Recently, the Madras High Court pronounced a significant judgment in several GST appeals on conspiracy to indulge in circular trading and unaccounted input tax credit transactions. Madras High Court Says Fake ITC Cases Can Attract Full Penalty Equal to Ineligible Credit The Update Mumbai ITAT permitted deduction of bad debts written off by a co-operative bank about NPAs categorized before 1.4.2006.
Recently, the Madras High Court pronounced a significant judgment in several GST appeals on conspiracy to indulge in circular trading and unaccounted input tax credit transactions. The Court upheld orders of assessment by the authorities to impose very high penalty payments under the Section 122 of the GST law. The Court clarified that penalty cannot be directed to be paid at Rs. 10,000 when the law prescribes higher penalty for misuse of ineligible ITC. The said decision has largely aided the Government in pursuing investigations related to fake billing and circular trading.
Key Takeaways
- Recently, the Madras High Court pronounced a significant judgment in several GST appeals on conspiracy to indulge in circular trading and unaccounted input tax credit transactions.
- Madras High Court Says Fake ITC Cases Can Attract Full Penalty Equal to Ineligible Credit The Update Mumbai ITAT permitted deduction of bad debts written off by a co-operative bank about NPAs categorized before 1.4.2006.
- The Court also found out that the expression "whichever is higher" appearing in Section 122 portrays the unambiguous purpose of the legislature to inflict strict financial penal text to ft and circular trading cases.
- Court’s Observations on Circular Trading The High Court did not take kindly to the allegation of false trading wherein the petitioners had minimal genuine business activity by way of circular trading.
- Conclusion The order passed by Madras High Court sends a clear message when it deals with the Issue of contrived ITC and circulation trading while implementing the GST.
Madras High Court Says Fake ITC Cases Can Attract Full Penalty Equal to Ineligible Credit
The Update
Mumbai ITAT permitted deduction of bad debts written off by a co-operative bank about NPAs categorized before 1.4.2006.
The Impact
Now holding that the deduction could be claimed in the year of actual write of if for earlier years where benefits under Sec. 36(1)(viia) was not available.
The Action
Companies must keep real invoices/transport documents/e-way bills and proof of movement of goods to prevent falling subject to strict fake ITC penalties.
Background of the Dispute
This case was comprised of three (writ) petitions filed by the businesses, SAM Enterprises. (PJN), New Life Healthcare Products, Infix Global Healthcare LLP, Sri Sana Enterprises, and Q--Tech Surgical Products. The petitioners challenged assessment orders issued in Form GST DRC-07 for the tax periods 2020-21 to 2024-25.
As per the authorities the enterprises had entered into circular trading arrangements and had wrongly availed or passed fake input tax credit. Section 122(1)(ii) and Section 122(1)(vii) of the GST enactments, forced upon large penalties that ranged up to crores of rupees.
What the Department Alleged?
The department accused the petitioners of doing bill only transactions without movement of goods. The assessment orders stated that the reason for inflating the turn over figures and issuing bogus invoices was only to give themselves the image of a big concern and enhance their financial capabilities, to gaining bank loans.
The orders allegedly revealed that there was circular trading turnover in excess of 98% to 100% of the actual transactions for a number of entities. It was further alleged that invoices and ineligible ITC were circulated amongst the connected entities without actual supply of goods. In some cases the penalty figures applied were indicative of the amount of ineligible ITC that was in fact received or passed on.
Why the Taxpayers Challenged the Penalties?
Taxpayers contended that even if breaches existed, the treatment meted out was too harsh and out of proportion. Their primary contention was that Section 122 should be read that limited penalties to Rs.10,000 and not the sums of money that purportedly represented the fake ITC.
The petitioners placed reliance on Supreme Court decisions on the issue of proportionality in disciplinary and penalty cases. The learned petitioners advanced the argument that penalty must be proportionate to the misconduct and it must not be expanded excessively.
How the Court Interpreted Section 122?
The Madras High Court dismissed the petitioner's submission. The Court noted that Section 122 explicitly states that "a taxable person shall be liable to pay a penalty of Rs.10,000 or an amount equivalent to the tax evaded or ITC wrongly availed, whichever is higher".
In the opinion of the Court, the language constrains authorities from capriciously reducing penalties to Rs.10,000 if the quantum of fake or ineligible ITC involved is Really higher. The Bench decided that, once the statutory conditions are fulfilled, the authorities ought to enforce penalties per the legislation itself.
Why the Rs. 10,000 Argument Failed?
The court struck down any reliance on Supreme Court's earlier judgments in case of proportionate penalties in excise law. It found that the GST law under Section 122 perhaps materially varies from the earlier provisions of excise law.
The Court also found out that the expression "whichever is higher" appearing in Section 122 portrays the unambiguous purpose of the legislature to inflict strict financial penal text to ft and circular trading cases.
The Bench further clarified that, the interpretations of Central Excise Act Section 11AC, cannot be considered as conclusive authority for interpretation of Section 9 penalty provisions of GST Act as the schemes laid therein are totally based on different principles.
Court’s Observations on Circular Trading
The High Court did not take kindly to the allegation of false trading wherein the petitioners had minimal genuine business activity by way of circular trading. What was being claimed was that these records of the assessment mainly revealed that these companies were producing tremendous turnover but not much of the goods. As the details 'such transactions are intended to create a false appearance of business and to give an appearance of commercial integrity'.
The Court observed that these orders had been passed from speaking orders, detailed reasoning, fair and correct application of mind by the assessing authorities. These orders so, could not be treated as arbitrary or procedurally flawed at the writ stage.
What This Ruling Means for Businesses?
This decision greatly enhances the enforcement powers of the government in investigation into fake ITC and circular trading. The judgment clarifies that courts can adopt a more rigorous approach to Section 122 where authorities seek to justify invoice-based trading where there was no real supply of goods.
Businesses prosecuted for fictitious ITC transactions may So struggle to have penalties reduced by claiming proportionality. Another aspect to be considered is the need to keep authentic invoices, transport documents, e-way bills, supplier verification documents, proof of actual movement of goods.
Conclusion
The order passed by Madras High Court sends a clear message when it deals with the Issue of contrived ITC and circulation trading while implementing the GST.
The Court indicated that Section 122 sanctions are manageable for amounts equal to the ineligible ITC, and refused to mitigate the penalties to Rs.10,000. On top of that the decision exemplifies the courts' growing reluctance to directly intervene in issues related to GST assessment where those issues involve complex factual allegations and appellate remedies are available under GST law.
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Madras High Court Refuses Relief in Circular Trading and Fake ITC Penalty Cases+
Recently, the Madras High Court pronounced a significant judgment in several GST appeals on conspiracy to indulge in circular trading and unaccounted input tax credit transactions. Madras High Court Says Fake ITC Cases Can Attract Full Penalty Equal to Ineligible Credit The Update Mumbai ITAT permitted deduction of bad debts written off by a co-operative bank about NPAs categorized before 1.4.2006.