JSA Newsletter | Indirect Tax | August 2026

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Recent Rulings by courts and authorities

Supreme Court of India

Goods and Services Tax not payable on transfer of leasehold rights in industrial land

The Supreme Court of India (“Supreme Court”), in the case of The Union of India and Anr. vs. Gujarat Chamber of Commerce and Industry and Ors^[1], dismissed the Revenue’s Special Leave Petition (“SLP”) challenging the Gujarat High Court (“Gujarat HC”) judgment concerning the levy of Goods and Services Tax (“GST”) on transfer of leasehold rights in industrial land. The Gujarat HC had held that transfer of leasehold right is outside the ambit of GST laws and therefore not subject to GST.

The Supreme Court noted that a similar SLP had already been dismissed in the matter of Aerocom Cushions[2] and accordingly held that “in view of the fact that a similar SLP has been dismissed, the instant special leave petitions are dismissed”. While dismissing the SLP, the Supreme Court clarified that the dismissal at the admission stage has no binding effect, and the questions of law i.e., whether the assignment or transfer of standalone developmental rights without underlying immovable property attracts GST, and whether the constitutional bar under Entry 49 of List II would apply, were left open.

Input Tax Credit of bona fide purchaser cannot be denied solely because supplier’s registration is subsequently cancelled

The Supreme Court, in the case of Additional Commissioner, Grade 2 and Anr. vs. Safecon Lifesciences Private Limited^[3], dismissed the Revenue’s SLP against the Allahabad High Court (“Allahabad HC”) judgment which held that proceedings under Section 74 of the Central GST Act, 2017 (“CGST Act”) cannot be sustained against a bona fide purchaser solely because the supplier is subsequently alleged to be non-existent. The Supreme Court held that it did not “find any good ground to entertain this petition”

The underlying Allahabad HC judgment had held that Section 74 of the CGST Act is invokable only where fraud, wilful misstatement, or suppression of facts with intent to evade tax is established and attributable to the purchaser. The Allahabad HC had further observed that denial of Input Tax Credit (“ITC”) solely on the basis of unverified intelligence that the supplier’s registration was cancelled cannot be justified under Section 74, especially where the purchaser demonstrates actual movement of goods and payment of tax to the Government.

Constitutional validity of Section 16(2)(c) of the CGST Act upheld; supplier’s tax payment is a pre-condition for availing ITC

The Supreme Court, in the case of Bhandari Scrap Traders vs. Union of India and Ors.^[4], dismissed the assessee’s SLPs challenging the Gujarat HC judgment which upheld the constitutional validity of Section 16(2)(c) of the CGST Act. The Supreme Court expressed complete agreement with the Gujarat HC’s reasoning and affirmed that no case was made out either for declaring the provision unconstitutional or for reading it down in favour of bona fide purchasing dealers.

The Supreme Court noted that the Gujarat HC had rightly distinguished the scheme of the Delhi Value Added Tax Act, 2004 (“Delhi VAT Act”) from the GST framework, observing that “there is no possibility of drawing parity between the provisions of the two enactments, so as to treat a purchasing dealer under the CGST Act on par with a purported bonafide purchasing dealer under the Delhi VAT Act in relation to ITC, when the supplier-dealer fails to pay the requisite tax”.

The Supreme Court further endorsed Gujarat HC’s finding that the GST framework itself protects genuine recipients by permitting re-availment of reversed ITC under Section 41 of the CGST Act, read with Sections 73 and 74, after the supplier is made to discharge the tax liability. Accordingly, the Supreme Court upheld the Gujarat HC’s refusal to strike down or read down Section 16(2)(c), affirming that entitlement to ITC remains statutorily conditioned upon actual payment of tax by the supplier to the Government.

High Courts

Statutory appellate remedy under Section 107 of the CGST Act must be exhausted before invoking writ jurisdiction

The Delhi High Court (“Delhi HC”), in the case of Sodexo India Services Private Limited vs. Union of India and Anr.^[5], dismissed a writ petition challenging an order-in-original passed under Section 74 of the CGST Act, whereby a demand of approximately INR 8,75,00,000 (Indian Rupees eight crore and seventy-five lakh), along with applicable interest and penalty, had been confirmed against the petitioner on 11 (eleven) issues arising from audit proceedings.

