Allahabad High Court Ruling: Department Can Recover ITC from Non-Existent and Bogus Firms

In a pivotal judgment, the Allahabad High Court has ruled that the tax department is entitled to recover Input Tax Credit (ITC) claimed from non-existent and bogus firms. This decisive ruling in the case of Rajshi Processors Raebareli vs. State of U.P. emphasizes the strict compliance requirements under the Goods and Services Tax (GST) regime and underscores the necessity of actual receipt of goods for validating ITC claims.

 

Case Summary: Rajshi Processors Raebareli vs. State of U.P.

Rajshi Processors Raebareli, a company involved in manufacturing and selling Aluminum Casting & Machinery Parts, faced scrutiny following a survey by the Special Investigation Branch. The investigation uncovered that the petitioner claimed ITC based on transactions with three firms—Ridhi Sidhi Enterprises, Siddhartha Trading Company, and Satvik Enterprises—that were later found to be non-existent. This led to the imposition of tax liability and penalties by the authorities, which were subsequently upheld by the appellate authority.

 

Key Findings and Legal Arguments

1. Survey and Evidence: The survey revealed that Rajshi Processors had fraudulently claimed ITC amounting to Rs. 10,12,491 based on fake invoices from non-existent firms without any actual supply of goods.

2. Petitioner’s Defense: The petitioner argued that they had received inward supplies, supported by necessary documentation. They contended that the subsequent cancellation of the supplier firms' GST registrations should not affect their ITC claims.

3. GST Act Provisions: The petitioner referred to Section 16(2) of the GST Act, outlining the conditions for availing ITC, and Rule 36 of the GST Rules, 2007, which deals with documentary requirements for claiming ITC.

 

Court’s Analysis and Conclusion

The court’s analysis highlighted the stringent requirements for ITC claims:

• Actual Receipt of Goods: Under Section 16(2)(b) of the GST Act, ITC can only be claimed if the registered person has actually received the goods. Merely possessing invoices or other documents is insufficient.

• Existence of Supplier Firms: Despite the suppliers having valid GST registrations at the time of the transactions, the investigation revealed that the firms were non-existent. This made the petitioner’s claim of receiving goods from these firms fraudulent.

• Fraudulent Transactions: The evidence supported the conclusion that the transactions were fabricated to claim undue ITC.

 

Implications of the Judgment

The Allahabad High Court’s decision reinforces the importance of GST compliance, particularly regarding the actual receipt of goods and the legitimacy of supplier firms. This ruling serves as a stern warning against fraudulent practices and highlights several key points:

• Due Diligence: Businesses must conduct thorough due diligence on their suppliers to ensure their legitimacy and compliance with GST laws.

• Strict Compliance: Proper adherence to GST laws is crucial to avoid penalties and recoveries by tax authorities.

• Verification of Transactions: Possessing documentation alone is not enough; there must be verifiable evidence of actual business transactions.

 

The Allahabad High Court’s ruling is a crucial step in maintaining the integrity of the GST system in India. By upholding the tax department’s right to recover ITC from non-existent and bogus firms, the court has set a precedent emphasizing the need for genuine business transactions and strict compliance with GST regulations. This judgment will likely prompt businesses to be more vigilant and ensure their ITC claims are backed by actual, verifiable transactions.

 

To Read The Complete Judgment:  Click  Here