Dealer claiming Input Tax Credit must prove transaction beyond a reasonable doubt, Supreme Court said for KVAT Act
The Karnataka Value Added Tax Act, 2003 is legislation that governs the levy and collection of value-added tax in the state of Karnataka. One of the key provisions of the Act is section 70, which relates to the Input Credit Tax (ITC) claimed by dealers on their purchases.
Recently the Supreme Court of India has interpreted this provision and held that a dealer claiming ITC must prove and establish the actual physical movement of goods and the genuineness of the transaction. The Input Tax Credit system is a mechanism that allows businesses to claim credit for the tax paid on their purchase of goods and services.
This credit can be used to offset the tax liability on their sales thereby reducing their tax burden. The ITC system is designed to avoid cascading taxation where taxes are levied on top of taxes leading to a higher tax burden on the end consumer.
Section of the Act provides for the conditions as well as restrictions for claiming ITC. The provision requires that the dealer claiming ITC must have received the goods in question and must have paid the tax on those goods.
The provision further states that the dealer must establish the actual physical movement of the goods and the genuineness of the transaction. The Bench consisting of Justice MR Shah and Justice Ravikumar observed that in cases where a dealer claiming ITC is unable to provide evidence of the physical movement of the goods, the Assessing Authority would be justified in denying such ITC claims.
The issue regarding the interpretation of Section 70 arose in the case of the State of Karnataka v. M/S Ecom Gill Coffee Trading Private Limited where the latter party in question bought green coffee beans from the other suppliers to sell for export and in the domestic market. During an assessment for the 2010-11 year, the Assessing Officer discovered discrepancies in their claimed Input Tax Rebate. As a result, they issued a notice under Section 39 of the Karnataka Value Added Tax Act, 2003.
Upon investigation it was found that Ecom had claimed ITC from 27 sellers of which 6 had deregistered, 3 had sold goods to Ecom without filing taxes and 6 had not disclosed their turnover or paid taxes. The Assessing Officer denied the ITC claim which was upheld by the first Appellate Authority.
However, the Karnataka Appellate Tribunal allowed the appeal resulting in the ITC claim being granted. The revenue authorities filed a revision application with the Karnataka High Court but it was dismissed. The court was focused on the specific issue of whether the second Appellate Authority and the High Court were right to grant the Input Tax Credit based on the circumstances of the case.
The court relied on section 70 of the Karnataka Value Added Tax, 2003, which places the responsibility of proving that a transaction is not taxable or that an Input Tax Credit claim is valid on the dealer or assessed. The court noted that the burden of proof cannot be shifted to the revenue authorities and that the dealer making the ITC claim must provide clear evidence of the transaction to support their claim.
Simply presenting invoices or proof of payment via cheque is insufficient to meet the burden of proof set forth in section 70 of the KVAT Act, 2003. The dealer claiming Input Tax Credit must provide irrefutable evidence of the actual transaction which includes identifying the name and address of the selling dealer, providing vehicle details for goods delivery, paying freight charges, acknowledging receipt of goods and presenting tax invoices and payment details. In addition to invoices and payment particulars, the above information must also be provided to demonstrate the validity of the claim.
