ITC is liable to be disallowed

Case Title: State of Karnataka v. Ecom Gill Coffee Trading (P.) Ltd.

Court: Supreme Court of India

Petition Numbers: Civil Appeal Nos. 216–217 & 230–232 of 2023

Relevant Section: Section 70 of the Karnataka Value Added Tax Act, 2003

Category of Dispute: Input Tax Credit (ITC)

Date of Judgment: 13 March 2023

Relevant Provisions: Section 70 of the KVAT Act, 2003; KVAT Rules, 2005 (Rules 27 & 29)

Facts of the Case

¶4–4.2: The appeals arose from cases where purchasing dealers, including Ecom Gill Coffee Trading (P.) Ltd., claimed Input Tax Credit (ITC) under the KVAT Act on purchases from dealers who either had their registrations cancelled, filed NIL returns, or denied sales. The Assessing Officer disallowed ITC, citing non-genuine transactions. The Karnataka Tribunal and High Court, however, allowed ITC based on invoices and payments made by cheque.

Questions in Consideration

¶8–8.1:

• Whether the purchasing dealers discharged the burden under Section 70 of the KVAT Act to claim ITC?
• Whether mere production of invoices and payment by cheque suffice to establish genuine purchases and entitlement to ITC?

Observations of the Court

¶9–11:

• Burden of Proof: Section 70 squarely places the burden of proving the correctness of ITC on the purchasing dealer.
• Insufficiency of Invoices/Cheques Alone: Mere invoices and payments by cheque do not fulfill this burden. Additional evidence such as seller’s name and address, vehicle details, freight charges, delivery acknowledgments, and proof of physical movement of goods is necessary.
• No Presumption in Favour of Purchasing Dealer: The genuineness of the transaction must be demonstrated independently.
• Rule 27 & 29 Compliance is Not Enough: Producing tax invoices in compliance with the KVAT Rules does not prove actual physical movement or genuineness of the transaction.
• ¶14: The Delhi High Court’s decision in On Quest Merchandising is distinguished as it dealt with different statutory language under the Delhi VAT Act.

Judgment of the Court

¶15–16:

• The Supreme Court held that the High Court and Tribunal erred in allowing ITC solely based on invoices and cheque payments without proof of physical movement and genuine transactions.
• The appeals were allowed.
• The orders allowing ITC were set aside.
• The Assessing Officer’s original disallowance of ITC (confirmed by the First Appellate Authority) was restored.

Between Fine Lines

1. The Supreme Court reinforced that claiming ITC under KVAT requires proof of real movement of goods, not just paperwork.
2. Dealers must substantiate their claims with delivery details and logistics evidence.
3. Payment via banking channels and possession of invoices do not automatically justify ITC.
4. The burden of proving genuine transactions lies entirely with the claimant.
5. This ruling strengthens compliance obligations on dealers under VAT frameworks

Summary of Referred Cases

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