Substance over form in deferred-payment supplies: deep freezers treated as a sale, with input tax credit allowed subject to statutory verification.

Deep freezers supplied to distributors against a so-called security deposit were treated on their real substance as a sale on deferred payment basis, because the assessee recovered the full value in instalments rather than retaining ownership as in a bailment. On that footing, the goods were not shown to fall within the statutory negative list, so input tax credit could not be disallowed on that ground. The disallowance was therefore set aside, but credit remained subject to verification of actual receipts and the statutory limitation under the second proviso to section 11(3) where the sale price is below cost.

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Issues: (i) Whether supply of deep freezers to distributors against security deposit constituted a sale or merely a transfer retaining ownership; (ii) whether the assessee was entitled to input tax credit on the purchase of deep freezers, and whether the goods fell within the statutory negative list.

Issue (i): Whether supply of deep freezers to distributors against security deposit constituted a sale or merely a transfer retaining ownership.

Analysis: The agreement showed that the assessee recovered the full value of the deep freezers in four equal instalments over four years, though described as deposit or security. The transaction was therefore examined on its real character rather than its form. On that basis, the arrangement was found to be a sale on deferred payment basis and not a mere bailment or returnable supply with continued ownership in the assessee.

Conclusion: The supply of deep freezers was held to be an outright sale on deferred payment basis, against the assessee.

Issue (ii): Whether the assessee was entitled to input tax credit on the purchase of deep freezers, and whether the goods fell within the statutory negative list.

Analysis: Once the transaction was treated as a sale, the deep freezers could not be regarded as the assessee's capital goods for the purpose of disallowing credit. The item was not shown to be included in the negative list notified for the purpose of section 11(5)(o). However, the assessing authority was directed to verify the actual payments received and to consider the effect of the second proviso to section 11(3) if the sale price was below cost, because input tax credit cannot exceed the output tax payable in such a situation.

Conclusion: The disallowance of input tax credit was set aside, and credit was held admissible subject to verification under the second proviso to section 11(3), in favour of the assessee.

Final Conclusion: The revisions succeeded only to the extent of input tax credit, while the finding that the transaction was a sale was sustained, and the matter was left to verification of the tax-credit limitation under the statute.

Ratio Decidendi: The true nature of a transaction must be determined from its substance, and input tax credit can be denied only when the goods fall within a statutory exclusion or other express limitation under the Act.

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