Karnataka High Court Rules That Inflating Contract Figures and Contesting Tax Authorities’ Reliance Amounts to Defrauding the State

In a recent judgment, the Karnataka High Court addressed a case involving an assessee who reported inflated contract figures in tax returns and later contested the tax authorities' reliance on those figures. The Division Bench, comprising Justices Krishna S. Dixit and Ramachandra D. Huddar, emphasized that such actions effectively defraud the state in two distinct ways.

The assessee contended that the inflated turnovers were the result of fraudulent actions by his Tax Consultant, who had submitted falsified Form VAT 156 to claim unwarranted refunds. The assessee had filed a police complaint against the consultant, who had since passed away, and argued that he should not be held accountable for the consultant's misconduct. He also claimed that the impugned order violated principles of natural justice, asserting that he was denied a fair opportunity to present his case.

Conversely, the Revenue argued that the assessee, despite being given opportunities, failed to produce his books of accounts or any relevant evidentiary material. They maintained that a Tax Consultant functions as an agent of the assessee, and any misrepresentation by the consultant should not absolve the assessee of responsibility. The Revenue highlighted that the assessee had signed the returns and records submitted, indicating his awareness and approval of the contents.

The court concurred with the Revenue's perspective, underscoring that a Tax Consultant acts on behalf of the assessee. The judges noted that the consultant would not benefit from inflating figures; rather, the assessee stood to gain from such misrepresentations. They dismissed the assessee's claim that the tax authorities were prejudiced, pointing out the lack of foundational evidence to support such an assertion. The court observed that the Revenue had judiciously considered all contentions presented by the assessee in their decision-making process.

The bench stated, "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. Such an assessee does not deserve any relief at the hands of this Court."

This judgment underscores the judiciary's stance on maintaining integrity within the tax system. It highlights the importance of accurate reporting and the legal ramifications of attempting to manipulate tax liabilities through fraudulent means. The court's decision serves as a cautionary tale for taxpayers, emphasizing that they bear ultimate responsibility for the accuracy of their tax filings, even when they engage professionals to assist in the process.

Furthermore, the ruling reinforces the principle that actions undermining the state's revenue collection will not be tolerated. By holding the assessee accountable, the court aims to deter similar conduct and uphold the integrity of the tax administration system. This case serves as a reminder that taxpayers must exercise due diligence and ensure transparency in their financial declarations to avoid severe legal consequences.