The Goods and Services Tax Appellate Tribunal (GSTAT), Agra Bench, has held that finding business premises closed and without stock during an inspection cannot, by itself, conclusively establish that the taxpayer’s earlier purchases and sales were fictitious.
The Bench of Ajeet Singh (Judicial Member) and Vivek Kumar (Technical Member) set aside both the adjudicating authority’s order imposing a penalty of ₹44,26,603 and the first appellate authority’s order granting relief to the taxpayer. It remanded the dispute for fresh adjudication after verification of the relevant records and an effective opportunity of personal hearing.
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The bench emphasised that the genuineness of transactions must be determined through a collective examination of evidence. Neither the inspection findings nor the taxpayer’s explanation could independently settle the controversy.
The dispute concerned the financial year 2021–22 and a taxpayer engaged in purchasing and selling iron scrap, plastic scrap and similar goods. The concern had obtained GST registration during the financial year 2019–20.
Officers of the Special Investigation Branch, Unit-B, Agra, inspected its declared principal place of business on February 3, 2022. They found the premises closed, with a “Vacant for Rent” notice displaying two telephone numbers.
A person contacted through one of those numbers, identified as the property owner’s son, informed the inspecting officer that the premises had been rented to the proprietor from October 2, 2019, at a monthly rent of ₹2,500.
He stated that the tenant had vacated the premises approximately two months before the inspection, discontinued business, handed over the keys and returned to Rajasthan.
When the shutter was opened, no goods, stock or scrap were found. A room with a smaller shutter was stated to have previously been used as an office.
Since no other godown or business premises had been declared, the proper officer concluded that the taxpayer had obtained and issued invoices without actual purchases or sales. A penalty of ₹44,26,603 was imposed under Section 122(1) of the applicable GST Act.
The first appellate authority set aside the penalty. The Department challenged that decision before the Tribunal under Section 112(3).
The Department argued that the premises lacked the storage capacity, infrastructure and operational capability required for scrap trading on the scale reflected in the taxpayer’s returns.
It contended that the disclosed transactions were merely paper entries unsupported by actual supplies. According to the Department, basic documents such as transport receipts, delivery challans, weighment slips and stock registers had not been produced to establish the movement, receipt and delivery of goods.
The Department also alleged discrepancies in e-way bills and submitted that the first appellate authority had failed to examine these issues adequately.
The taxpayer maintained that genuine business had operated from the premises before its closure. Counsel relied on the statement obtained during inspection that the tenant had vacated the property approximately two months earlier.
It was submitted that business activities had ceased from December 31, 2021, because the business was not performing satisfactorily. The available stock had allegedly been disposed of before closure, explaining its absence during the subsequent inspection.
The taxpayer also claimed that a horizontal press machine, a cutting machine, tools and other equipment had been installed at the premises, and that their purchase invoices were available.
Counsel further submitted that only one inward supplier had been treated as non-existent and that the amount relating to that transaction had already been deposited. Regarding e-way bills, the taxpayer maintained that the particulars required under Rule 138 had been furnished and that no material irregularity had been established.
The Tribunal identified the principal question as whether genuine purchases and sales had occurred before business closure, or whether the returns merely reflected an exchange of invoices without actual movement or supply of goods.
It observed that the inspection took place after the taxpayer claimed to have discontinued business. The statement obtained during inspection also indicated that the premises had already been vacated.
Consequently, the closed premises, rental notice and absence of stock on the inspection date could not, by themselves, conclusively establish that genuine business had never been conducted during the preceding period.
However, the Tribunal also held that the taxpayer’s assertion that it had traded earlier and disposed of stock before closure was insufficient by itself to establish the genuineness of the transactions.
The inspection findings, absence of another declared godown, alleged inadequacy of infrastructure and doubts about inward and outward supplies required verification against contemporaneous records.
The Tribunal explained that the relevant evidence could include purchase and sales invoices, registers, books of account, stock records, transport receipts, bilty, delivery challans, weighment slips and weighbridge records.
Freight payments, bank statements, payment records and e-way bills also required examination. Evidence concerning machinery installation and use, electricity expenditure, generator facilities, loading and unloading, labour and employees could be relevant wherever applicable.
The Bench clarified that machinery purchase invoices alone would not establish that the disputed trading activities had occurred. The installation, use and operational functioning of the equipment also required verification, having regard to the nature and scale of the business.
Significantly, the Tribunal held that the absence of any one particular document should not automatically be treated as conclusive proof of fictitious transactions. The evidentiary value of the available material had to be assessed collectively.
The Tribunal also examined the reference in the proper officer’s order to suppliers whose registrations had been cancelled.
It directed verification of when those registrations were cancelled, whether the suppliers were registered and operational during the relevant transaction periods, and whether the corresponding supplies had actually occurred.
A supplier’s subsequent registration cancellation would not, by itself, conclusively establish that supplies made during an earlier period were fictitious. The relevant dates, circumstances of cancellation and evidence concerning the transactions had to be considered.
Similarly, alleged e-way bill discrepancies required examination against the corresponding invoices, transportation records and other relevant material.
The Tribunal stressed that a finding of fictitious transactions must rest on an appropriate examination of evidence rather than general suspicion.
The Bench found that the first appellate authority had not adequately verified the books and supporting documents necessary to resolve the dispute. Its decision setting aside the penalty could therefore not be sustained without proper factual verification.
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