ITC Cannot Be Denied Solely on Supplier's Retrospective GST Cancellation
The Supreme Court has confirmed that Input Tax Credit cannot be denied solely because a supplier's GST registration was later cancelled with retrospective effect. Multiple High Courts and now apex court precedent establish that bona fide buyers with documentary proof of genuine supply are protected.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Section 16(2)(c), CGST Act-rbi)), 2017 — Effective: ongoing. Source: CBIC Instruction 2/2023-GST (7 April 2023); SC SLP (C) No. 23993/2026 (17 July 2026); Madras HC WP No. 23402/2026 (1 July 2026); Madras HC WP (12 June 2026). Last reviewed by CA Harun Raaj: August 2026.
The Supreme Court Has Closed This Debate
On 17 July 2026, the Supreme Court dismissed the Revenue's Special Leave Petition in SLP (C) No. 23993/2026, refusing to entertain the government's challenge to a pro-taxpayer High Court ruling on input tax credit. The Court's observation — "we do not find any good ground to entertain this petition" — marks the apex court's confirmation that retrospective cancellation of a supplier's GST registration is not, by itself, a valid ground to deny your Input Tax Credit (ITC).
This is the clearest signal yet that judicial doctrine on one of GST's most contested issues has solidified. If you are a recipient of goods or services, and your supplier's registration was later cancelled with retrospective effect, you are protected — provided you can demonstrate genuine supply through contemporaneous documentation.
The Judicial Chain: Three Courts, One Answer
Key point: Courts protect bona fide recipients of goods and services with genuine documentation; retrospective supplier cancellation is one data point, not a standalone ground for demand.
Why the Revenue's Argument Fails Under Section 16(2)(c)
The Revenue typically invokes Section 16(2)(c) of the CGST Act, 2017, which requires that "the tax charged in respect of such supply has been actually paid to the Government" as a condition for claiming ITC. When a supplier's registration is retrospectively cancelled, the Revenue argues the supplier could not have filed returns and paid tax — therefore Section 16(2)(c) is not satisfied.
Courts have rejected this mechanical logic. The emerging judicial consensus requires the Revenue to independently verify:
- Whether you held a valid tax invoice issued by the supplier
- Whether goods or services were actually received
- Whether you paid the invoice amount including GST (bank NEFT/RTGS proof)
- Whether e-way bills, lorry receipts, and delivery documentation were generated contemporaneously
Retroactive cancellation of the supplier's registration does not override these factual inquiries. If the supply was genuine and you paid the tax, your ITC is valid.
CBIC Instruction 2/2023-GST Already Said This
In April 2023, the Central Board of Indirect Taxes and Customs (CBIC) issued Instruction 2/2023-GST directing field officers not to mechanically deny ITC solely on the basis of retrospective cancellation of a supplier's GST registration. The Supreme Court's SLP dismissal in July 2026 places the force of apex court precedent behind this administrative instruction.
If your GST officer is issuing demands on the ground of retrospective supplier cancellation alone, reply with:
- CBIC Instruction 2/2023-GST (7 April 2023)
- SC SLP (C) No. 23993/2026 (17 July 2026)
- Madras HC WP No. 23402/2026 (1 July 2026)
- Your complete documentary package: tax invoice, e-way bill, lorry receipt, delivery challan, and bank payment proof
Do not treat the demand as final without contest.
Protection for Genuine Buyers — Not Complicit Ones
This doctrine applies only to transactions where you genuinely received goods or services. Courts will not protect:
- Fake invoice schemes: Where you colluded with a non-existent supplier to manufacture fraudulent ITC
- Non-receipt of goods or services: Where the supply never took place
- Forged documentation: Where invoices, e-way bills, or lorry receipts were fabricated
Notably, the Madras High Court (13 July 2026) upheld GST registration cancellation in a separate case involving fabricated ITC documents. The protection is for the arm's-length buyer with genuine documentation, not for those who participated in tax evasion schemes.
Practical Steps If You Receive a Demand
Immediate actions:
- Audit your purchase documentation for all suppliers whose registrations have been cancelled — gather tax invoices, e-way bills, delivery challans, lorry receipts, and bank payment confirmations
- Verify your GSTR-3B filings for the affected periods; confirm that ITC was correctly claimed and reflected in your returns
- On receipt of a Section 73 or 74 notice: Do not accept the demand without a detailed reply. Provide all documentary evidence and cite the case law and CBIC instruction above
- If demand is confirmed at adjudication: File an appeal immediately. This judicial trend shows a strong track record of success on appeal
Real-world example: A Chennai textile trader received a Section 73 demand of ₹8.2 lakh for FY 2020-21 after three suppliers' registrations were retrospectively cancelled. The trader possessed original tax invoices, e-way bills, lorry receipts, and NEFT payment confirmations for every disputed transaction. The firm's Chartered Accountant submitted a detailed reply citing Madras HC WP 23402/2026, CBIC Instruction 2/2023-GST, and the Supreme Court's SLP dismissal, with all documents annexed. The demand was dropped at the adjudication stage without further proceedings.
