Supreme Court clarifies burden of proof for Input Tax Credit under Karnataka VAT Act: State of Karnataka vs. M/s Ecom Gill Coffee Trading Private Limited (2023) INSC 208 (13 March 2023)

Date of the Judgment: 13 March 2023
Citation: (2023) INSC 208
Judges: M.R. Shah, J. and C.T. Ravikumar, J.

Can a purchasing dealer claim Input Tax Credit (ITC) merely by producing invoices and payment records, or is there a higher burden of proof? The Supreme Court of India recently addressed this crucial question under the Karnataka Value Added Tax Act, 2003 (KVAT Act, 2003). This judgment clarifies the obligations of purchasing dealers seeking ITC and emphasizes the need for verifiable proof of actual transactions. The bench comprised Justices M.R. Shah and C.T. Ravikumar, with the judgment authored by Justice M.R. Shah.

Case Background

The appeals before the Supreme Court arose from a series of cases where the State of Karnataka challenged the allowance of Input Tax Credit (ITC) to various purchasing dealers. These dealers had purchased goods from other dealers and subsequently claimed ITC on these purchases. The Assessing Officers disallowed these claims, citing doubts about the genuineness of the transactions. The primary reason for disallowance was that the selling dealers either had their registrations cancelled, filed ‘NIL’ returns, or denied the sales.

The purchasing dealers, in most cases, had produced invoices and payment records, arguing that they had fulfilled their obligations. However, the Assessing Officers and the first Appellate Authority rejected these claims, stating that the burden of proof under Section 70 of the KVAT Act, 2003, had not been met. The Karnataka Appellate Tribunal and the High Court, however, reversed these decisions, allowing the ITC on the grounds that the purchasing dealers had made payments via account payee cheques and had produced copies of invoices.

The State of Karnataka appealed these decisions, arguing that mere production of invoices and payment records was insufficient to prove the genuineness of the transactions and that the purchasing dealers had failed to demonstrate actual movement of goods.

Timeline

Course of Proceedings

The Assessing Officers initially disallowed the ITC claims, doubting the genuineness of the transactions based on irregularities such as cancelled registrations, ‘NIL’ returns, and denials of sales by the selling dealers. The first Appellate Authority upheld these disallowances. However, the Karnataka Appellate Tribunal reversed these orders, favoring the purchasing dealers. The High Court of Karnataka dismissed the revision applications filed by the State, relying on its previous decision in the case of M/s Tallam Apparels, which held that production of invoices and payment through account payee cheques was sufficient to claim ITC.

Legal Framework

The core of the dispute revolves around Section 70 of the Karnataka Value Added Tax Act, 2003, which deals with the burden of proof in tax matters.

Section 70 of the KVAT Act, 2003 states:

“70. Burden of proof.- (1) For the purposes of payment or assessment of tax or any claim to input tax under this Act, the burden of proving that any transaction of a dealer is not liable to tax, or any claim to deduction of input tax is correct, shall lie on such dealer.”

“(2) Where a dealer knowingly issues or produces a false tax invoice, credit or debit note, declaration, certificate or other document with a view to support or make any claim that a transaction of sale or purchase effected by him or any other dealer, is not liable to be taxed, or liable to tax at a lower rate, or that a deduction of input tax is available, the prescribed authority shall, on detecting such issue or production, direct the dealer issuing or producing such document to pay as penalty:
(a) in the case of first such detection, three times the tax due in respect of such transaction or claim; and
(b) in the case of second or subsequent detection, five times the tax due in respect of such transaction or claim.”

“(3) Before issuing any direction for the payment of the penalty under this Section, the prescribed authority shall give to the dealer the opportunity of showing cause in writing against the imposition of such penalty.”

This section places the burden of proving the correctness of any claim for input tax credit squarely on the dealer making the claim.

Arguments

Arguments by the State of Karnataka:

• The State argued that the High Court erred in allowing ITC based solely on invoices and cheque payments.
• It was submitted that the purchasing dealers failed to prove the genuineness of the transactions, especially when the selling dealers had cancelled registrations or filed ‘NIL’ returns.
• The State contended that Section 70 of the KVAT Act, 2003, requires a higher burden of proof, including evidence of actual movement of goods, not just financial transactions.
• The State relied on the Karnataka High Court’s decision in M/s. Bhagadia Brothers Vs. Additional Commissioner of Commercial Taxes and the Gujarat High Court’s decisions in Madhav Steel Corporation Vs. State of Gujarat and Shreeji Impex Vs. State of Gujarat to support its position.
• The State asserted that it cannot recover taxes from sellers who are not registered or who have filed ‘NIL’ returns, thus necessitating a stricter verification of ITC claims.
• It was argued that the purchasing dealer is entitled to ITC only on the actual tax paid by the seller and the actual transfer of goods, not on mere paper transactions.

