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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 10TH DAY OF DECEMBER 2025 PRESENT THE HON'BLE MR. JUSTICE B M SHYAM PRASAD AND THE HON'BLE MR. JUSTICE T.M. NADAF SALES TAX APPEAL NO. 11 OF 2021 BETWEEN:
M/S ORCHID LAMINATES PVT LTD PLOT NO.298, ROAD NO.1, HAROHALLI 2ND PHASE, KANAKAPURA TALUK, RAMANAGARA 562112, REPRESENTED BY ITS MANAGING DIRECTOR, SRI PRAMOD K TANTIA.
…APPELLANT (BY SRI. SANDEEP HUILGOL, ADVOCATE) AND:
THE ADDITIONAL COMMISSIONER OF COMMERCITAL TAXES ZONE II COMMERCIAL TAXES, ZONE-11, 6TH FLOOR, VTK-1, GANDHINAGAR, BENGALURU-560009.
DEPUTY COMMISSIONER OF COMMERCIAL TAX
Digitally signed by REKHA R Location: High Court of Karnataka
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
(AUDIT)-2.1, DGSTO-02, NO.642, 2ND FLOOR, PIONEER PLAZA, KENCHANAHALLI MAIN ROAD, RAJARAJESHWARI NAGAR, BANGALORE-98.
…RESPONDENTS (BY SRI. ADITYA VIKRAM BHAT, AGA)
THIS STA IS FILED UNDER SECTION 66(1) OF THE KVAT ACT, 2003 AGAINST THE ORDER DATED 10.03.2021 PASSED IN NO.ADCOM/ZONE-II/APP- 2/SMR/CR-29/2018-19 ON THE FILE OF THE ADDITIONAL COMMISSIONER OF COMMERCIAL TAXES ZONE-II, GANDHINAGAR BANGALORE, REJECTING THE APPLICATION FILED SEEKING RECTIFICATION OF THE REVISIONAL ORDER DATED 11.12.2018 PASSED BY ADDITIONAL COMMISSIONER OF COMMERCIAL TAXES ZONE-II, BENGALURU IN NO. ADCOM/ZONE-II/ APP-2/ SMR/ CR-29/ 2018-19, AND MODIFYING THE ORDER DATED 27.02.2018 PASSED IN VAT.AP NO.30/16-17 BY THE JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS) 2 BANGALORE ALLOWING THE APPEAL AND SETTING ASIDE THE REASSESSMENT ORDER DATED 31.05.2016 PASSED UNDER SECTION 39(1) OF THE KVAT ACT,2003 R/W SEC.36(1) AND 72(2) OF THE KVAT ACT 2003 BY THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES (AUDIT) - 2.1, BANGALORE FOR THE TAX PERIODS FROM APRIL 2013 TO MARCH 2014.
THIS APPEAL, COMING ON FOR HEARING, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER:
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
CORAM: HON'BLE MR. JUSTICE B M SHYAM PRASAD and HON'BLE MR. JUSTICE T.M.NADAF
ORAL JUDGMENT
(PER: HON'BLE MR. JUSTICE B M SHYAM PRASAD)
The appellant has impugned the orders under Sections 69 and 64 of the Karnataka Value Added Tax Act, 2003 [for short, 'the KVAT Act'] and the details of these impugned orders are as follows:
[i] The Rectification Order dated 10.03.2021 in No. ADCOM/ZONE-II/APP-2/SMR/CR- 29/2018-19 passed by the Additional Commissioner of Commercial Taxes [Annexure-A].
[ii] The Revision Order dated 11.12.2018 in No. ADCOM/ZONE-II/APP-2/SMR/CR- 29/2018-19 passed by the Additional Commissioner of Commercial Taxes [Annexure-B].
This Court has admitted this appeal to consider the following question of law:
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Whether the burden under Section 70 of the Karnataka Value Added Tax Act, 2003 has been rightly cast, and whether the materials placed on record have been duly considered to opine that such burden is discharged or not.
A brief statement of facts for a decision on the afore question is stated thus. The appellant manufactures and sells laminates and paper, and it has participated in the reassessment proceedings under Section 39(1) of the Karnataka Value Added Tax Act, 2003 [for short, 'the KVAT Act'] for the tax- period between April 2013 and March 2014. The appellant has failed in the reassessment proceedings on two issues viz., [i] the disallowance of Input Tax Credit [ITC] of Rs.36,600/- claimed by the appellant on the purchase from M/s. Om Sai Ram Enterprises [the Supplying Dealer], and [ii] the disallowance of ITC of Rs.1,63,441/- on the purchase of sawdust from an unregistered dealer.
