Madras High Court Holds ITC Claim Based On Fabricated Agreement Invalid, Upholds GST Demand

The Madras High Court on 30 June held that input tax credit (ITC) cannot be claimed on the basis of a fabricated contractual arrangement, where the agreement and supporting invoices do not establish a genuine business transaction.

Justice Senthilkumar Ramamoorthy dismissed two writ petitions filed by a proprietorship challenging GST assessment orders for financial years 2022-23 and 2023-24, thereby upholding the demand of tax, interest and penalty confirmed under Section 74 of the GST enactments (relating to tax not paid or short paid due to fraud, wilful misstatement or suppression of facts). He observed:

"Learned counsel for the petitioner is unable to controvert the above findings. In these circumstances, I find no infirmity in the orders impugned herein warranting interference in exercise of discretionary jurisdiction."

The petitioner had claimed ITC on services allegedly received from Rathod Enterprise for its event management business.

It challenged the assessment orders and sought an opportunity to produce additional documents, while also submitting that a substantial portion of the tax demand had already been recovered. The State opposed the petitions, contending that the petitioner's reply had been duly considered and that the assessment orders were based on detailed factual findings.

Tax authorities had found several discrepancies in the agreement relied upon by the petitioner. The agreement dated 23 December 2022 was executed on stamp paper purchased only on 4 May 2023. The stamp vendor had also confirmed that the stamp paper was not sold by her and had been stolen.

They further found that the original agreement had not been produced and that the invoices relied upon for claiming ITC were issued after cancellation of the supplier's GST registration. Based on these findings, the authorities concluded that the contractual arrangement was fabricated and that there was no genuine business transaction between the parties.

The Court observed that the petitioner was unable to controvert these factual findings. It also found no ground for interference under its writ jurisdiction. 

Accordingly, the High Court dismissed both petitions and upheld the GST demand, interest and penalty.

For Petitioner: Mr.Suresh T and Monisha S, Advocates 

For Respondent: Ms.Amirta Poonkodi Dinakaran, Government Counsel (T)