Representation to Protect Bona Fide Taxable Buyers in Karnataka from Adverse GST Action Based on Retrospective Cancellation, Non-Speaking AI/Generic Reports, and Mechanical Invocation of Section 74
OPEN DRAFT REPRESENTATION
To
The Commissioner of Commercial Taxes
Government of Karnataka
Vanijya Therige Karyalaya, Bengaluru
Subject: Representation seeking administrative safeguards for bona fide taxable buyers in Karnataka against wrongful ITC reversal, retrospective cancellation-based demands, non-speaking notices founded on unverifiable reports, and mechanical invocation of Section 74 in mismatch matters.
Respected Sir,
I write this representation in the larger interest of trade, tax administration, and the principles of natural justice on behalf of bona fide taxable buyers and compliant business persons across Karnataka. The object of this representation is not to protect non-genuine transactions, but to request fair and legally sustainable administrative measures so that honest purchasers are not penalised for the default, disappearance, or later non-compliance of third-party suppliers without proper enquiry and tangible material.
Across the State, notices are being issued proposing reversal of input tax credit and demand of tax, interest, and penalty against purchasing dealers on grounds such as retrospective cancellation of the supplier’s registration, non-existence of the supplier at a later point of time, mismatch reports mechanically generated without disclosure of underlying material, and broad allegations that appear to rest more on generic system outputs than on legally admissible evidence. In several cases, the purchasing dealer is not confronted with the documents, field report, statement, inspection material, or verification basis relied upon, and yet is asked to reverse ITC or face proceedings under Section 74. Such an approach causes grave hardship to genuine business persons and undermines faith in fair tax administration.
A further concern now troubling taxpayers is the recent issuance of notices referring to mismatch between details reflected in Form 26AS under the Income-tax law and B2B outward supplies reflected in GSTR-1 for FY 2020-21, and the consequent attempt to invoke Section 74 on the ground that Section 73 has become time-barred. With great respect, limitation under one provision cannot be overcome by mechanically shifting the matter into the fraud provision unless the notice itself discloses clear foundational allegations of fraud, wilful misstatement, or suppression of facts supported by material particulars. A return mismatch or data discrepancy, by itself, cannot automatically become a fraud case.
It is therefore humbly submitted that the Department may kindly issue suitable administrative instructions for the protection of bona fide buyers and for ensuring legally sound adjudication throughout Karnataka.
Legal position
The available judicial trend supports two parallel principles. First, a bona fide purchaser should not be denied credit merely because of supplier default, especially where the purchasing dealer satisfies statutory conditions and there is no material showing collusion or sham dealing. Recent High Court reporting reflects this approach, including cases emphasizing that ITC cannot be denied to a bona fide purchaser merely because the supplier failed to deposit tax, and that before denying ITC the buyer must be given an opportunity to establish bona fides through documents.
Second, the Supreme Court in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. has made it clear that mere invoice production and banking payment are not always enough; the purchasing dealer bears the burden to prove genuineness of the transaction and actual movement of goods through supporting material such as seller details, transport particulars, freight, delivery acknowledgement, and other corroborative evidence. That judgment was under KVAT, but its reasoning on burden of proof is highly relevant to GST disputes, especially because Section 155 of the CGST Act also places the burden on the person claiming ITC.
Accordingly, the correct legal balance is this: bona fide buyers deserve protection from arbitrary reversal, but they must be given an effective opportunity to prove genuineness with all available business records before adverse action is taken. Administrative fairness lies not in automatic credit allowance, and equally not in automatic credit denial.
On the issue of retrospective cancellation, courts have also intervened where demands were founded on cancellation orders later found unsustainable, or where buyers were not granted hearing and their documents were not examined. This supports a representation that retrospective cancellation should never be treated as conclusive against the purchaser without separate examination of the buyer’s documents and conduct.
On the issue of Section 74, the Delhi High Court has expressly doubted how Section 74 can be attracted on a mere mismatch between GSTR-3B and GSTR-1, noting that the provision applies only where fraud, wilful misstatement, or suppression of facts is made out. That principle is directly relevant where the Department seeks to reopen old mismatch issues merely because the normal-period provision is no longer available.
Difficulties faced by taxpayers
The practical hardship faced by honest dealers in Karnataka may be summarised as follows:
The buyer purchases goods from a supplier whose registration is active on the date of transaction, tax invoice is issued, goods are received, and payment is made through banking channels; later, the supplier defaults or disappears, and the buyer is asked to reverse ITC.
Notices often refer to non-existing supplier reports, local verification, intelligence inputs, or system-generated analysis, but copies of the relied-upon material are not furnished to the notice.
In some matters, generic or templated allegations are made without linking the buyer to any collusion, circular trading, fake invoicing chain, or movement failure.
Mismatch notices for old years are being pressed under Section 74 even where the dispute is only one of reconciliation between data sets like 26AS, books, GSTR-1, and other returns, without specific allegation of fraud.
Field-level insistence is sometimes made for immediate ITC reversal by the buyer merely because the third party is unavailable, despite the buyer holding purchase records and requesting a proper hearing.
Administrative measures requested
In the interest of justice and better compliance, the following measures are respectfully suggested for consideration and circulation to all officers in Karnataka:
No ITC reversal solely on retrospective cancellation: A supplier’s retrospective cancellation should not, by itself, lead to automatic denial of ITC to the purchaser; the buyer’s documents, conduct, and evidence of receipt of goods must be independently examined.
Mandatory disclosure of relied-upon material: No adverse order should be passed on the basis of inspection report, intelligence input, AI/system report, field verification, third-party statement, or non-existence report unless the material relied upon is furnished to the taxpayer with adequate opportunity to rebut. This is a basic requirement of natural justice.
