The State of Karnataka vs M/s Ecom Gill Coffee Trading Private Limited

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 230 OF 2023 (Arising from SLP(Civil) No. 2572/2022)

The State of Karnataka …Appellant

Versus

M/s Ecom Gill Coffee Trading Private Limited …Respondent

WITH

CIVIL APPEAL NO. 231 OF 2023 (Arising from SLP(Civil) No. 2690/2022) CIVIL APPEAL NO. 232 OF 2023 (Arising from SLP(Civil) No. 3915/2022) CIVIL APPEAL NOS.216-217 OF 2023 (Arising from SLP(Civil) Nos. 6337-6338/2022)

JUDGMENT

M.R. SHAH, J.

1. As common question of law and facts arise in this group of appeals

and the issue is with respect to interpretation of Section 70 of the

Karnataka Value Added Tax Act, 2003 (hereinafter referred to as the Signature Not Verified Digitally signed by Neetu Sachdeva Date: 2023.03.13 16:11:39 IST Reason: 1 ‘KVAT Act, 2003’), all these appeals are decided and disposed of

together, by this common judgment and order.

2. For the sake of convenience, Civil Appeal No. 231 of 2023 arising

from the impugned judgment and order dated 26.02.2021 passed by the

High Court of Karnataka at Bengaluru in S.T.R.P. No. 82 of 2018 is

treated as the lead matter, as in some matters, the said decision has

been relied upon.

3. By the impugned judgment(s) and order(s) passed by the High

Court, the High Court has dismissed the revision applications preferred

by the revenue – State of Karnataka and as such has allowed the Input

Tax Credit (hereinafter referred to as the ‘ITC’) claimed by the respective

purchasing dealers. The impugned judgment(s) and order(s) passed by

the High Court are the subject matter of present appeals.

Civil Appeal No. 231/2023 (The State of Karnataka v. M/s Tallam Apparels)

4. The facts leading to the present appeal in nutshell are as under:

That the respondent herein – M/s Tallam Apparels (hereinafter

referred to as the ‘purchasing dealer’) purchased readymade garments

from other dealers for the purposes of further sale. The purchasing

2 dealer claimed the ITC on such sale to the extent of Rs. 4,18,818/-.

Vide order dated 26.12.2014, the Assessing Officer disallowed the ITC

claim for the Assessment Year 2012-2013 on the ground that the dealers

from whom M/s Tallam Apparels have purchased the readymade

garments have either got their registration cancelled or have filed ‘NIL’

returns. Thus, the Assessing Officer doubted the sale and the payment

of tax on such sale of which the ITC was claimed. An Appeal was filed

by the purchasing dealer. The Appellate Authority dismissed the same

by holding that the burden under section 70 of the KVAT Act, 2003 has

not been discharged. However, 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 default of seller. The revision application before the High

Court has been dismissed by the impugned judgment and order.

4.1. In other cases, the Tribunal as well as the High Court have allowed

the ITC in favour of the purchasing dealers solely/mainly on the ground

that the sale price was paid to the seller by an account payee cheque

and that copies of invoices were produced.

4.2 Insofar as the case of M/s Ecom Gill Coffee Trading Private

Limited being Civil Appeal No. 230 of 2023 is concerned, M/s Ecom –

3 purchasing dealer purchased green coffee bean from other dealers for

the purposes of further sale in exports and in domestic market. Upon

finding some irregularities in Input Tax Rebate claimed by the

purchasing dealer for Assessment Year 2010-2011, the Assessing

Officer issued notice under section 39 of the KVAT Act, 2003 seeking

furnishing of accounts, books, tax invoices etc. Re-assessment order

came to be passed. It was found that the purchasing dealer had claimed

ITC from mainly 27 sellers and out of aforesaid 27 sellers , six were

found to be de-registered; three had effected sales to the respondent but

did not file taxes and six have outrightly denied turnover nor paid taxes.

Therefore, ITC came to be disallowed to the extent of Rs. 10.52 lacs.

The first Appellate Authority confirmed the findings of the Assessing

Officer. However, the Tribunal allowed the second appeal on the ground

that the purchasing dealer purchased the coffee from the registered

dealer under genuine tax invoices and consequently allowed the ITC

claimed. The revision application before the High Court has been

dismissed, relying upon its earlier decision in the case of M/s Tallam

Apparels (supra).

