High Court Rejects GST Appeal, Orders ₹6.27 Crore Penalty for Fraudulent ITC
High Court Rejects GST Appeal, Orders ₹6.27 Crore Penalty for Fraudulent ITC
Court Dismisses GST Fraud Appeal in R.S. Trading Co. Case
In a significant ruling, the Delhi High Court has dismissed the petition filed by R.S. Trading Co., challenging the imposition of a demand exceeding ₹6.27 crore under the Goods and Services Tax regime. The demand, which was accompanied by penalties and interest, arose due to the fraudulent availment of Input Tax Credit using fake invoices from non-existent suppliers. The Court, while upholding the legal framework surrounding such cases, declined to intervene in the matter under its writ jurisdiction, citing the appealable nature of the impugned order under Section 107 of the Central Goods and Services Tax Act.
Background of the Case
R.S. Trading Co., a company operating under the GST regime, faced a show-cause notice in March 2023, alleging fraudulent activities linked to the availment of ITC. The GST department discovered that the company, along with 17 other fictitious firms, had been part of a larger network of fraudulent tax credits. These fake credits were claimed through transactions involving non-existent suppliers, a clear violation of the GST Act.
The show-cause notice issued to R.S. Trading Co. in March 2023 demanded an amount exceeding ₹6.27 crore, which was sought under Sections 74 and 122 of the CGST Act. The charges related to tax evasion due to the fraudulent issuance of invoices. The investigation revealed that the company’s GST registration was established in July 2019 and the alleged fraudulent activities were confined to the financial years 2019-2020 and 2020-2021.
The Court’s Analysis and Decision
The Delhi High Court, comprising Justices Prathiba M. Singh and Shail Jain, observed that R.S. Trading Co.'s short-lived GST registration raised significant doubts about the company’s intentions. The company’s registration, which lasted only two financial years, was seen as insufficient to justify its existence as a legitimate business entity. This led the Court to infer that the company was likely created with the sole intent of passing on fraudulent ITC, an observation that was central to the Court's dismissal of the writ petition.
Manish Kumar, the proprietor of R.S. Trading Co., had admitted to using brokers for sourcing the fake invoices and stated that he had no direct knowledge of the non-existent suppliers. His admission, along with his arrest under Section 69 of the CGST Act in March 2021 for offences under Section 132, further strengthened the department's case against the company. Following his arrest, the company ceased operations, which reinforced the view that the entity was being used merely as a vehicle for tax evasion.
The petitioner’s argument that a circular issued by the Central Board of Indirect Taxes and Customs in July 2022 on penalty applicability in fake invoice cases should be considered was also rejected. The Court held that such arguments were matters for consideration during appellate proceedings and could not be examined in the writ petition.
Legal Implications and Statutory Remedy
Despite dismissing the petition, the Delhi High Court acknowledged that the petitioner had filed the writ petition within the prescribed limitation period for filing an appeal. As such, the Court allowed R.S. Trading Co. to exercise its right to appeal the impugned order under Section 107 of the CGST Act. The Bench directed that the appeal, if filed within the stipulated time frame, should be adjudicated on its merits and not dismissed as time-barred. The Court also stipulated that the appeal should be subject to the pre-deposit requirements under the Act, with a deadline of 15 December 2025 for the filing of the appeal.
The Delhi High Court’s ruling reaffirms the rigorous legal framework surrounding GST compliance and underscores the importance of maintaining the integrity of the tax system. In cases involving fraudulent tax credit claims, the Court’s decision emphasizes the necessity of following the proper appellate procedures rather than seeking immediate relief through writ petitions. This case serves as a reminder to businesses operating under the GST regime to adhere strictly to the provisions of the Act and avoid engaging in fraudulent practices that undermine the system.
