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 212 (13 March 2023)

Date of the Judgment: 13 March 2023
Citation: (2023) INSC 212
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 receipts, or is there a higher burden of proof? The Supreme Court of India addressed this crucial question under the Karnataka Value Added Tax Act, 2003, in a set of appeals filed by the State of Karnataka. The court clarified that the burden of proving the genuineness of transactions for claiming ITC lies squarely on the purchasing dealer. The bench comprised Justices M.R. Shah and C.T. Ravikumar, with the majority opinion authored by Justice M.R. Shah.

Case Background

The appeals before the Supreme Court arose from a series of cases where purchasing dealers claimed Input Tax Credit (ITC) on purchases made from other dealers. The Assessing Officers had disallowed these ITC claims, citing doubts about the genuineness of the transactions. The primary concern was that some of the selling dealers had either cancelled their registrations or filed ‘NIL’ returns, raising questions about the actual payment of tax on these sales.

The purchasing dealers, in their defense, argued that they had produced valid invoices and had made payments through account payee cheques, thus fulfilling their obligations. However, the revenue authorities contended that mere production of invoices and payment receipts was not sufficient to prove the genuineness of the transactions and the actual movement of goods.

The Karnataka Appellate Tribunal and the High Court had previously sided with the purchasing dealers, stating that they should not suffer due to the defaults of the selling dealers. The High Court had also observed that once purchases were made by account payee cheques, the purchasing dealer was deemed to have discharged their burden of proof.

Timeline:

Course of Proceedings

The Assessing Officers, upon scrutinizing the records, disallowed the Input Tax Credit (ITC) claims of the purchasing dealers. They found that the selling dealers had either cancelled their registrations or filed ‘NIL’ returns, thereby casting doubt on the genuineness of the transactions. The First Appellate Authority upheld these orders, agreeing with the Assessing Officers that the burden of proof under Section 70 of the Karnataka Value Added Tax Act, 2003 (KVAT Act) had not been discharged by the purchasing dealers.

However, the Karnataka Appellate Tribunal reversed these orders, holding that the purchasing dealers should not suffer due to the default of the sellers. The Tribunal’s view was that if the purchasing dealers had made payments through valid invoices and account payee cheques, they had fulfilled their obligations.

The State of Karnataka then filed revision applications before the High Court of Karnataka. The High Court dismissed these applications, relying on its earlier decision in the case of M/s Tallam Apparels. The High Court held that once the purchases were made by account payee cheque, the purchasing dealer was deemed to have discharged their burden. The State of Karnataka then approached the Supreme Court.

Legal Framework

The core legal provision at the heart of this case is Section 70 of the Karnataka Value Added Tax Act, 2003. This section deals with the burden of proof in matters of tax payment, assessment, and claims for Input Tax Credit (ITC).

Section 70(1) of the KVAT Act, 2003 states:

“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.”

This provision clearly places the onus on the dealer claiming ITC to prove the correctness of their claim. The Supreme Court emphasized that this burden is not merely a formality but a substantive requirement.

Section 70(2) of the KVAT Act, 2003 states:

“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…”

This provision highlights that the genuineness of the transaction is paramount, and any attempt to claim ITC based on false documents will attract penalty.

Arguments

Arguments by the State of Karnataka:

• The State argued that the High Court erred in allowing ITC based solely on the production of invoices and payment through cheques.
• It was contended that when the Assessing Officer doubted the genuineness of the transactions, and found that some sellers had cancelled their registrations or filed ‘NIL’ returns, the purchasing dealers should not be entitled to ITC.
• The State asserted that the burden of proof under Section 70 of the KVAT Act, 2003, requires more than just showing financial transfers. It necessitates proving the actual movement of goods.
• The State emphasized that the revenue cannot recover tax from sellers who are not registered or who have filed ‘NIL’ returns, thereby denying the sale.
• 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.
• The State argued that the purchasing dealer is entitled to ITC only on the tax actually paid by the seller, and mere paper transactions are not sufficient.

Arguments by the Purchasing Dealers:

• The purchasing dealers argued that they had discharged the burden of proof under Section 70 of the KVAT Act, 2003, by producing genuine invoices and making payments through cheques.
• They contended that once they have met the requirements of the KVAT Act, they are entitled to ITC, and if the seller fails to pay the tax, it should be recovered from the seller, not the purchasing dealer.
• The purchasing dealers argued that the Karnataka Value Added Tax Rules, 2005, specifically Rules 27 and 29, only require the issuance of tax invoices with specific details, and no other document or obligation is statutorily required.
• They argued that they had ensured that the selling dealer was registered and had issued tax invoices in compliance with the KVAT Act and Rules.
• 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 has acted without due diligence.
• The purchasing dealers contended that the denial of ITC to a diligent purchasing dealer who has taken all necessary precautions is unfair.

