Onus in the Case of GST Input Tax Credit (ITC) with Case Laws – Eligibility | Conditions | Legal Implications

Input Tax Credit (ITC) refers to the credit a business can claim for the taxes paid on its purchases, which can be used to offset the tax liability on its sales. Essentially, it allows a business to reduce the taxes it has to pay on its output (sales) by the amount of tax it has already paid on its inputs (purchases). This mechanism is designed to avoid the cascading effect of taxes, where the final consumer does not end up paying tax on tax. ITC is a fundamental feature in Goods and Services Tax (GST) and is critical for ensuring that only the value addition at each stage is taxed, thereby making the taxation process more efficient and less burdensome.

By Kamal Aggarwal – Chartered Accountant

Table of Contents

1. Introduction to Input Tax Credit (ITC)
2. Conditions & Eligibility for ITC
3. Onus to Prove Eligibility
4. Genuineness of the Transaction
5. Department Clarifications
6. Supplier Doesn’t Pay the Taxes – Legal Position
7. Registration Certificate is Cancelled
8. Non-existent Supplier

1. Introduction to Input Tax Credit (ITC)

• A registered person is eligible to take,
• ITC on supply of goods or services,
• which are used or intended to be used in the course or furtherance of business,
• subject to conditions and restrictions prescribed under the CGST Act.
• Except for certain goods or services specified in Section 17 of the CGST Act, ITC is generally available to the registered person on all goods and services.

2. Conditions & Eligibility for ITC – Section 16

• Possession of tax invoice or debit note;
• Details of such invoice/debit note has been furnished in GSTR 1 by the supplier and reflected in GSTR 2B of the recipient;
• Goods or services have been received;
• ITC is not restricted as per auto-generated statement in Form GSTR 2B;
• Tax charged by supplier has actually been paid to Government; and
• Recipient has furnished GSTR 3B

3. Onus to Prove Eligibility

• Section 155 of the CGST Act provides that

“Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”

• The recipient is availing ITC & hence is liable to prove the genuineness of the transaction
• The Hon’ble Supreme Court has, in State Of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. [2023] 148 taxmann.com 352 (SC), examined a similar provision under the Karnataka VAT Act and held as follows:

“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 invoice and payment particular etc. The aforesaid information would be in addition to tax invoice, particular of payment etc. In fact, if a dealer claims Input Tax Credit on purchases, such dealer/purchaser shall have to prove and establish the actual physical movement of goods, genuineness of transaction by furnishing the details referred above and mere production of tax invoices would not be sufficient to claim ITC.”

• In the matter of Shiv Trading v. State of UP [2023] 156 taxmann.com 715 (All), the Hon’ble High Court of Allahabad, held as follows:

“the petitioner failed to discharge its onus to prove and establish beyond doubt the actual transaction, actual physical movement of goods as well as the genuineness of the transactions and as such, the proceedings have rightly been initiated against the petitioner under section 74 of the GST Act. ”

• The recipient produced tax-invoice, e-way bill, weighment receipt, bilty etc, but since the supplier was found non-existent, movement was held as doubtful
• This decision has been affirmed by the hon’ble Supreme Court
• In the matter of Malik Traders v. State of UP [2023] 155 taxmann.com 517 (All), the Hon’ble High Court of Allahabad, held as follows:

“…………………….. onus is to be discharged by the petitioner to prove and establish beyond doubt the actual transaction and physical movement of goods. But in the case in hand, the petitioner has failed to prove and establish actual physical movement of goods and genuineness of transaction as such the proceedings has rightly been initiated.”

• Here also, the petitioner produced invoices, payment made through banking channel, bilties etc.
• The above decisions have categorically held that Onus to prove genuineness of the transaction is on the recipient of goods or services
• What is meant by genuineness of the transaction?

