Receiving a show-cause notice alleging fake invoices and fraudulent input tax credit is one of the most serious situations a business can face. The allegations can trigger proceedings under Section 74, penalties under Section 122, and even prosecution under Section 132. However, genuine businesses that have actually received goods or services have strong defences available.
This article explains the legal framework for fake invoice allegations and how to build an effective defence.
The Core Legal Test: Actual Receipt of Goods or Services
The foundational principle in fake invoice cases is that ITC cannot be denied mechanically merely because the supplier defaulted. Actual receipt of goods or services is the core test. If the recipient can prove that goods or services were actually received, the ITC claim is valid, regardless of the supplier's conduct.
CBIC Circular No. 171/03/2022
This circular clarifies the GST implications of fake invoices issued without actual supply. It distinguishes between three scenarios:
- Invoice without supply: No ITC is available to the recipient.
- Supply without invoice: ITC may be available if the recipient can prove the supply.
- Fake ITC passed on through invoices without supply: Penalties under Section 122 apply.
Building a Factual Defence
A strong defence requires documentary evidence of the actual transaction:
- Purchase orders: Correspondence showing that goods were ordered.
- Invoices: Properly issued tax invoices with all required particulars.
- Transport documents: E-way bills, lorry receipts, and delivery challans.
- Payment proof: Bank statements showing payment through banking channels.
- Receipt of goods: Stock registers, warehouse records, and delivery acknowledgements.
- GST returns: GSTR-2B reflecting the ITC claim.
The Department's Burden of Proof
The department must prove collusion between the buyer and the supplier. The mere fact that the supplier defaulted on their tax obligations does not automatically make the recipient complicit. The Allahabad High Court has held that allegations of circular trading must be backed by concrete evidence, not suspicion.
Know Your Supplier (KYS) Policy
Businesses should adopt a Know Your Supplier policy to verify the credentials of their suppliers:
- Verify GST registration status on the portal.
- Check filing history and compliance record.
- Obtain PAN and other identity documents.
- Monitor GSTR-2B for ITC reflection.
- Maintain records of supplier verification.
Practical Steps If You Receive a Notice
- Do not panic — fake invoice allegations are defensible.
- Engage a GST professional immediately.
- Gather all documentary evidence of the transaction.
- Reconcile GSTR-2B with purchase records.
- Prepare a point-wise reply addressing each allegation.
- Challenge the department's failure to prove collusion.
- Consider challenging the proceedings if the supplier has been exonerated.
Conclusion
Fake invoice allegations are serious but defensible. Genuine businesses that have actually received goods or services have a strong defence based on documentary evidence. The key is to act promptly and build a factual, documented defence.
At Anuj Desai & Associates, we provide expert representation services for fake invoice and fraudulent ITC matters. Our team can help you build a strong defence and protect your business.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.