Arguments by the Purchasing Dealers:

• The purchasing dealers argued that they had discharged their burden of proof under Section 70 of the KVAT Act, 2003, by producing genuine invoices and making payments through cheques.
• It was submitted that once the purchasing dealer has complied with the requirements of the KVAT Act, they should not suffer due to the seller’s default.
• The dealers contended that Rules 27 and 29 of the Karnataka Value Added Tax Rules, 2005, only require the issuance and production of tax invoices, and no other statutory obligations are imposed for claiming ITC.
• It was argued that the only requirement is to ensure that the selling dealer is registered and has issued a valid tax invoice.
• The purchasing dealers relied on the Supreme Court’s decision in Corporation Bank Vs. Saraswati Abharansala, arguing that ITC should only be denied if the purchasing dealer acted without due diligence.
• It was submitted that the purchasing dealers had acted bonafide and had taken necessary precautions.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether, in the facts and circumstances of the case, the second Appellate Authority as well as the High Court were justified in allowing the Input Tax Credit?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Section 70 of the Karnataka Value Added Tax Act, 2003
• Rules 27 and 29 of the Karnataka Value Added Tax Rules, 2005

Judgment

How each authority was viewed by the Court?

• The Karnataka High Court’s decision in M/s. Bhagadia Brothers Vs. Additional Commissioner of Commercial Taxes was followed to emphasize the higher burden of proof required for claiming ITC.
• The Gujarat High Court’s decisions in Madhav Steel Corporation Vs. State of Gujarat and Shreeji Impex Vs. State of Gujarat were cited to support the view that mere invoices and payment records are insufficient.
• The Supreme Court distinguished its own decision in Corporation Bank Vs. Saraswati Abharansala, stating that it dealt with due diligence and did not negate the burden of proof under Section 70 of the KVAT Act, 2003.
• The Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi was distinguished as it was based on a different provision of law.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear language of Section 70 of the KVAT Act, 2003, which places the burden of proof squarely on the purchasing dealer. The Court emphasized the need to prove the genuineness of transactions and the actual movement of goods, not just the financial aspects. The Court also highlighted that the revenue cannot recover taxes from sellers who are not registered or file ‘NIL’ returns, making it essential to verify ITC claims thoroughly.

The Court’s reasoning can be summarized as follows:

The Court considered alternative interpretations, such as the purchasing dealers’ argument that compliance with Rules 27 and 29 of the KVAT Rules, 2005, was sufficient. However, this was rejected because the Court held that these rules only pertain to the issuance of tax invoices and not the genuineness of the transactions or the actual movement of goods. The Court also rejected the argument that the purchasing dealers should not suffer due to the seller’s default, stating that the burden of proof remains on the purchasing dealer.

The Court stated that the purchasing dealers had to prove the actual physical movement of the goods, alleged to have been purchased from the respective dealers. The Court observed that the purchasing dealers had failed to produce any further supporting material, such as, furnishing the name and address of the selling dealer, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgement of taking delivery of goods, tax invoices and payment particulars etc.

The Supreme Court’s final decision was that the purchasing dealers had failed to discharge the burden of proof under Section 70 of the KVAT Act, 2003, and thus, their ITC claims were not valid. The Court restored the orders passed by the Assessing Officers, denying the ITC.

The Court quoted the following from the judgment:

“The dealer claiming ITC has to prove beyond doubt the actual transaction which can be proved by furnishing the name and address of the selling dealer, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgement of taking delivery of goods, tax invoices and payment particulars etc.”

“In fact, the genuineness of the transaction has to be proved as the burden to prove the genuineness of transaction as per section 70 of the KVAT Act, 2003 would be upon the purchasing dealer.”

“At the cost of repetition, it is observed and held that mere production of the invoices and/or payment by cheque is not sufficient and cannot be said to be proving the burden as per section 70 of the Act, 2003.”

There were no dissenting opinions in this case.

Key Takeaways

• Purchasing dealers cannot claim Input Tax Credit (ITC) merely by producing invoices and payment records.
• The burden of proof under Section 70 of the Karnataka Value Added Tax Act, 2003, lies on the purchasing dealer to prove the genuineness of the transaction.
• Purchasing dealers must provide evidence of actual movement of goods, including details of the selling dealer, vehicle, freight charges, and delivery acknowledgments.
• The decision emphasizes the need for thorough verification of transactions to prevent fraudulent ITC claims.

Directions

The Supreme Court quashed and set aside the impugned judgments and orders passed by the High Court and the second Appellate Authority, which had allowed the ITC. The Court restored the orders passed by the Assessing Officer, denying the ITC to the concerned purchasing dealers.

Development of Law

The ratio decidendi of this case is that the burden of proof under Section 70 of the KVAT Act, 2003, requires the purchasing dealer to prove the genuineness of the transaction and the actual movement of goods, not just the financial aspects. This decision clarifies that mere production of invoices and payment records is insufficient to claim ITC, thus setting a higher standard for claiming ITC under the KVAT Act, 2003. This is a change from the previous position where High Court had accepted invoices and payment records to be sufficient to claim ITC.

Conclusion

The Supreme Court’s judgment in State of Karnataka vs. M/s Ecom Gill Coffee Trading Private Limited clarifies that purchasing dealers must provide substantial evidence of genuine transactions, including proof of actual movement of goods, to claim Input Tax Credit under the Karnataka Value Added Tax Act, 2003. This ruling reinforces the importance of due diligence and proper documentation in tax matters. The Court’s decision sets a precedent for stricter scrutiny of ITC claims, ensuring that only genuine transactions are granted tax benefits.