4. Genuineness of the Transaction

• The hon’ble Supreme Court and High Courts have held that genuineness of transaction to be proved by following, in addition to invoices & payment proof:

1. 1. Name of address of selling dealer
   2. Actual movement of goods
   3. Details of vehicle by which goods have been received
   4. Payment of freight charges on such goods
   5. Acknowledgment of delivery of such goods

• The above list is not exhaustive, and more evidence may be required on case to case basis
• The Government says that a recipient should be able to trace the supplier and also hold him responsible for payment of GST
• The issue arises where a recipient had only few transactions with a particular supplier and only those transactions are in question
• Or transactions have executed through a broker and neither the broker nor the supplier is reachable
• In case of a regular supplier, generally the recipient should be able to comply with these requirements
• What happens if

1. 1. Supplier hasn’t deposited GST, even after follow up by the recipient
   2. His registration certificate is cancelled or non-existent taxable person

5. Department Clarifications

• Press release dated 04th May 2018, provides that in cases of default in payment of tax by supplier, recovery shall be made first from the supplier & recovery from recipient would be under exceptional circumstances
• Circular 183 dated 27th December 2022, provides that in cases of default in payment of tax by supplier, certificate can be produced from a chartered accountant certifying that supplier has paid taxes in GSTR 3B
• The new circular shows change in Government stand. Government wants taxpayers to handle non payment of GST commercially and not legally

6. Supplier Doesn’t Pay the Taxes – Legal Position

• The statutory condition of Section 16(2)(c) stands violated
• Read with Section 155, Revenue can seek to deny the credit
• Constitutional validity of Section 16(2)(c) has been challenged in several high courts and a final judicial decision is awaited
• In the VAT regime, several high courts, including hon’ble Delhi High Court in the case of Arise India Ltd. and On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi, [2017] 87 taxmann.com 179 (Delhi) held that

1. 1. Denial of input tax credit to bona fide purchasers for nonpayment of tax by the selling dealers is not justified
   2. Equating bona fide purchasers with those with hand in glove with fraudulent sellers is violative of Article 14 of the Constitution

• The hon’ble Madras High Court in D Y Beathel Enterprises also given the same verdict

7. Registration Certificate is Cancelled

• The Hon’ble Supreme Court, in the case of State of Maharashtra v. Suresh Trading Company, [1998] taxmann.com 1747 (SC), has held,

“purchasing dealer is entitled by law to rely upon the certificate of registration of selling dealer…..”

• When the certificate of registration was valid during the period of transaction, the purchasing dealer is entitled to rely upon the same

8. Non-existent Supplier

• The Hon’ble Orissa High Court has, in the case of Santosh Kumar and Co, 54 STC 322 addressed this issue

“Government should take appropriate action against fictitious dealers, as registration cannon be granted to a non-existent person. Officers under collusion with these fictitious dealers, who has failed to perform due diligence must be put under enquiry.”

“We must bring to the notice of the State that registration of dealers is indeed a serious matter and its officers authorised to grant registration should be very careful. Once a certificate of registration is issued to a person and he becomes a registered dealer, he is entitled to certain benefits under the Act. Certificates granted by the public officers have their value and people in the commercial field would in normal course accept such certificates to be genuine. The fact that registration has been granted, yet the person holding the certificate is a fictitious one seem to be contradictions in term. A certificate of registration can be granted only when the dealer, apart from being a businessman, satisfies the other requirements prescribed by law. A registration certificate cannot be granted to a non-existent person. The fact that there have been some persons who are labelled by the department as fictitious dealers goes to show that the officers under the Act either collude with dishonest people in the field or fail to exercise due diligence and allow fraud to be practised in the commercial field. Whether it is collusion or negligence, these officers bring disrepute to the State and introduce uncertainty and lack of confidence into a true field of trust. It is high time that the State Government institutes appropriate enquiries, take such steps as are necessary to eliminate fictitious dealers from the field and also take strong action against persons connected with such matters so that there be no recurrence of it in future.”