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
The appellant, in response to the Notice in VAT Form 275, has stated that the Supplying Dealer is a registered dealer and continues to file monthly returns regularly referring to the VAT Returns filed by the supplying dealer. The appellant has asserted that the transactions with the Supplying Dealer are genuine and all payments are made through Account Payee Cheques or Online transfers. However, the Reassessing Officer [the Prescribed Authority] has refused the ITC on both these grounds.
On the ITC claimed by the appellant for the supplies by the Supplying Dealer, the Prescribed Authority has recorded that in the absence of evidence to show that the Supplying Dealer has remitted the tax collected from it, the appellant will not be entitled to ITC, and hence, the appellant will be liable to pay penalty and interest. On the disallowing ITC on the purchase of sawdust from an unregistered dealer, the Prescribed Authority has
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
referred to the provisions of Section 11[a][7] of the KVAT Act to conclude that the appellant is not eligible to claim ITC for the purchase of sawdust as it is used as fuel. The appellant has carried the Prescribed Authority’s order on these two issues in appeal under Section 62(1) of the KVAT Act with the Joint Commissioner of Commercial Taxes (Appeals) - 2, Bengaluru [The Joint Commissioner].
The Joint Commissioner has opined that the appellant's transactions with the Supplying Dealer are not bogus, or Bill Trading, concluding that the appellant is denied ITC only because the Supplying Dealer has not filed the Returns in VAT Form 100 showing the Credit Output Turnover [COT] and tax liability thereon. The Joint Commissioner has also opined that the Supplying Dealer’s default in filing incorrect Monthly Returns and discharging tax liability cannot be a ground to deny ITC to the appellant and that the concerned authority should
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have taken necessary steps to verify the correctness of the returns filed by such dealer and initiated proceedings if tax is not discharged by its dealer.
On the disallowance of ITC on the purchase of sawdust, the Joint Commissioner has opined that the appellant has not used the sawdust as the primary fuel and the sawdust is converted into fuel later resulting in the manufacture of taxable commodity. It is after these proceedings that the Additional Commissioner of Commercial Taxes [the first respondent who is referred to as ‘the Additional Commissioner’ has invoked jurisdiction under Section 64 and has modified the Joint Commissioner’s order dated 27.02.2018 calling upon the Prescribed Authority] to recompute the tax liability in terms of this order and to issue demand notice with levy of penalty and interest.
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The Additional Commissioner, on the issue of disallowing ITC for the taxes paid to the Supplying Dealer, has recorded that set off on tax paid on purchases will not qualify for rebate of ITC unless the tax collected on sales by the dealer [the Supplying Dealer] is remitted to the Government and holding that the appellant has not produced e- SUGAMs to establish that it is in receipt of goods purchased from the supplying dealer. On the disallowance of ITC on the purchase of sawdust, the Additional Commissioner has opined, referring to 11[a][7] of the KVAT Act, that the appellant will not be eligible to claim such as ITC.
The appellant has filed an application for rectification under Section 69 of the KVAT Act, but the Additional Commissioner has rejected the application by the order dated 10.03.2021 holding that rectification of a revisional order [the order dated 11.12.2018] in exercise of powers under Section 69
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thereof would be impermissible. Mr. Sandeep Huilgol, the learned counsel for the appellant, submits the following as against the Order dated 11.12.2018 and the Order dated 10.03.2021.
8.1 The Additional Commissioner, to exercise the power of review, should have given a finding on the jurisdictional fact satisfying the two requirements contemplated under Section 64 of the KVAT Act as underscored by the different authorities, including the Apex Court in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, Kerala State1. The Additional Commissioner, in exercise of power under Section 64 of the KVAT Act, could not have exercised the review jurisdiction unless an error apparent and loss to the exchequer were seen.
