“‘Claiming Inflated Refunds and Blaming Consultant Amounts to Defrauding the State’: Karnataka High Court Dismisses Sales Tax Appeal for Lack of Legal Merit”
Sanchayita Lahkar
The Division Bench of the Karnataka High Court comprising Justice Krishna S. Dixit and Justice Ramachandra D. Huddar dismissed a sales tax appeal filed by an assessee challenging a reassessment order under the Karnataka Value Added Tax Act, 2003. The Court held that the questions of law raised in the appeal lacked legal coherence and did not qualify as substantial. It found that the assessee had failed to produce any books of account despite being given the opportunity and recorded that the fraudulent returns filed by the assessee’s tax consultant could not absolve the appellant of liability. The Court declined to interfere with the impugned order passed by the Additional Commissioner of Commercial Taxes and dismissed the appeal as devoid of merit.
The appellant, a proprietary concern engaged in electrical works, filed the sales tax appeal under Section 66(1) of the Karnataka Value Added Tax Act, 2003, challenging the order dated March 28, 2024, issued by the Additional Commissioner of Commercial Taxes, Zone-1, Bengaluru. The order in question pertained to the reassessment proceedings for the tax period of 2017–2018, and had upheld the disallowance of various deductions and input tax credits, and confirmed tax liability along with interest and penalty.
The dispute arose from an audit reassessment conducted by the Assistant Commissioner of Commercial Taxes (Audit), Bidar, through an order passed on March 5, 2021. The reassessment had disallowed input tax credit claimed on the ground of non-submission of supporting documents, refused deductions towards labour and similar charges for lack of books of account, and demanded refund reversal for the tax period June 2017 based on an allegedly invalid Form VAT-156 filed by the assessee’s then consultant.
The appellant's memorandum of appeal framed seven questions, which included the following issues: whether the tax consultant had issued his personal cheque in connection with the refund; whether a successor officer could vary an order passed by a predecessor; whether proceedings based on a notice under Section 64(1) of the Act issued in contravention of Rule 154 could be sustained; the validity of relying on Form VAT-100 in the absence of books of account; disallowance of deductions and standard deductions under Rule 3(2)(m); denial of exemption for labour charges and deemed VAT; and the legality of demanding back refunds with penalty and interest.
The appellant argued that the impugned order was passed in violation of principles of natural justice and that the officer concerned had acted with a prejudiced mind. It was submitted that the tax consultant had unilaterally declared inflated turnovers with the intent of claiming refunds through a fraudulent Form VAT-156. The appellant contended that he had filed a police complaint against the said consultant, who was now deceased, and that he had not personally benefited from the falsified returns.
On behalf of the respondent, it was submitted that the impugned order had been passed after affording sufficient opportunity to the appellant, who nevertheless failed to produce the relevant books of account. The Additional Government Advocate submitted that the consultant acted as an agent of the assessee and that the appellant had signed the returns and records filed before the department. It was contended that any errors committed by the consultant could not shield the appellant from liability, especially as the returns were not unsigned or unauthorized. It was further submitted that no supporting documents or evidentiary material had been provided during the reassessment or appellate stages.
The Court began by noting that the appeal was constructed on what were described as "Substantial Questions of Law", but held that they were incoherently framed and did not raise questions that could be classified as legal in nature. It recorded: “Firstly, the questions of law are haphazardly framed and they lack coherence both in terms of law and language. Secondly, these questions are not of law inasmuch as, to answer them, turning the pages of statute book would not come to aid.”
It found that the appellant had failed to demonstrate any perversity or lack of evidentiary basis in the findings recorded by the respondent authority. The Court stated: “Despite taking us through the Paper Book of the appeal, we are not shown which finding in the impugned order is perverse that is to say contrary to evidence borne out by record or which of the observations in the impugned order are made without evidentiary basis.”’
Addressing the contention of violation of natural justice, the Court examined whether the appellant was denied an opportunity to produce records. It noted that despite the opportunity being provided, the appellant had failed to submit the books of account. Referring to paragraph 30 of the impugned order, the Court observed: “In support of the contentions urged, the DAR of the appellant even at appeal stage has not submitted any books of account related to the actual expenses incurred towards labour & like charges for the tax periods of the financial years 2016-17 & 2017-18 (up to June-17).”
The impugned order recorded that although the DAR had submitted a copy of an FIR relating to the alleged loss of books, no vouchers or reconstructed evidence was produced even during the appeal proceedings. The Court noted: “The DAR present has submitted copy of FIR filed before the jurisdictional police station related to loss of books of account by the appellant… However, has not submitted any books of account even at appeal stage.”
Regarding the argument that the fraud was committed by the consultant and that the appellant should not be penalised for it, the Court held this to be an untenable position. It recorded: “The submission… that for the fraud committed by the Tax Consultant, the assessee should not be made to suffer is too broad a proposition to accept.”
The Court further held that the tax consultant, even if a professional, acted as the agent of the assessee and that the appellant had signed the documents and was the primary beneficiary of the inflated returns. It observed: “It is not that the assessee had not put his signatures to the Returns and Records filed before the Revenue… Claiming higher contract amount by inflated figures and thereafter complaining that the Tax authorities have premised their decision on such figures, virtually amounts to defrauding the State, in two-ways.”
The contention that the respondent authority had acted with a prejudiced mind was dismissed as baseless. The Court recorded: “Why a high functionary of the State who acts quasi-judicially in deciding the tax liability of the assessee should be presumed to be prejudicial, remains unanswered… Such a contention cannot be countenanced without laying foundational basis.”
On perusing the impugned order and accompanying materials, the Court stated that there was no basis to conclude that the authority had acted in a manner inconsistent with the record. It observed: “A perusal of the impugned order in the light of other material accompanying the appeal memo leaves no manner of doubt that the respondent has judiciously considered all contentions of the assessee as reflected in the impugned order.”
Concluding that the appeal was devoid of merit and that none of the questions raised amounted to substantial questions of law, the Court declined to interfere with the order passed by the Additional Commissioner.
The Court ordered: “In the above circumstances, this appeal being devoid of merits is liable to be dismissed and accordingly it is, costs having been reluctantly made easy.”
Advocates Representing the Parties
For the Petitioners: Sri. Sathyanarayana T. R., Advocate
For the Respondents: Sri. Aditya Vikram Bhat, Additional Government Advocate
Case Title: M/s Yellalinga Electricals v. The Additional Commissioner of Commercial Taxes
Neutral Citation: 2025:KHC:11280-DB
Case Number: STA No. 1 of 2024
Bench: Justice Krishna S. Dixit, Justice Ramachandra D. Huddar
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