Stox N Tax

Burden of Proof in Case of Input Tax Credit (ITC)

Introduction

The concept of the burden of proof is a fundamental principle in taxation, particularly in the realm of Goods and Services Tax (GST) in India. The burden of proof determines who is responsible for providing evidence to substantiate a claim or defense.

Under Section 155 of the CGST Act, 2017, the responsibility to prove the eligibility of Input Tax Credit (ITC) rests solely with the taxpayer. This principle has been reinforced by various judicial pronouncements and departmental clarifications, making it a crucial compliance aspect for businesses availing ITC.

This article delves into the statutory provisions, judicial interpretations, practical challenges, and compliance best practices regarding the burden of proof in ITC claims.

Statutory Framework: Section 155 of the CGST Act

Legal Provision

Section 155 of the CGST Act, 2017, states:

“Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”

Implications

This provision clearly places the responsibility on the claimant (taxpayer) to prove that ITC has been rightfully availed. The taxpayer must ensure that:

  • Proper documentation is maintained, including valid invoices, receipts, and agreements.
  • The supplier has complied with GST obligations, including timely filing of returns and payment of tax.
  • Reconciliations are done periodically between GSTR-2A, GSTR-3B, and books of accounts.

Failure to provide adequate proof can result in denial of ITC, interest liabilities, and penalties.

Judicial Interpretations on Burden of Proof

1. Supreme Court: Karnataka vs. ECOM Gill Coffee Trading Pvt. Ltd. (C.A. Nos. 216-217 of 2023)

  • The Supreme Court held that the burden of proving the correctness of ITC lies entirely with the taxpayer.
  • This burden cannot be shifted to the tax authorities, meaning taxpayers must proactively verify supplier compliance before availing ITC​.

2. Sanchita Kundu vs. The Assistant Commissioner of State Tax (Calcutta HC, 2022)

  • The petitioners were denied ITC because their suppliers’ GST registrations were retrospectively canceled.
  • The court held that purchasers who conducted due diligence should not be penalized for later supplier defaults​.

3. Gargo Traders vs. Joint Commissioner of Commercial Taxes (Calcutta HC, 2023)

  • ITC was denied on the grounds that suppliers were non-existent and had opened bank accounts with fake documents.
  • The court ruled that the taxpayer had performed due diligence, including verifying the supplier’s GST registration on the government portal at the time of the transaction.
  • The authorities were directed to reconsider the ITC claim in light of proper documentation​.

4. LGW Industries Limited vs. Union of India (Calcutta HC, 2021)

  • The department denied ITC for purchases from suppliers whose registrations were retrospectively canceled.
  • The court ruled that genuine transactions with valid tax invoices cannot be denied ITC simply due to retrospective cancellation of the seller’s registration​.

Challenges for Taxpayers

1. Supplier Non-Compliance

  • If a supplier fails to file GSTR-1 or GSTR-3B, the recipient’s ITC claim may be rejected.
  • Many businesses struggle to ensure supplier compliance, especially in B2B transactions with multiple vendors.

2. Retrospective Cancellation of Supplier Registration

  • Courts have ruled that ITC cannot be denied if the transaction was genuine and the supplier was registered at the time.
  • However, tax officers often disallow ITC without considering these legal precedents.

3. Mismatch in GSTR-2A and GSTR-3B

  • The government reconciles ITC claims with suppliers’ GSTR-1 filings.
  • If there is a discrepancy between GSTR-2A (auto-populated) and GSTR-3B (self-declared), ITC may be denied.

4. Burden of Proof on Buyers Instead of Sellers

  • Authorities often target buyers instead of going after non-compliant sellers.
  • Courts have held that the department should first recover tax from the defaulting supplier before denying ITC to the buyer.

Best Practices for Ensuring ITC Compliance

  1. Vendor Due Diligence
    • Verify GST registration of suppliers on the GST portal.
    • Ensure suppliers file GSTR-1 and GSTR-3B on time.
  2. Maintain Proper Documentation
    • Preserve tax invoices, e-way bills, purchase orders, and payment proofs.
    • Perform regular reconciliations between GSTR-2A, GSTR-3B, and books of accounts.
  3. Monitor Supplier Compliance
    • Request GST compliance certificates from vendors.
    • Conduct periodic audits of major suppliers.
  4. Timely Reconciliation of ITC
    • Match ITC in GSTR-2A and purchase registers to avoid discrepancies.
    • Rectify mismatches before GST return filing deadlines.
  5. Legal Action in Case of Disputes
    • In case of ITC denial, challenge it through a GST appeal.
    • Refer to relevant judicial rulings to strengthen the case.

Conclusion

The burden of proof in ITC claims firmly rests on the taxpayer, as per Section 155 of the CGST Act. With increasing scrutiny by tax authorities, businesses must take proactive steps to ensure supplier compliance, maintain robust documentation, and perform timely reconciliations.

Recent judicial precedents indicate that ITC should not be denied solely due to supplier defaults, provided the buyer has acted in good faith. However, taxpayers must stay vigilant and follow best practices to safeguard their ITC claims.

By adhering to strong internal controls, legal awareness, and diligent record-keeping, businesses can mitigate risks and optimize their GST compliance strategy.

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