1 (2000) 2 SCC 718. The reliance on this decision is with the caveat that though this decision is under Section 263(1) of the Income Tax Act, 1961, will apply equally to the powers under Section 64 of the KVAT Act
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
8.2 A Co-ordinate Bench of this Court in the State of Karnataka Vs. Sri. Rajesh Jain2, has opined that once the purchasing dealer satisfactorily demonstrates that he has paid the tax while purchasing goods to the selling dealer, the purchasing dealer would be entitled to claim ITC and if the supplying dealer has not deposited the amount in full or a part thereof, it would be for the Revenue to proceed against the selling dealer. In view of this exposition, the Additional Commissioner could not have opined that unless tax collected on sale is remitted by a supplying dealer, the appellant will not be entitled to rebate/ITC.
8.3 The appellant has produced documents such as the VAT Returns filed by the Supplying Dealer to show that the transactions were genuine and there was no bill trading or a wrong claim of ITC
2 STRP No.171/2016 & STRP Nos.313/316/2016 decided on 07.12.2016
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
with the Joint Commissioner considering the same to opine that the appellant cannot be denied the benefit of ITC only because the Supplying Dealer has filed incorrect Monthly Returns.
8.4 The Prescribed Authorityhas disallowed ITC on the purchase of sawdust relying upon the provisions of Section 11[a][7] of the KVAT Act and the Joint Commissioner has relied upon the very same provision to render another view and this time in favour of the assessee, and thus, it is shown that there are two views and when there are two views, it is trite that the jurisdiction under Section 64 of the KVAT Act cannot be exercised. 9. Mr. Aditya Vikram Bhat, the learned Additional Government Advocate refuting the afore submissions, relies upon the Additional Commissioner's order dated 11.12.2018 to contend that the Additional Commissioner has first found an error apparent and then arrived at a decision on
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
prejudice to the Revenue's interest, and learned Additional Government Advocate asserts that [i] the Additional Commissioner has supported such conclusions by reasoning and considering that the supplying dealer has filed VAT 100 admitting a part of sales turnover and the output tax as asserted by the appellant and [ii] the Joint Commissioner has overlooked that the prescribed authority's order was based on the VAT returns filed by the supplying dealer.
9.1 On the reliance of the decision of the Co- ordinate Bench in the Rajesh Jain's case [supra], Mr. Aditya Vikram Bhat submits that the Division Bench has indeed opined that once the purchasing dealer/assessee satisfactorily demonstrates that he has paid the amount of tax to the selling dealer while purchasing goods, this purchasing dealer must be entitled to ITC but that view is in the light of the factual matrix of the case in hand. The learned
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Additional Government Advocate emphasizes that the Division Bench's opinion as aforesaid is because the assessee, in the case on hand had produced, amongst others, e-SUGAMs issued by the selling/supplying dealer, Forms in VAT 100 of the selling/supplying dealer and acknowledged by the respective LVOs and in the light of the Tribunal's opinion that the assessee in such case in providing these documents had discharged the burden of proving a bonafide transaction.
9.2 Mr. Aditya Vikram Bhat argues that the error in the Joint Commissioner's order dated 11.12.2018 is apparent as found by the Additional Commissioner, and the learned Additional Government Advocate also elaborates that ITC is disallowed on fuels of the kind mentioned in Section 11[a][6] of the KVAT Act when it is used as fuel in the motor vehicles but allowance is made permissible when such fuel is used for manufacturing purposes.
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
In all other kinds of fuel, the applicable provisions would be Section 11[a][7] of the KVAT Act and no claim for ITC could be made for the tax paid on the purchase of such fuel and this would be independent on whether it would be used for manufacture of goods or otherwise.
These facts and rival submissions present the context in which the questions are admitted for consideration. The further context is that for intervention under Section 64 of the KVAT Act the twin test viz., [a] an error apparent in the order that is sought to be revised and [b] such order being prejudicial to the Revenue's interest must be answered; and insofar as an order being prejudicial to the Revenue's interest, it would suffice if the revenue is lost to the Exchequer. However, this Court must examine whether these two tests were satisfied for exercise of jurisdiction under Section 64 of the KVAT Act.
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
The Prescribed Authority refers to the VAT returns of the Supplying Dealer furnished by the appellant and the details of the payments made to the Supplying Dealer through Account Payee Cheques or Online Transfers, but without considering why these documents would not be the evidence that is required to be placed on record by the appellant to discharge the burden under Section 70 of the KVAT Act, the Prescribed Authorityhas disallowed ITC observing that the appellant has failed to place on record proof to show that the Supplying Dealer has remitted tax.