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:

Judgment

The Supreme Court overturned the High Court’s decision and ruled in favor of the State of Karnataka. The Court held that the purchasing dealers had failed to discharge the burden of proof under Section 70 of the KVAT Act, 2003.

How each authority was viewed by the Court?

• M/s. Bhagadia Brothers Vs. Additional Commissioner of Commercial Taxes [Karnataka High Court]: The Court agreed with the State’s reliance on this case, which emphasized the need to prove the actual movement of goods, not just financial transactions.
• Madhav Steel Corporation Vs. State of Gujarat [Gujarat High Court]: The Court noted this case supported the State’s argument that the burden of proof for ITC lies on the purchasing dealer.
• Shreeji Impex Vs. State of Gujarat [Gujarat High Court]: The Court agreed with the State’s reliance on this case, which emphasized the need to prove genuineness of the transaction.
• Corporation Bank Vs. Saraswati Abharansala [Supreme Court of India]: The Court distinguished this case, stating that it did not deal with the specific burden of proof under Section 70 of the KVAT Act, 2003.
• On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi [Delhi High Court]: The Court distinguished this case, noting that it dealt with a different provision of the Delhi Value Added Tax Act and did not address the burden of proof under Section 70 of the KVAT Act, 2003.

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 proving the correctness of the ITC claim on the purchasing dealer. The Court emphasized that this burden is not a mere formality but a substantive requirement that necessitates proving the genuineness of the transaction and the actual movement of goods. The Court was also concerned that allowing ITC based solely on invoices and payment receipts would open the door to fraudulent claims and would make it difficult for the revenue to recover tax from sellers who are not registered or who have filed ‘NIL’ returns. The Court also noted that the purchasing dealers had failed to provide any additional evidence, such as the name and address of the selling dealer, details of the vehicle that delivered the goods, payment of freight charges, and acknowledgment of delivery.

The Court rejected the argument that producing invoices and making payments through cheques was sufficient to claim ITC. The Court stated that the purchasing dealer must prove the actual movement of goods, genuineness of the transaction, and payment of tax by the seller. The Court emphasized that the burden of proof under Section 70 of the KVAT Act, 2003, is on the purchasing dealer and cannot be shifted to the revenue.

The Court observed that the purchasing dealers had failed to provide any further supporting material, such as the name and address of the selling dealer, details of the vehicle which delivered the goods, payment of freight charges, acknowledgement of taking delivery of goods, and payment particulars.

The Court stated:

“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.”

The Court further stated:

“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.”

The Court also stated:

“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 was no minority opinion.

Key Takeaways

• The burden of proving the correctness of an Input Tax Credit (ITC) claim under Section 70 of the Karnataka Value Added Tax Act, 2003, lies squarely on the purchasing dealer.
• Mere production of invoices and payment through cheques is not sufficient to claim ITC.
• Purchasing dealers must provide additional evidence to prove the genuineness of the transaction and the actual movement of goods. This includes the name and address of the selling dealer, details of the vehicle that delivered the goods, payment of freight charges, acknowledgment of delivery, and tax payment details.
• The judgment emphasizes the importance of due diligence by purchasing dealers in ensuring that their transactions are genuine and that the selling dealers are compliant with tax laws.
• This decision may lead to stricter scrutiny of ITC claims by tax authorities in Karnataka and potentially other states with similar VAT laws.

Directions

The Supreme Court quashed and set aside the impugned judgment(s) and order(s) passed by the High Court and the second Appellate Authority allowing the ITC. The Court restored the orders passed by the Assessing Officer denying the ITC to the concerned purchasing dealers, which were confirmed by the first Appellate Authority.

Development of Law

The ratio decidendi of this case is that the burden of proving the correctness of an Input Tax Credit (ITC) claim under Section 70 of the Karnataka Value Added Tax Act, 2003 lies squarely on the purchasing dealer. This decision clarifies that the purchasing dealer must provide sufficient evidence to prove the genuineness of the transaction and actual movement of goods, and not just produce invoices and payment receipts. This is a change from the previous position where the High Court had held that payment via cheque is sufficient.

Conclusion

The Supreme Court’s judgment in State of Karnataka vs. M/s Ecom Gill Coffee Trading Private Limited clarifies the burden of proof for claiming Input Tax Credit (ITC) under the Karnataka Value Added Tax Act, 2003. The Court held that purchasing dealers must provide substantial evidence beyond invoices and payment receipts to prove the genuineness of transactions and the actual movement of goods. This decision has significant implications for businesses in Karnataka and sets a precedent for stricter scrutiny of ITC claims.