FRADULENT AVAILMENT OF INPUT TAX CREDIT

Input tax credit

Section 16 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides for availing and utilising the input tax credit by the taxable person under Section 16 of the Act. The concept of input tax credit is recognised for enabling the business to get input tax on the goods and services which are manufactured/supplied by them in the chain of business transactions. It is an incentive for businesses who need not pay taxes on the inputs, which have already been taxed at the source itself. Section 16 of the Act is business friendly and is meant to enable ease of doing business.

Misuse of section 16

Now it can be seen that the above said facility is misused by the business people. Fake invoices are issued in plenty and input credit is availed and utilised by the individuals, firms, entities and companies to avail the input tax credited. The goods movement is not actual. When the output tax is not deposited or when the entities or individuals who had to deposit the output tax are themselves found to be non-existent. The Department continuously is raiding such misuse but the same is continuing. This will create an enormous dent in the GST regime itself.

Case laws

In Mukesh Kumar Garg Versus Union Of India & Ors. - 2025 (5) TMI 922 - DELHI HIGH COURT, the petitioner and his other family members were alleged to have incorporated or floated various firms and businesses only for the purpose of availing input tax credit without any supply or goods or providing services. The Department made demands and imposed penalties on the petitioners on 30.01.2025. Against the said order the petitioners filed the present writ petition before the High Court. The demand and penalty have been imposed on a larger number of firms, individuals who were connected in the entire episode including the petitioner.

The High Court considered the writ petition. The High Court considered the impugned orders are extremely very serious in nature having maze of transaction that have been carried out between non-existent persons for the purpose of availing and utilising input tax credit. The High Court further observed that the impugned order is an appealable order. Already one of the petitioners filed appeal against the impugned order before the First Appellate Authority. The High Court further observed that the writ jurisdiction cannot be exercised in this petition because it is the settled position that the writ jurisdiction ought not to be exercised by the High Court to support the unscrupulous litigants.

In this case more transactions were entered into. For this purpose a factual analysis is required to be undertaken. The same cannot be decided in the writ jurisdiction. The High Court cannot adjudicate upon or ascertain the factual aspects pertaining to-

• what was the role played by the petitioner;
• whether the penalty imposed is justified or not;
• whether the same requires to be reduced proportionately in terms of the invoices raised by the petitioner under his firm;
• whether the penalty is liable to be imposed under Section 122 (1) and Section 122(3) of the Act.

The High Court held that the petitioner is having alternative remedy available under the Act. Filing writ petitions in such cases will cause the multiplicity of litigations and could also lead to contradictory findings of different Forums, Tribunals and Courts. In view of the above the High Court dismissed the writ petition.

In M/s. Pankaj Polymers Through Its Prop. Pankaj Gupta Versus Commissioner of CGST, Delhi North And Ors. - 2025 (6) TMI 514 - DELHI HIGH COURT, the department issued show cause notices to various registered persons including the petitioner on 03.08.2024. The show cause notice alleged that the noticees were not eligible to avail and utilise the input tax credit on the basis of invoices issued by non-existent firm, i.e, ML Traders, the noticee No. 1 and the petitioner is the noticee No. 5. The recipient of the notices is passed on input tax credit of Rs.1 crore and more. A total number of 1552 tax payers availed such ineligible input tax credit to the tune of Rs.7309 crores. This amount is stated to have been passed on 42406 recipients. The Adjudicating Authority passed an order on 03.02.2025 making demand of tax and also imposed penalty.

Against the order of the Adjudicating Authority the present writ petition was filed before the Delhi High Court. The petitioner contended before the High Court that no show cause notice was issued to the petitioner and no personal hearing was given the petitioner. Without following the principles of Natural Justice the Adjudicating Authority passed the impugned order.

The High Court considered the case and the documents available on record. The High Court observed that all the noticees were connected to Noticee No. 1, ML Traders, who created invoices without supply of goods. The High Court also observed that the Department sent notice for personal hearing to the petitioner. The same has not been served and returned with remarks ‘No such person’. ML traders submitted its reply to the Department. In the reply ML traders submitted that they have filed GSTR – 1 and GSTR – 3B up to January 2021. Their registration certificate was cancelled on 31.01.2021 on the basis of the application filed by ML Traders.

M.L. Traders contended, in their reply, that there was no reason or occasion to remain present at the declared registered premises to receive the summon dated 02.09.2022 after surrender of the GST registration certificate. The investigation done by the Department is not quality oriented. The demand and the penalty have been imposed without examining a single piece of paper but the said order has been issued on the basis of DGARM report.

Another noticee, Guru Dev Electronics also filed reply to the show cause notice. It submitted that the tax amount is very low and in order to avoid confrontation with the Department for the piece of mind the noticee has voluntarily deposited the amount Rs.33,370/- and interest and penalty. The noticee prayed the Adjudicating Authority to drop the show cause notice.

The High Court observed that the main allegations of the noticees that the show cause notice was not property and the personal hearing notice was also not issued despite some filed reply and attended the personal hearing. In regard to the return of notice as unserved with remarks ‘No such person’ the High Court observed that the address of the petitioner in the show cause notice matches with the address mentioned in the writ petition. Therefore, there is no reason to disbelieve the endorsement of postal department.

Therefore, the High Court did not entertain the writ petition. The petitioner is permitted to avail of the appeal remedy with necessary pre deposit. The Appellate Authority shall decide the appeal on merits and not liable to be dismissed on the ground of limitation.