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

Civil Appeal · 2023 INSC 212Decided 13 Mar 2023
Civil Appeal No. 230 of 2023
M.R. Shah · C.T. Ravikumar

Background

Several traders (including Ecom Gill Coffee Trading, which bought green coffee beans, and other purchasing dealers who bought readymade garments) claimed Input Tax Credit (ITC), a tax rebate for tax already paid on goods bought for resale, under the Karnataka VAT Act. Tax authorities disallowed the ITC after finding that many of the sellers involved were deregistered, had filed "NIL" returns, or had denied making the sales at all, suggesting the transactions may not have been genuine. The traders argued they had done nothing wrong because they held valid invoices and had paid by cheque, and the appellate tribunal and the Karnataka High Court agreed with them, restoring the ITC. The State of Karnataka then appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that Section 70 of the KVAT Act places the burden of proving an ITC claim squarely on the purchasing dealer, and that this burden does not shift to the tax department merely because invoices exist. The Court ruled that producing a tax invoice or showing payment by cheque is not, by itself, sufficient proof of a genuine purchase: a buyer must also show the actual physical movement of goods, such as the seller's details, transport/vehicle records, freight payment, and proof of taking delivery. Since none of the dealers in this batch of cases had produced this additional evidence, and the tax officer's doubts about the sellers (deregistered, non-filing, or denying the sale) were well-founded, the Court held the ITC claims were rightly rejected at the first stage. It set aside the High Court and tribunal orders and restored the original denial of ITC by the assessing officer.

Lesson Learnt

A business claiming input tax credit cannot rely only on an invoice and a cheque payment. It must be able to prove that goods genuinely and physically moved from seller to buyer, since the law places the full burden of proving a transaction's genuineness on the party claiming the tax benefit.

Official source (sci.gov.in)View Judgment (PDF)

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