I'm CA Harun Raaj, Visakhapatnam. If you've received a demand based on retrospective supplier cancellation, or if you're concerned about your ITC position, reach out — we'll audit your documentation and build your response.
---
See Also
Frequently Asked Questions
Can my ITC be denied just because my supplier's GST registration was cancelled retrospectively?+
No. Per SC SLP (C) No. 23993/2026 (17 July 2026) and Madras HC WP No. 23402/2026 (1 July 2026), retrospective supplier cancellation alone is not a valid ground to deny ITC. Courts require the Revenue to independently examine whether you possess a valid tax invoice, received genuine goods or services, paid the GST amount, and have supporting documentation (e-way bills, lorry receipts, bank payment proof). If you have these, your ITC is protected.
My GST officer says my supplier did not file returns or pay GST. Does this mean I lose my ITC?+
No. This is the Section 16(2)(c) argument that courts have repeatedly rejected when applied in isolation. Your burden is to prove the genuineness of your supply transaction — not to prove the supplier filed returns. Respond with your documentary evidence (invoice, e-way bill, payment proof, delivery proof) and cite SC SLP (C) No. 23993/2026 and CBIC Instruction 2/2023-GST. The department must establish that the supply was fictitious, not that the supplier's registration was cancelled.
What documents should I keep to prove genuine supply if challenged?+
Maintain: (1) original tax invoice from the supplier with invoice date, invoice number, GST amount, and items/services detailed; (2) e-way bill or shipping documents; (3) lorry receipt or delivery challan showing goods received; (4) bank NEFT or RTGS payment proof showing payment of invoice amount including GST. These four elements together establish your position as a bona fide buyer and protect your ITC even if the supplier's registration is later cancelled.
I received a Section 73 demand denying ITC on retrospective supplier cancellation. What should I do?+
Do not accept the demand without contesting it. Submit a detailed written reply citing: (1) CBIC Instruction 2/2023-GST (7 April 2023); (2) SC SLP (C) No. 23993/2026 (17 July 2026); (3) Madras HC WP No. 23402/2026 (1 July 2026). Annex all your documentary evidence of genuine supply. If the demand is confirmed at adjudication, file an appeal immediately — this judicial trend shows a strong track record of success on appeal.
Does this protection apply to fake invoices and fictitious supply schemes?+
No. This doctrine protects only bona fide recipients of genuine goods and services with contemporaneous documentation. If you colluded with a non-existent supplier to fabricate ITC, forged invoices or e-way bills, or participated in a fake supply scheme, the protection does not apply. Courts have upheld cancellation in such cases — the protection is for arm's-length, genuine buyers only.
Should I verify a supplier's GST registration before each purchase?+
Yes. Due diligence at the time of purchase strengthens your bona fide position and reduces scrutiny risk. While retrospective cancellation alone does not deny your ITC, purchasing from verified suppliers with clean compliance history is prudent risk management and makes your transaction defence stronger if ever challenged.
What is the role of CBIC Instruction 2/2023-GST in this case?+
CBIC Instruction 2/2023-GST (7 April 2023) directed GST field officers not to mechanically deny ITC solely on the basis of retrospective cancellation of a supplier's GST registration. The Supreme Court's July 2026 SLP dismissal places apex court precedent behind this administrative instruction, making it a powerful tool in your reply to any demand on this ground.
If my supplier's registration is cancelled, do I have to reverse ITC immediately in my next GSTR-3B?+
Not automatically. If you have documentary proof of a genuine supply (invoice, e-way bill, payment record, delivery documentation), retrospective cancellation alone is not a basis for ITC reversal per the current judicial consensus. However, if you receive a formal notice from the GST officer, respond with all documentation immediately — do not ignore official notices. The judicial protection applies to those who can prove genuineness, not those who remain silent.
Go deeper with our hub guides
Statute-cited, section-by-section guides covering the same ground this article does.
Need help with this?
Our team handles the paperwork. You focus on your business.