
- Answering a Notice After Bhandari
- Frequently Asked Questions
- How R & D Law Chambers Works on These Matters
1. What Bhandari Scrap Traders Decided, and What It Did Not
| Short answer. The Supreme Court dismissed the special leave petitions against the Gujarat High Court’s judgment in Maruti Enterprise and held that no grounds existed to declare section 16(2)(c) unconstitutional or to read it down. That decides validity. It does not decide how, when or under which provision a buyer’s credit may be recovered. |
The order of 24 July 2026 (SLP (C) No. 23931 of 2026, 2026 SCC OnLine SC 1570) affirms Maruti Enterprise v Union of India, 2026 SCC OnLine Guj 4013. It holds that there is no parity between a CGST buyer and a bona fide purchaser under the Delhi Value Added Tax Act, 2004 (paragraph 2), so the VAT-era protection does not carry across, and it relies on sections 41, 73 and 74, under which reversed credit returns once the supplier is made to pay (paragraph 3).
The order did not consider whether any particular demand was validly raised, under which section or within what time, and it did not address credit taken before the re-availment mechanism existed. Those questions remain open in every case.
2. What Section 16(2)(c) and Section 155 Require of the Buyer
| Short answer. Section 16(2)(c) allows credit only if the tax charged on the supply has been actually paid to the Government, in cash or through admissible credit, subject to section 41. Section 155 puts the burden of proving eligibility on the person claiming credit. An invoice, receipt of goods and payment to the supplier are necessary but not sufficient. |
Section 16(2) denies credit unless each of its conditions is met, among them a tax invoice (clause (a)), receipt of the supply (clause (b)), actual payment of the tax to the Government (clause (c)) and the buyer’s own return (clause (d)). Section 155 places the burden of proving eligibility on the claimant, so the buyer must prove a fact about someone else’s tax account.
The Gujarat High Court accepted that and upheld the condition anyway: credit is a statutory concession, not a vested right (Maruti Enterprise, paragraph 63), and the buyer is not remediless because the department can recover from the supplier, after which the credit is restored (paragraph 62). The Punjab and Haryana High Court has since observed that checking whether a supplier’s return is correct is neither contemplated by the scheme nor appears possible for a buyer (Shaurya Alloys Private Limited v State of Punjab, CWP-34296-2024, 1 October 2026, paragraph 29).
3. Two Gates: Entitlement and Recovery
| Short answer. Entitlement and recovery are separate questions under separate provisions. Section 16 decides whether the credit was available. Sections 73, 74 and 74A decide whether, within what time and on what terms the department may recover it, with interest and penalty. A demand that fails the second test fails even where the first is met. |
Each of sections 73, 74 and 74A applies where input tax credit has been wrongly availed or utilised, and each requires a notice, a reasoned determination and an order within a fixed time. Sections 73 and 74 govern periods up to 2023-24; section 74A governs 2024-25 onwards (sections 73(12), 74(12) and 74A(12)).
Paragraph 3 of Bhandari treats sections 73 and 74 as part of why the condition is fair: the department recovers from the supplier, and the buyer’s credit returns. The order assumes the demand machinery; it does not displace it.
After Bhandari, the argument that section 16(2)(c) should be read down for an honest buyer is closed. The argument that a particular demand is under the wrong section, out of time, unsupported by its ingredients or aimed at the wrong period is fully open, because none of those questions was before the Court.
4. The Self-Reversal Route Under Section 41(2) and Rule 37A
| Short answer. Section 41(2) requires the buyer to reverse, with applicable interest, credit on supplies where the supplier has not paid the tax, and allows re-availment once the supplier pays. Rule 37A sets the mechanics: reverse by 30 November where the supplier has not filed GSTR-3B by 30 September after the year, and re-avail once it files. |
Section 41, substituted by the Finance Act, 2022 from 1 October 2022, requires credit availed on supplies on which the supplier has not paid the tax to be reversed with applicable interest, in the prescribed manner, and its proviso allows re-availment, in the prescribed manner, once the supplier pays.
