[Opinion] Unraveling the Mystery of Genuine Transactions: Supreme Court clears the air

“Proof beyond doubt is the golden thread that runs through the web of the administration of justice.”

– Anonymous

1. Introduction

It is said that art of simplicity is the puzzle of complexity. Burden of proof is a pivotal tenet in any legal system, requiring the parties making claim to provide substantial evidence to support their assertion. Easy, as it may appear, proving it, is the real challenge. Tax laws invariably put burden of proof on the taxpayer. One such puzzle has been recently solved by the Supreme Court in case of State of Karnataka v. ECOM Gill Coffee Trading (P.) Ltd. [2023] 148 taxmann.com 352. This Supreme Court Judgment has been widely assailed in a way that it will thwart the taxpayers from availing their legally available Input Tax Credit (‘ITC’) as also encourage department authorities in imposing additional restrictions dehors the law.

Through this article the authors aim to explicate the enigma surrounding the Supreme Court Judgement and how the same can be delineated in the current GST regime.

2. Supreme Court Judgment

Purchasing dealers were contesting that since goods were purchased basis genuine invoices and all payments were made through banking channels, obligation casted under section 70 of the Karnataka VAT Act, 2003 (‘KVAT Act’) stood discharged. Section 70 provides that burden of proof is on the purchasing dealer to prove that ITC is correctly availed. The purchasing dealers vehemently argued that there should be an intelligible differentia between those who acted diligently and those who did not. Notably, the said diligent dealers had undertaken adequate precautions by ensuring that their selling dealers were registered and provided valid invoices and payments were made to the selling dealers through banking channel.

On above contentions, the department avowed that sale transaction of the dealers were only paper transactions without actual sale/delivery of goods. It was argued that the burden of proof under Section 70 goes beyond financial transactions and requires actual movement of goods to be established and proven by the purchasing dealers availing ITC.

On these facts, the Assessing Authority denied ITC to purchasing dealers, which was upheld by First Appellate Authority. However, Tribunal reversed the order and High Court also upheld the Tribunal decision. In Department’s appeal, the Supreme Court held that under section 70, the burden to prove correctness of ITC claimed lies on the purchasing dealer, and merely being a bona fide purchaser alone is not sufficient. The purchasing dealer must prove actual receipt of goods beyond doubt. The Court expounded the law by providing an illustrative list of documents inter alia including name and address of the selling dealer, details of the delivery vehicle, payment of freight charges, acknowledgement of receipt of goods, tax invoices, and payment details, as evidence of actual movement of goods. Since purchasing dealers failed to produce any documents beyond invoices and payment records, the Court held that they had not discharged the obligation cast under section 70.

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