The Joint Commissioner [the appellate Authority] has opined that it is clearly evident that the transactions are not bogus and they are not in the nature of bill trading concluding that the appellant is denied the benefit of ITC only because the Supplying Dealer has filed incorrect Monthly Returns discharging incomplete tax liability. This is
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
at the core of the Joint Commissioner's decision to interfere with the Prescribed Authority's order on the appellant being disentitled to ITC on the purchases from the Supplying Dealer. The Additional Commissioner has indeed referred to VAT 100 Returns filed by the Supplying Dealer for October 2013 to record that the Supplying Dealer has only admitted part of the turnover and Out Put Tax but without referring to the payments made by the appellant through Account Payee Cheques and Online Transfers as asserted by the appellant.
The Additional Commissioner, in exercise of the jurisdiction Section 64 of the KVAT Act, has concluded that the Joint Commissioner's order is erroneous and prejudicial to the Revenue's interest but to justify the same, the Additional Commissioner should have reasoned why the Joint Commissioner's order was erroneous. The Additional Commissioner should have recorded an error apparent in the Joint
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
Commissioner opining that the appellant is denied ITC only because the Supplying Dealer has filed incorrect Monthly Returns and discharged incomplete tax liability on appreciation of the appellant’s case that it has paid the taxes to the Supplying Dealer through Account Payee Cheques and Online Transfers.
It is settled that repetition of a requirement in law to assume jurisdiction cannot satisfy the requirement unless it is reasoned considering all the material on record. On the first question, this Court opines that the Additional Commissioner has assumed jurisdiction to correct a finding in the appeal without considering all the material. The appellant has filed the details of the purchase turnover of sawdust claiming ITC in Form VAT 100 and also does not dispute that it is used as fuel. However, to justify the claim of ITC, the appellant has referred to the provisions of Section
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11[a][6] and 11[a][8] of the KVAT Act, to contend that the Legislature has consciously provided for the ITC in respect of fuel used in the production of goods and therefore denial of ITC/rebate when sawdust is used as fuel in the manufacture of goods could be opposed to the provisions of law.
Both the Prescribed Authority and the Joint Commissioner have taken a contra view without reference to any of the provisions except referring to Section 11[a][7] of the KVAT Act. The Additional Commissioner has again, without any elaboration affirmed the view of the Prescribed Authority deferring the Joint Commissioner's order opining that it is without justification. There could be argument to hold that given the Scheme under Section 11[a] of the KVAT Act for ITC on fuel, the determinative factor would be whether it is used for manufacture of goods or may purchase depending on the nature of the fuel and this will have to be examined in the light of the
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HC-KAR NC: 2025:KHC:52370-DB STA No. 11 of 2021
provisions of Section 11[a][6] and 11[a][7] of the KVAT Act which read as under:
"11. Input tax restrictions
(a) Input tax shall not be deducted in calculating the net tax payable, in respect of,- xxxxxxxxxxxxxxx
(6) tax paid on purchases attributable to naptha, liquefied petroleum gas, furnace oil, superior kerosene oil, kerosene and any other petroleum product, when used as fuel in motor vehicles, but when used as fuel in production of any goods for sale in the course of export out of the territory of India or taxable goods or captive power, input tax shall be deducted as provided in Section 14.
(7) tax paid under sub-section (2) of Section 3 on the purchase of fuel."
The Additional Commissioner was not exercising appellate jurisdiction but revisional jurisdiction and when such jurisdiction is exercised, the jurisdictional facts will have to be even if it is a
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question of law that will have to be satisfied. The Additional Commissioner's order will have to fail even on this ground. In the light of the afore and answering the first question in favour of the appellant and the second and third questions as also consequentially in favour of the appellant, the following: ORDER
A. The appeal is allowed and the impugned orders dated 11.12.2018 and 10.03.2021 passed by the Additional Commissioner of Commercial Taxes, (Zone)-II, Gandhinagar, Bengaluru are set aside.
B. It is needless to observe that no opinion is rendered on disallowance of ITC when fuel is purchased and it should be examined in
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the pending cases by the Tribunal independent of this order.
Sd/- (B M SHYAM PRASAD) JUDGE
Sd/- (T.M.NADAF) JUDGE
RB,NV