4

5. Shri Nikhil Goel, learned AAG has appeared on behalf of the State

of Karnataka and the respective learned counsel have appeared on

behalf of the respective purchasing dealers.

6. Shri Nikhil Goel, learned AAG appearing on behalf of the State has

vehemently submitted that in the facts and circumstances of the case,

the High Court has materially erred in dismissing the revision

applications and confirming the respective orders passed by the

Appellate Authorities in allowing the Input Tax Credit in favour of the

respective purchasing dealers.

6.1 It is vehemently submitted that the High Court has not properly

appreciated that when the Assessing Officer doubted the genuineness of

the transactions/sales and when it was found that the sale transactions

were only paper transactions and even in some of the cases, the

registration of the sellers were cancelled and nothing was on record that

any tax was paid by the seller, the purchasing dealers shall not be

entitled to the Input Tax Credit.

6.2 It is vehemently submitted by Shri Nikhil Goel, learned AAG

appearing on behalf of the State that the High Court ought to have

appreciated that as such a duty is cast upon the purchasing dealers to

5 prove the transactions/financial transfers, which in the present case, the

purchasing dealers failed to discharge. It is submitted that for the

purposes of Section 70 of the KVAT Act, 2003, the burden required to be

discharged is slightly higher than showing financial transfers and should

show actual movement of goods. It is submitted that mere production of

invoices or even payment to the seller by cheque cannot be said to be

sufficient and may not be said to discharging the burden to claim Input

Tax Credit, to be discharged under Section 70 of the KVAT Act, 2003. It

is submitted that actual movement of goods is required to be established

and proved, over and above the invoices, payment by cheques and

actual payment and even the demand of tax by the seller.

6.3 Shri Goel, learned AAG has heavily relied upon the decision of the

Karnataka High Court in the case of M/s. Bhagadia Brothers Vs.

Additional Commissioner of Commercial Taxes, STA No. 4 of 2018

dated 29.01.2020, against which the special leave petition has been

dismissed as well as the decision of the Gujarat High Court in the case

of Madhav Steel Corporation Vs. State of Gujarat, Tax Appeal No.

742 of 2013 and other allied tax appeals against which also the special

leave petition has been dismissed, however, keeping the question of law

6 open and has also relied upon another decision of the Gujarat High

Court in the case of Shreeji Impex Vs. State of Gujarat, Tax Appeal

No. 330 of 2014, 2014 SCC OnLine Guj 8074, in support of his above

submissions.

6.4 It is further submitted by Shri Nikhil Goel, learned AAG appearing

on behalf of the State that the High Court has failed to appreciate that

the revenue cannot recover from the seller who is not registered or who

has filed ‘NIL’ returns, thereby denying sale. It is further submitted that

the High Court has materially erred in observing and holding that once

the purchases are made by the purchasing dealer by account payee

cheque, the purchasing dealer is deemed to have discharged his

burden. It is submitted that the High Court has also materially erred in

observing that if the seller of the goods from whom the dealer has

purchased does not deposit such tax, the dealer (purchasing dealer)

cannot be held liable for that. It is submitted that as such the purchasing

dealer is entitled to the Input Tax Credit on the tax paid by the seller

and/or on the tax paid. It is submitted that therefore, for the purposes of

Input Tax Credit, the purchasing dealer has to prove the actual payment

7 of tax and actual transfer of goods and mere paper transaction is not

sufficient.

6.5 Making above submissions and relying upon the above decisions,

it is prayed to allow the present appeals.

7. While opposing the present appeals, learned counsel appearing on

behalf of the respective assessees/dealers, who claimed the Input Tax

Credit have vehemently submitted 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.

7.1 It is further submitted by learned counsel appearing on behalf of

the respective dealers that in fact they have discharged the burden of

8 proof cast under Section 70 of the KVAT Act, 2003 by producing the

valid invoices and making the payment online to the supplier. It is

submitted that registration of the dealer and online payments were never

disputed. It is further submitted that apart from Section 70 of the KVAT

Act, 2003, the Karnataka Value Added Tax Rules, 2005, namely Rules

27 and 29 provide for the details and obligations upon the dealer to

issue the tax invoice and also the particulars of the tax invoices. It is

submitted that neither the KVAT Act nor the Rules provide for any other

document or any other obligation, which are statutorily required for the

purposes of establishing the claim for seeking refund towards Input Tax

Credit.