Rule 37A, in force from 26 December 2022, prescribes that manner. Where the supplier has reported the invoice in GSTR-1 but not filed GSTR-3B for that period by 30 September after the year, the buyer must reverse the credit by 30 November; otherwise it is payable with interest under section 50. If the supplier later files, the buyer may re-avail.
5. The Gap Rule 37A Leaves: The Supplier Who Filed but Did Not Pay
| Short answer. Rule 37A is triggered by one event only: the supplier’s failure to file GSTR-3B by 30 September. It prescribes nothing where the supplier files GSTR-3B but pays short, or pays through credit later held inadmissible. That is the default a buyer cannot see, and it usually surfaces only in a notice. |
Section 41(2) speaks of tax not paid by the supplier, but rule 37A, the only prescribed manner of reversal, addresses one event: non-filing of GSTR-3B. A supplier that files but pays short, or pays through credit later disallowed, is inside section 41(2) and outside rule 37A.
The Punjab and Haryana High Court made the same point in Shaurya Alloys: even after rule 37A, the buyer can in practice only check whether the supplier has filed GSTR-3B (paragraph 27).
Two consequences follow. There is no prescribed self-reversal timetable for this default, so it reaches the buyer as a demand under section 73, 74 or 74A. And while the proviso to section 41(2) grants re-availment whenever the supplier pays, rule 37A prescribes the manner only for a supplier who later files GSTR-3B; a buyer whose supplier later pays a short-paid amount should put its claim on record under section 41(2) itself.
6. Why the Tax Period Matters
| Short answer. The Supreme Court upheld the condition because a reversed credit can be re-availed once the supplier pays. The prescribed mechanism for that arrived with rule 37A on 26 December 2022. For credit taken earlier, the effect of Bhandari has to be examined against the provisions in force for that period. |
Until 1 October 2022 the Act provided for matching, reversal and reclaim under section 42, a scheme the Punjab and Haryana High Court recorded was never implemented (Shaurya Alloys, paragraphs 19 to 21). It also recorded that before rule 37A no provision let a buyer reclaim credit even after the supplier paid (paragraph 28), and that the effect of Bhandari for a given period must be examined against the provisions then in force (paragraph 38.1).
That does not reopen validity. It lets a buyer with credit taken before 26 December 2022 ask whether the premise of Bhandari, re-availment, applied to its period at all.
| Period in which credit was taken | Reversal and re-availment | Demand provision |
|---|---|---|
| 1 July 2017 to 30 September 2022 | Original section 41 (provisional credit); matching, reversal and reclaim under section 42 on the statute book but not implemented | Section 73 or section 74 |
| 1 October 2022 to 25 December 2022 | Substituted section 41(2) in force; manner of reversal and re-availment not yet prescribed | Section 73 or section 74 |
| 26 December 2022 to 31 March 2024 | Section 41(2) with rule 37A | Section 73 or section 74 |
| From 1 April 2024 (financial year 2024-25 onwards) | Section 41(2) with rule 37A | Section 74A |
7. Section 74 Is Not the Default Route
| Short answer. Section 74, and the higher penalty in section 74A(5)(ii), are engaged only where credit was wrongly availed by reason of fraud, wilful misstatement or suppression of facts to evade tax. Bhandari addressed the validity of section 16(2)(c) and said nothing about those ingredients. The notice has to supply them. |
For periods up to 2023-24, an order under section 73 must issue within three years of the annual return due date (section 73(10)) and under section 74 within five (section 74(10)). Section 74 adds two years, but only where its ingredients are present.
From 2024-25, section 74A applies one time limit to both kinds of case: notice within 42 months of the annual return due date and order within 12 months of the notice, extendable by six months (section 74A(2), and section 74A(7) with its proviso). The penalty still differs: ten per cent of the tax or ten thousand rupees, whichever is higher, in ordinary cases (section 74A(5)(i)), and equal to the tax for fraud, wilful misstatement or suppression (section 74A(5)(ii)).
