Fake ITC, Voluntary Payment, Appeal and Professional Ethics
Nova Traders, a registered dealer in Delhi, availed ITC of ₹18 lakh during FY 2023-24 on invoices from Skyline Enterprises. The GST department later found Skyline to be non-existent and issued a show cause notice dated 15.11.2025 to Nova under section 74, proposing recovery of ₹18 lakh, interest under section 50 and penalty equal to the tax availed under section 122(3). Nova's accountant admits that the goods were received from an unidentified supplier and that the invoices were arranged through a broker. Nova's director wants to pay the tax before adjudication to avoid penalty and has asked his CA to issue a certificate confirming receipt of goods and to backdate a stock register. The CA is also asked whether the company should file an appeal immediately or wait for the order. Nova's turnover is ₹8 crore. Advise.
1. Advise Nova on whether to pay voluntarily or contest. Which provision governs voluntary payment after the show cause notice, and what is the penalty exposure?
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Nature of the case: The supplier is non-existent and invoices were arranged through a broker. This falls within the fraud, suppression or misstatement category under section 74, not the ordinary section 73 category. Penalty under section 122(3) for availing ITC using invoices without supply is equal to the tax availed, i.e. ₹18 lakh.
Voluntary payment: Because the show cause notice has already been served on 15.11.2025, section 74(6) is relevant. If Nova pays the tax, interest and a penalty equal to 25% of the tax within 30 days of service of the notice, all proceedings are concluded. The penalty would be ₹4.5 lakh, making the total payment ₹22.5 lakh plus interest. If payment had been made before notice, section 74(5) would have reduced the penalty to 15%, i.e. ₹2.7 lakh.
Interest: Interest under section 50 runs at 18% per annum from the date of availing ITC to the date of payment. Compute it precisely; delay increases the cost.
Contest or pay: The accountant's admission and the broker arrangement make the defence weak. If Nova contests and loses, it faces tax, interest and penalty equal to ₹18 lakh, plus possible prosecution if the threshold is met. Voluntary payment under section 74(6) is therefore commercially prudent unless Nova can prove genuine receipt of goods, valid tax invoices, payment through banking channels and the supplier's existence. The backdated stock register would destroy credibility, so it must not be created.
2. If Nova decides to contest, what is the appeal mechanism after the order, including limitation and pre-deposit?
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Adjudication and appeal: Nova should first file a reply to the show cause notice, appear for personal hearing and produce whatever genuine evidence exists. If the order confirms the demand, an appeal lies to the Appellate Authority under section 107 within three months from the date of communication of the order. The Appellate Authority may condone a further delay of one month if sufficient cause is shown.
Pre-deposit: Section 107(6) requires a pre-deposit of 10% of the tax in dispute. On ₹18 lakh, that is ₹1.8 lakh. Penalty and interest are not included in the 10% computation for the pre-deposit, though they remain payable if the appeal fails. The appeal must be filed in FORM GST APL-01 with the order, grounds and proof of pre-deposit.
Grounds: Possible grounds include bona fide purchase, valid registration of the supplier at the time of transaction, invoice matching in GSTR-2A, payment through banking channels and lack of mens rea. However, the admission that goods came from an unidentified supplier and invoices were broker-arranged weakens these grounds. The backdated stock register cannot be used. If the appeal fails, a further appeal to the Appellate Tribunal may be considered, subject to its monetary threshold and pre-deposit rules.
3. Discuss the CA's ethical obligations when asked to certify receipt of goods and backdate the stock register.
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No false certificate: The CA must not issue a certificate confirming receipt of goods when the facts show that the goods came from an unidentified supplier and the invoices were broker-arranged. Certifying a false statement amounts to professional misconduct under Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949, which covers certifying or signing documents without verification. Clause (12) of the same Part covers gross negligence.
No backdating: Backdating a stock register is fabrication of records. Assisting in it can attract disciplinary action and criminal liability. The CA should refuse clearly and record the refusal in the engagement file.
Confidentiality and withdrawal: Confidentiality under the CA Act does not permit aiding concealment or fraud. The CA should advise the client to correct the records, disclose the true position and pay the tax voluntarily. If the client insists on false certification, the CA should withdraw from the engagement after informing the appropriate person in the client entity and documenting the reasons.
Representation: The CA may represent Nova before the GST authorities, but only on the basis of true facts. The CA should not submit the backdated register or a false certificate. If the client persists, the CA should consider reporting obligations under the applicable law and resign.