2025 (5) TMI 1116 - HC - GST

Disallowance of Input Tax Credit (ITC) - purchase of Superior Kerosene Oil (SK Oil) for distribution under the Public Distribution System (PDS) - ex parte assessment order passed under Section 73 of the CGST Act without affording the petitioner an opportunity to produce books of accounts and substantiate the ITC claim - Violation of principles of natural justice - HELD THAT - In the instant case there is no allegation of suppression. It is the input tax credit claimed in the returns in respect of tax paid under the Central Goods and Services Tax Act 2017/the Odisha Goods and Services Tax Act 2017 (GST Act) on receipt/purchase of Superior Kerosene Oil from IOCL- supplier at the price fixed by the supplier as against sale/supply/distribution thereof under the PDS at the price fixed by the Government has been disallowed in the assessment. On perusal of Section 16 of the GST Act it is clear that every registered taxable person can claim the benefit of ITC only on fulfilment of certain conditions as enumerated thereunder. Sub-section (1) of Section 16 deals with the eligibility of a registered person to avail of ITC on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business and the said amount is to be credited to the electronic credit ledger of such person. The conditions enabling such benefit are available in said section. The existence of a tax invoice or debit note issued by the supplier proof of receipt of goods or services or both and the tax charged in respect of such supply having been actually paid to the Government either in cash or through utilization of ITC admissible in respect of the said supply. The said conditions are to be satisfied together and not separately or in isolation and these are the conditions and restrictions which would regulate the availment of ITC. Input tax credit by the very nomenclature contemplates a credit being available for the purchaser-registered person in its credit ledger by way of payment of tax by the supplier to the Government. In State of Karnataka Vrs Ecom Gill Coffee Trading Private Limited 2023 (3) TMI 533 - SUPREME COURT the assessee was saddled with the burden of proving inter alia any claim to ITC under the Act. The registered taxable person who claims input tax credit has to prove beyond doubt the actual transaction by furnishing the name and address of the supplier details of the vehicle delivering the goods payment of freight charges acknowledgment of taking delivery of goods tax invoices and payment particulars etc. It was also held that to sustain a claim of input tax credit on purchases the recipient would have to prove and establish the actual physical movement of the goods and genuineness of transactions by furnishing the details referred to above and mere production of tax invoices would not be sufficient to claim ITC. Thus the primary responsibility of claiming the benefit is upon the person claiming the benefit and he is required to lead evidence to prove and establish the actual physical movement of goods genuineness of transactions etc. and if such person fails to prove the actual physical movement of goods the benefit cannot be granted. The mechanism for claiming ITC has been introduced in the tax regime all over the country for the purpose of avoiding the cascading effect of taxes. The benefit of such credit being availed by a registered person who sells/supplies or manufactures goods using raw materials on which tax has been paid is a benefit or concession conferred under the statute. The condition under which the concession and benefit is given is always to be strictly construed. The GST statute contains self-contained scheme of levy computation and collection of tax. The time under which a return is to be filed for purpose of assessment of the tax cannot be dependent on the will of a taxable person. Diligent scrutiny of materials available on record indicates that the petitioner did not have proper opportunity to substantiate his claim made in the return vis- -vis books of accounts. Therefore this Court is of the considered view that the petitioner is entitled to one opportunity before the Assessing Authority. Conclusion - The assessment order disallowing ITC and raising demand interest and penalty is unsustainable in the absence of proper verification and opportunity to the petitioner. The impugned ex parte assessment order dated 28.08.2024 framed under Section 73 of the GST Act by the Assistant Commissioner GST Central Excise Cuttack-I Division Cuttack is hereby set aside - Petition disposed off.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the Assessing Authority was justified in disallowing the input tax credit (ITC) claimed by the petitioner on the purchase of Superior Kerosene Oil (SK Oil) for distribution under the Public Distribution System (PDS), thereby raising a demand for tax, interest, and penalty under the Central Goods and Services Tax Act, 2017 (CGST Act).

2. Whether the ex parte assessment order passed under Section 73 of the CGST Act, without affording the petitioner an opportunity to produce books of accounts and substantiate the ITC claim, was legally sustainable.

3. Whether the petitioner, being authorized to deal exclusively in SK Oil supplied by a single supplier (Indian Oil Corporation Limited - IOCL) at government-fixed prices, was entitled to the ITC claimed and whether the disallowance was justified on the basis of alleged mismatch in returns.

4. The scope and extent of the burden of proof on the petitioner to establish genuineness of ITC claims under the GST regime, and the procedural fairness required in assessment proceedings.

Issue-wise Detailed Analysis

Issue 1: Justification for Disallowance of Input Tax Credit and Demand of Tax, Interest, and Penalty

The relevant legal framework is the CGST Act, 2017, particularly Section 16 which governs eligibility and conditions for availing ITC, Section 73 which deals with determination of tax not paid or short paid, and Section 122 which prescribes penalties for contraventions.

The petitioner, a wholesaler authorized under the Odisha Public Distribution System (PDS) Control Order to deal exclusively in SK Oil, claimed ITC on tax paid on purchases from IOCL, the sole supplier. The Assessing Authority disallowed the entire ITC claim on the ground of mismatch in returns and absence of documentary evidence, and proceeded to raise a demand of Rs.42,45,522/- along with interest and penalty by an ex parte order under Section 73.

The Court noted that the assessment order did not contain any material evidence or findings indicating that the petitioner had purchased SK Oil from any source other than IOCL or sold it outside the PDS at prices other than those fixed by the Government. The petitioner's transactions were under strict governmental supervision and involved a fixed price regime, which inherently limits the possibility of tax evasion or misreporting.

