Genuineness Of Transactions Need To Be Proved By Dealers For Claiming Input Tax Credit: Supreme Court

The Supreme Court bench comprising Justices M.R. Shah and C.T. Ravikumar held that in order to claim ITC (Input Tax Credit) a dealer has to prove the genuineness of the transactions and prove the actual movement of goods and details as per section 70 of Karnataka Value Added Tax Act 2003 Need to be furnished.

In the matter at hand the respondent Tallam Apparels purchased readymade garments for the further sale. The dealer claimed ITC (Input Tax Credit) on such sale of Rs. 4,18,818 but the assessing officer disallowed the ITC for the year 2012-13 on the ground that the dealers from whom the respondent herein purchased readymade garments have either got their registration cancelled or have filed NIL for their returns. An appeal was later filed by the purchasing dealer but it was dismissed because burden under Section 70 of KVAT Act 2003 has not been discharged.

Thereafter, the Karnataka Appellate Tribunal reversed the orders passed by the assessing officer as well as the first appellate authority on the ground that the purchasing dealer should not suffer due to the default of the seller. 

ITC (Input Tax Credit) in favour of the purchasing dealers has been allowed in other cases on the ground that the sale price was paid to the seller by an account payee cheque and that copies of invoices were produced.The revision petition filed before the high court was dismissed.

It was submitted on behalf of the state that the high court erred in its decision of dismissing the revision applications and confirming the respective orders of the appellate authorities in allowing the input tax credit in favour of the respective purchasing dealers. It was further submitted that high court did not properly appreciate that when the assessing officer doubted the genuineness of transitions and when it was found that the sale transactions were only paper transactions and in some cases the registration of sellers was cancelled and nothing on record showed that any tax was paid by the seller and hence should not be entitled for ITC.

It was submitted on behalf of dealers that in the present case, as such, the purchasing dealers have discharged the burden of proof cast under Section 70 of the KVAT Act, 2003 and proved the genuineness of the transactions by producing the genuine invoices and even the payment made through cheques. It is submitted that therefore once the dealer has discharged the burden cast under Section 70 of the KVAT Act, 2003, the purchasing dealer is entitled to the Input Tax Credit and if at all it is found that a tax is not paid by the seller, the same can be recovered from the seller. However, so far as the purchasing dealer is concerned, they are entitled to the ITC, once having discharged the burden under Section 70 of the KVAT Act, 2003.

The court considered the question of whether the second appellate authority as well as the high court were justified in allowing the Input Tax Credit? The court perused section 70 of Karnataka Value Added Tax Act 2003 and observed  burden of proving that the ITC claim is correct lies upon the purchasing dealer claiming such ITC. Burden of proof that the ITC claim is correct is squarely upon the assessee who has to discharge the said burden. Merely because the dealer claiming such ITC claims that he is a bona fide purchaser is not enough and sufficient. The burden of proving the correctness of ITC remains upon the dealer claiming such ITC. Such a burden of proof cannot get shifted on the revenue. 

The Supreme Court bench further observed that Mere production of the invoices or the payment made by cheques is not enough and cannot be said to be discharging the burden of proof cast under section 70 of the KVAT Act, 2003. 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 aforesaid information would be in addition to tax invoices, particulars of payment etc.

The bench relied on the decision of Delhi high court in On Quest Merchandising India pvt. Ltd. v. govt. Of NCT Delhi and observed that the burden is upon the purchasing dealer to prove the same while claiming ITC.

In the light of aforementioned, the bench observed that the appellate authority and the high court erred in allowing ITC despite the dealers failed to prove the genuineness of transactions and failed to discharge proof under Section 70 of KVAT Act 2003.

CASE: THE STATE OF KARNATAKA V. M/S ECOM GILL COFFEE TRADING PVT. LTD.

CIVIL APPEAL NO. 230 OF 2023