The petitioner contended that the adjudicating authority ought to have called upon it to furnish further documents or clarifications before passing the order, and that its reply had not been adequately considered, thereby violating the principles of natural justice. The Delhi HC observed that:

the appellate remedy under Section 107 of the CGST Act constitutes a complete, efficacious, and comprehensive statutory mechanism for redressal of grievances;
once adequate opportunity has been afforded to a noticee to place all material in support of its case, the adjudicating authority is required to adjudicate on the basis of the record before it;
whether the material produced was sufficient, or whether the conclusions drawn were sustainable, are matters within the province of the statutory appellate authority; and
the Petitioner’s grievance did not establish a manifest violation of the principles of natural justice so as to justify bypassing the statutory appellate mechanism.

The Delhi HC dismissed the writ petition with liberty to the petitioner to avail the statutory remedy of appeal under Section 107 of the CGST Act and clarified that the period during which the writ petition remained pending will not be reckoned for the purposes of limitation.

Section 73(2) of the CGST Act does not mandate a minimum three-month gap between show cause notice and assessment order

The Madras High Court (“Madras HC”), in the case of Raj Machine Tools vs. The Assistant Commissioner (ST) (FAC)^[6], examined the interpretation of Section 73(2) read with Section 73(10) of the CGST Act. The petitioner challenged 2 (two) separate assessment orders pertaining to the same assessment period on the ground, inter alia, that a minimum 3 (three) month gap between the show cause notice and the assessment order is mandatory under Section 73(2) of the CGST Act. The Madras HC held that:

Section 73(2) is intended to ensure that the show cause notice is issued not less than 3 (three) months before the limitation period for adjudication under Section 73(10) expires, and does not mandate a three-month interval between the show cause notice and the order of adjudication;
the object of Section 73(2) of the CGST Act is to prevent a situation where a show cause notice is issued close to the expiry of the limitation period, thereby depriving the taxpayer of a reasonable opportunity to respond; and
while a reasonable interval between the show cause notice and the order is necessary to afford a meaningful opportunity, a mandatory three-month gap cannot be read into Section 73 of the CGST Act.

The Madras HC declined to follow the contrary view of the Bombay High Court in AM Market Places Private Limited vs. the Union of India[7]. However, the Madras HC found merit in the Petitioner’s contention that the two orders were contradictory, one proceeding on the basis that ITC was wrongly availed in respect of exempt supplies, and the other on the basis that the supplies were taxable. Accordingly, Madras HC set aside both orders and remanded the matters for reconsideration, subject to the petitioner remitting 25% of the disputed tax demand within thirty days.

Show cause notice issued using Artificial Intelligence tool quashed for lack of application of mind by the statutory authority

The Punjab and Haryana High Court (“Punjab and Haryana HC”), in the case of M/s. SRO India vs. State of Punjab and Anr.^[8], quashed a show cause notice (DRC-01A) dated February 2, 2025, on the ground that it had been prepared and issued using an Artificial Intelligence (“AI”) tool, without independent application of mind by the concerned officer.

The petitioner’s contention was based on a document annexed to the show cause notice and uploaded on the GST portal, which contained AI-generated suggestions including options to “tighten this further with case-law citation paragraph-wise”, “convert it into Order-in-Original reasoning”, “add ‘knowledge and connivance inferred from facts’ language” and “draft a defence-proof rebuttal against ‘buyer not responsible’ plea”. The department contended that the AI references had been inadvertently uploaded on the portal. The Punjab and Haryana HC was not impressed by this explanation and held that the statute requires the competent authority to examine the facts of the case and apply independent mind before issuing a show cause notice. Further, the use of an AI tool for preparation and issuance of a show cause notice is not shown to be permissible under the statute.

Accordingly, the Punjab and Haryana HC quashed the show cause notice and all consequential proceedings, while reserving liberty with the competent authority to initiate fresh proceeding in accordance with law with independent application of mind.

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