Precedents cited include a Division Bench decision emphasizing that statutory authorities have a duty to apply relevant provisions to ascertain the true tax liability and cannot rely solely on non-disclosure or mismatch to deny benefits (Kiran Stone Crusher case). The Supreme Court's ruling in Commissioner of Income-tax, Delhi v. Mahalaxmi Sugar Mills Co. Ltd. was also relied upon to highlight the obligation of tax authorities to apply the law correctly and not deny benefits solely on procedural lapses.

The Court observed that the ITC mechanism is designed to avoid cascading taxation and is subject to strict conditions under Section 16 of the CGST Act, including possession of a tax invoice, receipt of goods, and payment of tax by the supplier. The petitioner's claim satisfied these conditions on the face of the record, given the single supplier arrangement and fixed pricing.

Further, the Court referred to the recent Supreme Court authority in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd., which clarified that the burden to prove the genuineness of ITC claims lies on the claimant, who must furnish comprehensive evidence such as supplier details, delivery proofs, and payment particulars. However, no adverse finding was recorded against the petitioner regarding such proof, nor was an opportunity given to produce such evidence.

In sum, the Court found that the Assessing Authority's disallowance of ITC was not supported by substantive evidence and was based on an ex parte order without proper verification of returns or documents.

Issue 2: Validity of Ex Parte Assessment Without Affording Opportunity to Produce Books of Accounts

The petitioner contended that the Assessing Authority had allotted dates for personal hearing on three occasions, but due to unavoidable circumstances, neither the petitioner nor his representative could appear. Despite this, the Authority proceeded ex parte and disallowed the ITC claim.

The Court emphasized the principles of natural justice and procedural fairness inherent in tax assessment proceedings. It held that the petitioner was entitled to an opportunity to substantiate the ITC claim by producing books of accounts and other relevant documents, especially since the claim related to a single commodity supplied by a single source under strict governmental control.

The Court noted that the Assessing Authority did not appear to have utilized available portal data or verified returns with accessible evidence before passing the ex parte order. This procedural lapse rendered the assessment order unsustainable.

Therefore, the Court set aside the impugned ex parte order and directed the Assessing Authority to grant the petitioner a fresh opportunity for de novo assessment in accordance with law, ensuring compliance with principles of natural justice.

Issue 3: Entitlement to ITC Given the Nature of Transactions and Regulatory Framework

The petitioner's transactions involved the purchase of SK Oil from IOCL at a fixed price and distribution under PDS at government-fixed prices. The petitioner was not authorized to purchase from any other source or alter the sale price.

The Court found no evidence that the petitioner deviated from this regulatory framework. The fixed price regime and sole supplier arrangement facilitated verification of the genuineness of ITC claims. The Court reasoned that the ITC claimed should not have been disallowed on the basis of alleged mismatch in returns without proper verification.

The Court reiterated that ITC is a concession under the GST law to avoid cascading taxes and is subject to strict compliance with conditions under Section 16. Since the petitioner's purchases were from a registered supplier who charged tax and the goods were used in the course of business, the petitioner prima facie satisfied the conditions for ITC.

Issue 4: Burden of Proof and Treatment of Competing Arguments

The Assessing Authority argued that the petitioner failed to substantiate the ITC claim and did not avail the opportunity to be heard, justifying the ex parte assessment and disallowance of ITC.

The petitioner argued that the claim was genuine, supported by returns filed, and that the Authority did not verify available data or provide adequate opportunity to produce evidence.

The Court balanced these arguments by underscoring the petitioner's burden to prove ITC claims but also the Authority's duty to verify claims using available data and to afford procedural fairness. The Court found that the Authority's failure to verify returns and to provide a meaningful opportunity to the petitioner undermined the assessment order.

The Court concluded that the petitioner should be given one chance to produce books of accounts and substantiate the ITC claim, failing which the assessment order would stand.

Significant Holdings

"The petitioner is entitled to one opportunity before the Assessing Authority to substantiate his claim of input tax credit made in the returns."

"The impugned ex parte assessment order dated 28.08.2024 framed under Section 73 of the GST Act by the Assistant Commissioner, GST & Central Excise, Cuttack-I Division, Cuttack is hereby set aside."

"There is no material on record to show that the petitioner had purchased or received the said commodity other than from Indian Oil Corporation Limited and sold/supplied/distributed goods to consumers other than the entitled persons under the PDS."

"The benefit of concession in the form of input tax credit under the tax statute can be availed only on fulfilment of certain conditions or restrictions as stipulated under the Act."

"The Assessing Authority is required to verify the returns and claims available on the portal and cannot proceed to disallow ITC on the specious plea of mismatch without proper verification and opportunity to the petitioner."

"The mechanism for claiming ITC has been introduced to avoid cascading effect of taxes and the conditions under which such concession is given are to be strictly construed."

"Failure to avail personal hearing opportunities does not justify denial of the right to produce documentary evidence, especially when the assessment order is passed ex parte."

In conclusion, the Court held that the assessment order disallowing ITC and raising demand, interest, and penalty was unsustainable in the absence of proper verification and opportunity to the petitioner. The order was set aside, and the matter was remanded for de novo assessment with directions to afford the petitioner an opportunity to produce evidence and substantiate the ITC claim. The Court clarified that if the petitioner fails to comply with the directions, the original assessment order shall be given effect to. This ruling underscores the necessity of procedural fairness and evidentiary verification in GST assessments involving ITC claims, particularly in cases involving regulated commodities supplied by a single source under government control.