FACTS OF THE CASE
This case involves a series of appeals dealing with the issue of entitlement to Input Tax Credit (ITC) under Section 70 of the Karnataka Value Added Tax Act, 2003 (KVAT Act). The appeal pertains to M/S Ecom Gill Coffee Trading Private Limited, a registered dealer, had claimed Input Tax Credit (ITC) on its purchases of green coffee beans for the Assessment Year 2010–2011. During a re-assessment conducted under Section 39 of the KVAT Act, the Assessing Officer scrutinized the ITC claims and found substantial irregularities. Out of 27 sellers from whom the respondent claimed to have purchased goods, it was discovered that six had been de-registered, three had made sales but failed to file returns or pay taxes, and six others denied turnover or failed to deposit the applicable taxes.
Based on these findings, the Assessing Officer disallowed the ITC amounting to approximately ₹10.52 lakhs, citing doubts over the genuineness of the transactions and the legitimacy of the tax invoices. The first Appellate Authority upheld this order. However, on a second appeal, the Karnataka Appellate Tribunal reversed the decision, holding that the respondent had purchased goods from registered dealers, submitted valid tax invoices, and made payments through account payee cheques, thereby discharging its burden under Section 70 of the KVAT Act. The High Court of Karnataka, relying on its earlier judgment in M/s Tallam Apparels, dismissed the revision petition filed by the State, thereby affirming the Tribunal's decision in favour of the respondent.
ISSUES BEFORE THE COURT
The core issue before the Supreme Court was whether the second appellate authority and the HC were justified in allowing the ITC based on the finding that purchasing dealer has complied with the law and that ITC cannot be denied based on fault of the selling dealer?
ARGUMENT BY THE APPELLANT (State of Karnataka)
- The contention of the State was based on Section 70 of the Karnataka Value Added Tax Act, 2003, which places the burden on the dealer claiming ITC to prove that the transaction in question was genuine and that tax had indeed been paid. According to the State, this burden is not discharged merely by the production of tax invoices or by demonstrating that payment was made via account payee cheques. Rather, the provision contemplates a slightly higher burden, requiring the purchasing dealer to establish the actual physical movement of goods, which forms the core of a genuine taxable transaction under the KVAT framework.
- It was contended that mere production of invoices or even the payment to the seller by the cheque cannot be said to be sufficient to discharge the burden as provided under section 70 of the Act and the actual movement of the good is required over and above the invoice and the payment.
- The appellant contended that in the present case, the Assessing Officer had rightly found irregularities in the ITC claim. Among the 27 sellers involved, six were discovered to be de-registered, three had failed to pay taxes despite reporting sales, and six others outrightly denied the turnover. In such a scenario, the transactions appeared to be suspicious or non-existent, and the genuineness of the claimed purchases became questionable.
- The State said that where the sellers had either disappeared, de-registered, or defaulted on their tax obligations, and no physical evidence of delivery—such as vehicle records, freight charges, or delivery acknowledgements—had been furnished, the ITC ought not to have been allowed.
- Therefore, for the purposes of Input Tax Credit, the purchasing dealer has to prove the actual payment of tax and actual transfer of goods and mere paper transaction is not sufficient and in the present case the respondent has failed to discharge the requisite burden to prove the genuine transaction to claim the ITC.
ARGUMENTS BY RESPONDENT (Purchasing Dealers)
- The counsel for M/s Ecom Gill Coffee Trading Pvt. Ltd. argued that the respondent had fully discharged the burden imposed under Section 70 of the KVAT Act. It was submitted that the respondent had made purchases from dealers who were registered at the time of sale, received valid tax invoices, and had paid the purchase price through account payee cheque. Once the buyer had demonstrated that the seller was registered and that the payment and documentation were proper, the burden stood satisfied.
- The respondent contended that neither Section 70 nor the relevant rules under the KVAT Act—particularly Rules 27 and 29—required a dealer to furnish any other document other than producing invoice and the payment. To require more than this would be reading into the statute obligations that are not provided by law. The respondent further argued that punishing the buyer for the seller’s failure to file returns or deposit tax was inherently unjust, especially when the buyer had acted in good faith.
- In support of their contention, the respondent relied on Corporation Bank v. Saraswati Abharansala and On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, to argue that ITC cannot be denied if the buyer had acted with due diligence and taken all precautions and has acted Bonafide.
JUDGEMENT
The Supreme Court analyse Section 70 of the KVAT Act, which provides that the burden of proving that a transaction is not liable to tax or that an input tax claim is correct lies on the dealer making the claim that is the purchasing dealer. The Court held that this burden is substantial and cannot be discharged merely by producing tax invoices or showing that payment was made by cheque. It ruled that the to prove the genuineness of the transaction and the actual physical movement of the goods are sine quo non and the same can be proved by furnishing the name and address of the seller, details of transport (e.g., vehicle numbers), freight charges, delivery acknowledgements, and other corroborative material and if the purchasing dealer failed to prove the actual movement of the goods then he cannot claim the ITC.
The Court noted that in the present cases, none of the purchasing dealers produced evidence beyond invoices and cheques. There was no proof of delivery or transport of goods, and in some instances, the sellers had denied the transactions or had not paid any tax.
The Court also examined the findings of the Assessing Officer, which revealed significant irregularities in the ITC claims. The officer found that six of the selling dealers were de-registered, three had sold goods but had not deposited tax, and another six either denied the sale or failed to pay taxes altogether.
The Court distinguished the Delhi High Court's ruling in On Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi, noting that the said case was decided under Section 9(2)(g) of the Delhi VAT Act, a different statutory provision and not related to the present case.
The Court also rejected the argument that compliance with Rules 27 and 29 of the KVAT Rules was sufficient. While those rules require specific particulars in a tax invoice, the Court held that production of such an invoice alone does not prove the genuineness of the underlying transaction. The statutory intent, according to the Court, is to ensure that ITC is claimed only on real and completed transactions involving actual movement of goods.
After analyzing the entire factual and legal matrix, the Court concluded that the purchasing dealers had failed to discharge the statutory burden under Section 70. They did not furnish sufficient evidence to prove the physical movement of goods or the bona fides of the transactions, and in many instances, the sellers were either non-existent, de-registered, or non-compliant. As a result, the Assessing Officer was justified in disallowing the ITC claims.
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