Opportunity to prove bona fides: Before denial of ITC, the buyer should be permitted to produce tax invoices, e-way bills, lorry receipts, weighment slips, goods inward register, stock register, payment proof, delivery acknowledgments, purchase orders, correspondence, and any other records showing actual receipt and use of goods. This aligns with the documentary burden highlighted by the Supreme Court in Ecom Gill.
Section 74 only where fraud is pleaded with particulars: Section 74 should not be invoked merely because Section 73 is time-barred. The notice should clearly specify the precise act of fraud, wilful misstatement, or suppression, the role of the notice, and the material supporting that allegation.
Separate treatment for 26AS vs GST mismatches: Mismatch between Income-tax data and GST data for FY 2020-21 should first be treated as a reconciliation issue. Differences may arise because of accounting method, TDS timing, credit notes, advances, gross receipts versus taxable value, inclusion of exempt or non-GST components, and other classification issues. Such cases should not automatically be equated with tax evasion.
Speaking orders only: Any order denying ITC or confirming demand should specifically record what document was produced by the taxpayer, what defect was found in it, whether movement of goods was disproved, and what material establishes fraud or collusion, if alleged. Non-speaking orders should be avoided.
Action against actual defaulters first: Where the selling dealer collected tax and failed to remit it, recovery should primarily target the defaulting supplier unless the purchaser’s complicity is shown by evidence. This distinction between defaulting seller and genuine buyer is reflected in the broader judicial approach protecting bona fide purchasers absent collusion.
State-level SOP for verification: A uniform standard operating procedure may be issued for ITC denial cases, especially where supplier is non-traceable or registration stands cancelled retrospectively, so that inconsistent field practices across Karnataka are reduced. This would improve both fairness and compliance.
Suggested paragraph on recent Section 74 notices
With reference to recent notices relating to mismatch between Form 26AS under the Income-tax law and B2B details reflected in GSTR-1 for FY 2020-21, it is respectfully submitted that such discrepancies require factual reconciliation and cannot automatically justify proceedings under Section 74. The legal threshold for Section 74 is fraud, wilful misstatement, or suppression of facts, and courts have already expressed doubt about invoking that provision for mere return mismatch cases without such allegations. Where the normal period under Section 73 is no longer available, that circumstance alone cannot convert a reconciliation dispute into a fraud case.
Suggested prayer
In these circumstances, it is humbly prayed that your good office may kindly:
issue a suitable circular/instruction protecting bona fide buyers from automatic ITC reversal based only on supplier default or retrospective cancellation;
direct all adjudicating authorities to furnish all relied-upon material, including field reports and system-generated reports, before drawing adverse conclusions;
ensure that Section 74 is invoked only in cases where fraud or suppression is specifically alleged and supported by tangible material;
permit full reconciliation and documentary substantiation in mismatch matters, including 26AS versus GST data disputes for FY 2020-21;
require reasoned and speaking orders after meaningful hearing; and
adopt a fair State-wide SOP so that honest taxpayers and business persons across Karnataka are not subjected to avoidable litigation and hardship.
The above measures will reduce unnecessary disputes, improve voluntary compliance, and strengthen confidence in tax administration under the GST law. Honest taxpayers do not seek immunity; they seek only lawful treatment, equal protection, and an effective opportunity to demonstrate that their transactions are genuine.
Yours faithfully,
S. PRASAD
Tax Professional / GST Practitioner
Mysuru, Karnataka
Professional note
The central propositions for the representation are these. First, recent legal summaries state that bona fide purchasers are entitled to protection where they transacted with a registered supplier, possessed valid invoices, and there is no proven collusion or sham transaction, even if the seller later defaulted in payment of tax. Second, retrospective cancellation by itself is not sufficient to mechanically deny ITC for past transactions.
Third, Section 74 is a penal and extended-limitation provision that requires material supporting fraud, wilful misstatement, or suppression of facts. Recent legal reporting on mismatch cases indicates that a mere GSTR-1/GSTR-3B difference does not automatically justify Section 74. Commentary on Section 74 also notes that the officer must have material evidence and must make such basis part of the demand notice.
Cases and propositions to cite
- Commissioner Trade and Taxes, Delhi v. Shanti Kiran India Pvt. Ltd.: recent legal reporting states that the Supreme Court upheld protection for bona fide purchasing dealers where the seller was registered on the date of transaction and the transactions or invoices were not doubted.
- Commissioner Trade and Tax v. Arise India Ltd.: legal summaries continue to rely on this principle that credit should not be denied to an innocent purchaser merely because the selling dealer defaulted, absent collusion.
- Niranjan Paul v. Assistant Commissioner of State Tax: recent reporting states that retrospective cancellation cannot be mechanically used to deny ITC and fair adjudication is required.
- Patna High Court reporting on GSTR-1/GSTR-3B mismatch: recent legal reporting notes that Section 74 requires fraud, wilful misstatement, or suppression and cannot be triggered by mismatch alone.
- Section 74 commentary citing Northern Operating Systems: legal commentary notes that material evidence of fraud or suppression must exist and should form part of the notice.
Suggested documentary checklist
For defending bona fide buyers, the representation may emphasize the following documents as indicators of genuine transactions: tax invoice, purchase order, goods receipt note, e-way bill where applicable, lorry receipt or transport proof, bank payment proof, stock entry, ledger extracts, consumption or onward supply evidence, supplier registration status as existing on the date of transaction, and correspondence showing ordinary commercial dealing. These are the kinds of objective materials that help distinguish a genuine buyer from a collusive participant.
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