The classification also prices an early exit: in a non-fraud case, paying tax and interest within 60 days of the notice ends the proceedings without penalty (section 74A(8)(ii)), while in a fraud case it costs 25 per cent of the tax (section 74A(9)(ii)).
8. Answering a Notice After Bhandari
| Short answer. Start with the demand, not the condition: the period, the provision invoked, the time limit, and whether the notice identifies the supplier, the invoices and the nature of the default. Then meet section 155 with documents, and put the re-availment position on record. |
Fix the period and test the provision against it: credit for 2024-25 onwards cannot be demanded under section 73 or 74, nor earlier credit under section 74A. Check the order deadline under section 73(10), 74(10) or 74A(7). A notice that invokes section 74 without alleging fraud, wilful misstatement or suppression invites the objection that its own section does not apply.
Meet section 155 with the buyer’s own evidence: invoice, proof of receipt and movement, bank payment and returns. Then ask what has been done against the supplier, because both Maruti Enterprise (paragraph 62) and Bhandari (paragraph 3) treat recovery from the supplier, followed by re-availment, as what keeps the condition fair. If the supplier has since paid, claim re-availment under the proviso to section 41(2).
An adverse order is appealable under section 107; when a writ lies instead is outside this article.
9. Frequently Asked Questions
Is a valid tax invoice and bank payment to the supplier enough to keep the credit?
No. They satisfy the invoice condition in section 16(2)(a) and support receipt and payment, but section 16(2)(c) separately requires the tax to have been actually paid to the Government. After Bhandari Scrap Traders, that condition cannot be read down for an honest buyer. The documents still matter: they discharge the other conditions and answer any allegation of fraud.
Does acting in good faith protect a buyer whose supplier defaulted?
Not as a defence to the condition. The Supreme Court held there is no parity between a bona fide purchaser under the Delhi VAT Act and a buyer under the CGST Act, so the VAT-era protection does not carry across. Good faith remains relevant to whether the department can invoke section 74 or the higher penalty under section 74A, which require fraud, wilful misstatement or suppression.
Can I take the credit back if the supplier pays later?
Yes. The proviso to section 41(2) of the CGST Act allows re-availment once the supplier pays the tax on the supply. Rule 37A prescribes the manner where the supplier had not filed GSTR-3B and later files it: re-avail in a subsequent GSTR-3B. Where the supplier had filed but paid short, record the later payment and claim re-availment under section 41(2) itself.
Will I face a penalty as well as reversal of the credit?
The notice will ask why a penalty should not be levied. Under section 74A the penalty is ten per cent of the tax or ten thousand rupees, whichever is higher, in ordinary cases, and equal to the tax for fraud, wilful misstatement or suppression. In an ordinary case, paying tax and interest within 60 days of the notice ends the proceedings without penalty.
How can a supply contract reduce this risk?
By allocating it. A contract can require the supplier to file and pay on time, let the buyer withhold or set off the tax component while the supplier’s GSTR-3B is unfiled, and make the supplier indemnify the buyer for credit reversed, interest and penalty. Section 16(2)(c) is unchanged, but the loss moves to the party who caused it.
10. How R & D Law Chambers Works on These Matters
R & D Law Chambers LLP is an Ahmedabad law firm. The practice advises businesses on GST disputes over input tax credit, from the reply to a show cause notice through the statutory appeals and, where the law permits, proceedings before the Gujarat High Court.
The practice advises on section 16(2)(c) and the demand provisions, time limits, reversal and re-availment under section 41 and rule 37A, and GST default risk in supply contracts.
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| General information on Indian law as at 3 October 2026, not advice on any facts. A special leave petition against the Tripura High Court’s decision in Sahil Enterprises was pending when Bhandari Scrap Traders was decided. |