Karnataka High Court on Fake Invoices and Input Tax Credit: Penalty Sustainably Restored

Background of the Dispute

This matter concerns M/s. Bhavani Enterprises (assessee), based in Bangalore, which approached the Karnataka High Court under Section 66 of the Karnataka Value Added Tax Act, 2003 (KVAT Act). The challenge was directed against a revisional order dated 26.03.2012 issued by the Additional Commissioner of Commercial Taxes, Zone III, Bangalore.

The revisional order had revived a penalty under Section 70(2)(a) of the KVAT Act. That penalty was originally imposed by the Assessing Authority on 30.04.2009, but later cancelled by the first Appellate Authority on 23.10.2009. The Revisional Authority overturned the Appellate Authority’s relief and reinstated the penalty, leading to the present appeal before the High Court.

The central allegation was that the assessee had claimed input tax credit (ITC) on the strength of fake tax invoices issued in the names of non-existent selling dealers.

Chronology of Proceedings

Assessment Stage

  • The Assessing Authority examined the ITC claims of M/s. Bhavani Enterprises.
  • It was noticed that the assessee had availed ITC based on invoices purportedly issued by several registered dealers.
  • On investigation, the Commercial Taxes Department found that those so-called selling dealers were not carrying on any business at the registered addresses.
  • The investigation revealed that the dealers were essentially name-lenders or bill traders, used to generate invoices without actual supply of goods.
  • Based on these findings, the Assessing Authority:
    • Disallowed the ITC claimed by the assessee, and
    • Levied a penalty under Section 70(2)(a) of the KVAT Act by order dated 30.04.2009.

First Appeal

The assessee carried the matter in appeal before the Joint Commissioner of Commercial Taxes [Appeals]-3, Bangalore (first Appellate Authority).

The first Appellate Authority:

  • Accepted the finding that the ITC was not allowable, holding that purchases were supported by false invoices.
  • However, it deleted the penalty under Section 70(2) on the reasoning that:
    • The burden lay on the Department to establish the circumstances justifying penal action.
    • Reliance on statements from suppliers who were themselves engaged in bill trading and fraudulent activities was questionable.
    • In the given facts, the penal provision under Section 70(2) allegedly did not withstand judicial scrutiny.

Revisional Proceedings

The Additional Commissioner of Commercial Taxes invoked revisional jurisdiction and examined the first Appellate Authority’s decision.

After considering the record and the assessee’s objections, the Revisional Authority:

  • Noted that once the Appellate Authority itself had held that:

    • The purchase invoices were false, and
    • The ITC claim was incorrect,
      the logical consequence was that Section 70(2)(a) would automatically be triggered.

  • Observed that in similar factual situations, penalties under Section 70(2)(a) had previously been set aside by the Appellate Authority but were restored in revision and subsequently upheld by the Karnataka High Court.

  • Relied specifically on the Division Bench decision in:

    Microqual Techno Private Limited Vs. Additional Commissioner of Commercial Taxes, Zone 1, Bangalore [(2012) 52 VST 362 (Karn)]

  • Following this binding precedent, the Revisional Authority passed an order dated 26.03.2012, whereby:

    • The Appellate Authority’s order dated 23.10.2009, to the extent it deleted the penalty, was set aside.
    • The penalty as originally imposed by the Assessing Authority on 30.04.2009 was restored.

High Court Appeal under Section 66

Aggrieved, the assessee invoked Section 66 of the KVAT Act, which provides for appeal to the High Court against revisional orders (read with Section 65, whose sub-sections (6) and (12) apply mutatis mutandis to such appeals).

The High Court was called upon to decide whether any substantial question of law arose from the revisional order.

Assessee’s Contentions

Counsel for the assessee, Mr. Atul K. Alur, advanced the following key arguments before the Karnataka High Court:

  1. Bona fide Purchaser Argument
    • The assessee claimed to be a genuine purchasing dealer who had entered into transactions in the ordinary course of business.
    • It was contended that the assessee had no knowledge that the invoices were fake or that the suppliers were non-existent.