7.2 It is submitted that therefore the decision of the adjudicating

authority was beyond the Act and Rules. It is further submitted by the

learned counsel appearing on behalf of the respective assessees /

dealers that the only requirement of law, as far as the purchasing

dealers wanting to avail the benefit of Input Tax Credit is concerned, is

that he has to make sure that the selling dealer is a registered dealer

and has issued the tax invoice in compliance with the requirement of the

KVAT Act and the Rules made thereunder. It is submitted that once the

9 purchasing dealer demonstrates that he has complied with such

requirement, he cannot be denied the ITC only because the selling

dealer fails to discharge his obligation under the KVAT Act.

7.3 It is submitted that in the present case, the respondents are

purchasing dealers, who have complied with the requirement of KVAT

Act and have ensured that the purchases made by them are in

compliance with the requirements of the KVAT Act and Rules for

claiming ITC. Reliance is placed on the decision of this Court in the

case of Corporation Bank Vs. Saraswati Abharansala, (2009) 19 VST

84 (SC). It is further submitted that the ITC could be denied where the

purchasing dealer has acted without due diligence, i.e., by proceeding

with the transaction without first ascertaining if the selling dealer is a

registered dealer having a valid registration. It is submitted that denial of

ITC to a purchasing dealer who has taken all the necessary precautions

fails to distinguish such a diligent purchasing dealer from the one that

has not acted bonafide. It is submitted that in the case of The

Additional Commissioner of commercial Taxes Zone – II and Ors.

Vs. M/s. Transworld Star Manjushree, Civil Appeal Nos. 216-217 of

10 2023 @ SLP (Civil) No. 6337-6338 of 2022, both the seller and dealer

were registered.

7.4 Making above submissions, it is prayed to dismiss the present

appeals.

8. We have heard learned counsel for the respective parties at

length.

We have gone through the orders passed by the Assessing Officer

and the first Appellate Authority as well as the orders passed by the

second Appellate Authority/Tribunal and also the impugned judgment(s)

and order(s) passed by the High Court dismissing the revision

applications. The respondents herein – all purchasing dealers claimed

the Input Tax Credit on the alleged purchases made from the respective

dealers. The Assessing Officer, on appreciation of evidence and

considering the other material on record, doubted the genuineness of

the transactions and the purchases made from the respective dealers

and denied the ITC. The findings of fact recorded by the Assessing

Officer came to be confirmed by the first Appellate Authority. However,

the second Appellate Authority and the High Court have allowed the ITC,

by observing that as the purchasing dealers produced the invoices

11 issued by the respective dealers and that in some of the cases they also

made the payment through cheques, the Assessing Officer was not

justified in denying the ITC. Against the grant of ITC, the State is before

this Court.

8.1 Therefore, the short question which is posed for the consideration

of this Court is, “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?”

9. While considering the aforesaid issue/question, Section 70 of the

Karnataka Value Added Tax Act, 2003 is required to be referred to,

which reads as under:

“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.

12 (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.”

9.1 Thus, the provisions of Section 70, quoted hereinabove, in its plain

terms clearly stipulate that the 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. 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. In fact, if a

13 dealer claims Input Tax Credit on purchases, such dealer/purchaser

shall have to prove and establish the actual physical movement of

goods, genuineness of transactions by furnishing the details referred

above and mere production of tax invoices would not be sufficient to

claim ITC. 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.

10. Even considering the intent of section 70 of the Act, 2003, it can be

seen that the ITC can be claimed only on the genuine transactions of the

sale and purchase and even as per section 70(2) if 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 take at a lower rate, or that a

deduction of input tax is available, such a dealer is liable to pay the

penalty. Therefore, as observed hereinabove, for claiming ITC,

genuineness of the transaction and actual physical movement of the

14 goods are the sine qua non and the aforesaid can be proved only 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 purchasing dealers have to prove the actual

physical movement of the goods, alleged to have been purchased from

the respective dealers. If the purchasing dealer/s fails/fail to establish

and prove the said important aspect of physical movement of the goods

alleged to have been purchased by it/them from the concerned dealers

and on which the ITC have been claimed, the Assessing Officer is

absolutely justified in rejecting such ITC claim.

