The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru, has restored penalties against an areca nut trader for claiming input tax credit without receiving goods and creating false accounts and documents, holding that the dropping of the tax demand did not invalidate the penalties in the circumstances of the case.
The Bench of Srikanth Venkatraman (Judicial Member) and Sudha Koka (Technical Member) restored penalties under Sections 122(1)(vii) and 122(1)(x) of the Central Goods and Services Tax Act, 2017. It also maintained the appropriation of ₹22,00,400 already paid and the attached bank balances.
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The proceedings originated from an investigation into alleged fake invoicing in the areca nut trade. Scrutiny of returns, invoices and e-way bills led the department to transactions involving invoices without corresponding supplies and the alleged reuse of documents for multiple consignments.
Investigators searched the premises of Unique Trading Co., Sirsi, in November 2020 and found them empty. The investigation also involved the interception of a truck carrying 18,200 kilograms of areca nuts without valid accompanying documents.
The respondent’s proprietor appeared before the authorities in connection with the detained goods. A subsequent search of his firm’s registered premises found no business records or computers belonging to the taxpayer. Transport-related papers and other documents were recovered.
According to the findings recorded in the order, the proprietor made statements under Section 70 admitting to fake invoicing and transactions without actual receipt or supply of goods. His statements also described the use of the same invoices and e-way bills for transporting more than one consignment.
The order records that the taxpayer disclosed sales turnover of approximately ₹85.67 crore for July 2017 to January 2021. More than 99% of the tax liability for 2018-19 and 2019-20, and more than 95% for 2020-21, was discharged through ITC.
The investigation identified ITC of ₹4,28,42,308, comprising IGST of ₹2,87,74,180 and CGST and SGST of ₹70,34,064 each.
The department found that relevant supplier and recipient registrations had been cancelled before the dates of the invoices. Vehicle verification also revealed numbers linked to scooters, tankers, three-wheelers and other vehicles, while several searches returned no vehicle details.
The adjudicating authority concluded that the taxpayer had not furnished credible documents establishing movement of goods or explaining the vehicle discrepancies.
The show cause notice proposed recovery under Section 74, interest and penalties. However, the adjudicating authority dropped the tax demand of ₹4,28,42,308 after finding that the invoices were issued without actual supplies. The related interest demand and penalty under Section 74 were also dropped.
The authority nevertheless imposed penalties under Section 122(1)(vii) for taking and utilising ITC without actual receipt of goods and Section 122(1)(x) for falsified records, fake accounts or documents, or false information furnished with intent to evade tax.
The Commissioner (Appeals) subsequently set aside these penalties, leading to the departmental appeal before GSTAT.
A central issue concerned CBIC Circular No. 171/03/2022-GST dated July 6, 2022, dealing with fake invoice transactions.
The Commissioner (Appeals) had accepted the taxpayer’s contention that the circular contemplated penalties under Sections 122(1)(ii) and 122(1)(vii), making the penalty under Section 122(1)(x) contrary to its clarification.
GSTAT rejected that interpretation.
The Tribunal explained that the circular addresses a situation where a person claims ITC without receiving goods or services and issues invoices without making actual supplies. In that scenario, penal action may follow even where a demand under Sections 73 or 74 is not made.
The Bench held that the circular must be read in its entirety, including its recognition that action depends on the specific facts and circumstances. It did not restrict penalties exclusively to the two clauses mentioned in the illustrative scenario.
A circular could not be interpreted to curtail powers available under the statute. Section 122(1)(x) therefore remained applicable where the evidence established falsification of records or documents, or furnishing of false information with the requisite intent.
The Tribunal found that the adjudicating authority had identified the conduct supporting the penalty under Section 122(1)(x).
It referred to the proprietor’s contradictory explanations, admissions concerning bills without supplies, invoices dated after cancellation of relevant registrations, doubtful vehicle particulars and findings that accounts and GST returns were created without underlying supplies.
The Bench consequently rejected the conclusion that the nature of the offence had not been specified. It held that deletion of the penalty under Section 122(1)(x) was improper and unjustified.
The Tribunal also disagreed with the appellate authority’s insistence on further corroboration of the proprietor’s statements before imposing liability.
Drawing on decisions concerning statements recorded under analogous provisions of customs and excise law, the Bench held that the taxpayer’s own statements under Section 70 could be relied upon.
The appellate authority had not found that the statements were obtained through duress or coercion. The taxpayer had also not retracted them at the earliest opportunity.
GSTAT distinguished cases involving third-party statements or employee-prepared records from the present case, where the proprietor had personal knowledge of the business and had made admissions concerning its operation.
The Bench further observed that the adjudication rested on material beyond the statements, including registration cancellation details, vehicle verification and the absence of documents proving receipt of goods.
Referring to Sections 155 and 16(2)(b) and (c), the Tribunal held that the taxpayer had to establish actual receipt of goods and payment of the relevant tax by suppliers.
The show cause notice had disclosed the department’s evidence concerning cancelled registrations, doubtful vehicle details and invoices without underlying supplies.
The taxpayer failed to produce material establishing the genuineness of the transactions or disproving those allegations. The Tribunal therefore held that deletion of the penalty under Section 122(1)(vii) was invalid and unjustified.
The Commissioner (Appeals) had relied on CBIC Circular No. 64/38/2018-GST dated September 14, 2018, concerning certain minor discrepancies in documents accompanying goods.
GSTAT held that reliance misplaced. It distinguished minor errors in vehicle numbers in detention proceedings from the present dispute, where the existence of the vehicles allegedly used for transportation was itself questioned.
The findings from vehicle verification, coupled with the taxpayer’s failure to explain them with evidence, could not be dismissed by applying the clarification on minor discrepancies.
The Tribunal also rejected reliance on the decision in Gargo Traders concerning retrospective cancellation of a supplier’s registration.
Here, GSTAT found that the material supported cancellation before the invoice dates. The appellate authority’s finding that the registrations had been cancelled retrospectively was unsupported by the record.
The Bench also noted that Gargo Traders involved different circumstances, including payments through banking channels and no allegation of collusion against the purchaser.
The Tribunal criticised the appellate authority’s reliance on purported bank statements and purchase records that had not been produced before the adjudicating authority.
It observed that the document presented as a bank statement was actually a ledger copy. Documents such as weighment slips and toll receipts establishing movement of goods had also not been furnished.
Referring to Rule 112 of the CGST Rules, the Bench held that the appellate authority ought not to have accepted additional material without addressing the requirements governing its admission and recording reasons.
Allowing the Revenue’s appeal, GSTAT set aside the Commissioner (Appeals)’s order dated May 3, 2024, and restored the penalties imposed through the original order dated January 25, 2023.
The appropriation of ₹22,00,400 and the attached bank balances were maintained.
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