11. In the present case, the respective purchasing dealer/s has/have

produced either the invoices or payment by cheques to claim ITC. The

Assessing Officer has doubted the genuineness of the transactions by

giving cogent reasons on the basis of the evidence and material on

record. In some of the cases, the registration of the selling dealers have

been cancelled or even the sale by the concerned dealers has been

disputed and/or denied by the concerned dealer. In none of the cases,

the concerned purchasing dealers have produced any further supporting

material, such as, furnishing the name and address of the selling dealer,

15 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. and therefore it can be said that the concerned

purchasing dealers failed to discharge the burden cast upon them under

Section 70 of the KVAT Act, 2003. At the cost of repetition, it is

observed and held that unless and until the purchasing dealer

discharges the burden cast under Section 70 of the KVAT Act, 2003 and

proves the genuineness of the transaction/purchase and sale by

producing the aforesaid materials, such purchasing dealer shall not be

entitled to Input Tax Credit.

12. Despite the findings of fact recorded by the Assessing Officer on

the genuineness of the transactions, while refusing to allow the ITC,

which came to be confirmed by the first Appellate Authority, the second

Appellate Authority as well as the High Court have upset the concurrent

findings given by the Assessing Officer as well as the first Appellate

Authority, on irrelevant considerations that producing invoices or

payments through cheques are sufficient to claim ITC which, as

observed hereinabove, is erroneous. As observed hereinabove, over

and above the invoices and the particulars of payment, the purchasing

dealer has to produce further material like the name and address of the

16 selling dealer, details of the vehicle which has delivered the goods,

payment of freight charges, acknowledgement of taking delivery of

goods including actual physical movement of the goods, alleged to have

been purchased from the concerned dealers.

13. Now so far as the reliance placed upon Rules 27 and 29 of the

Karnataka Value Added Tax Rules, 2005 and the submission on behalf

of the purchasing dealers that under the provisions of the Rules 2005,

more particularly under Rules 27 & 29, the only requirement is to issue

the tax invoice and to produce the same and there is no other

requirement is concerned, the aforesaid has no substance. Rule 27 cast

an obligation on the dealers to issue tax invoice and the particulars of

the tax invoice are provided under Rule 29. Merely because the tax

invoice as per Rule 27 and Rule 29 might have been produced, that by

itself cannot be said to be proving the actual physical movement of the

goods, which is required to be proved, as observed hereinabove.

Producing the invoices as per Rules 27 and 29 of the Rules 2005 can be

said to be proving one of the documents, but not all the documents to

discharge the burden to prove the genuineness of the transactions as

per section 70 of the KVAT Act, 2003.

17

14. Now so far as the reliance upon the decision of the Delhi High

Court in the case of On Quest Merchandising India Pvt. Ltd. v.

Government of NCT of Delhi (Writ Petition (Civil) No. 6093/2017,

decided on 26.10.2017), relying upon by the learned counsel appearing

on behalf of the purchasing dealers is concerned, at the outset, it is

required to be noted that before the Delhi High Court, Section 9(2)(g) of

the Delhi Value Added Tax Act was under consideration, which reads as

under:

“9(2)(g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.”

The burden of proof as per Section 70 of the KVAT Act, 2003 was

not an issue before the Delhi High Court. How and when the burden of

proof can be said to have been discharged to prove the genuineness of

the transactions was not the issue before the Delhi High Court. As

observed hereinabove, while claiming ITC as per section 70 of the KVAT

Act, 2003, the purchasing dealer has to prove the genuineness of the

transaction and as per section 70 of the KVAT Act, 2003, the burden is

upon the purchasing dealer to prove the same while claiming ITC.

18

15. In view of the above and for the reasons stated above and in

absence of any further cogent material like 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. and the

actual physical movement of the goods by producing the cogent

materials, the Assessing Officer was absolutely justified in denying the

ITC, which was confirmed by the first Appellate Authority. Both, the

second Appellate Authority as well as the High Court have materially

erred in allowing the ITC despite the concerned purchasing dealers

failed to prove the genuineness of the transactions and failed to

discharge the burden of proof as per section 70 of the KVAT Act, 2003.

The impugned judgment(s) and order(s) passed by the High Court and

the second Appellate Authority allowing the ITC are unsustainable and

deserve to be quashed and set aside and are hereby quashed and set

aside. The orders passed by the Assessing Officer denying the ITC to

the concerned purchasing dealers, confirmed by the first Appellate

Authority are hereby restored.

16. The instant appeals are accordingly allowed. However, there shall

be no order as to costs.

19 ……………………………..J. [M.R. SHAH]

NEW DELHI; ……………………………..J. MARCH 13, 2023. [C.T. RAVIKUMAR]

20