2018 (2) TMI 524 - HC - VAT and Sales Tax

Court deems denial of Input Tax Credit claims under Karnataka VAT Act illegal; emphasizes no time limit for claims

The court held that the denial of Input Tax Credit (ITC) claims based on a restrictive interpretation of Section 10(3) of the Karnataka Value Added Tax ... Input Tax Credit - Section 10(3) of the Karnataka Value Added Tax Act, 2003 - returns and revised returns under Section 35 - machinery provisions cannot override substantive provisions - indefeasibility of input tax credit (pari materia with CENVAT) - verification of genuineness of invoices - remand for fresh assessment - Article 265 of the Constitution of IndiaInput Tax Credit - Section 10(3) of the Karnataka Value Added Tax Act, 2003 - returns and revised returns under Section 35 - machinery provisions cannot override substantive provisions - Whether claim of deduction or set off of Input Tax Credit against Output Tax Liability can be restricted or denied by reference to the tax period or timing of returns filed - HELD THAT: - The Court held that Section 10(3) (as it stood for the relevant assessment periods) did not impose any temporal restriction that the input tax invoice must pertain to the same tax period in which the credit is claimed, nor did it require that ITC be claimed in the month immediately succeeding the month of purchase. The machinery provisions governing filing of returns and revision (Section 35) cannot be used to defeat the substantive right to claim ITC under Section 10(3). Revenue may only verify that claimed credits are genuine and not duplicate, fictitious or bogus. The Court rejected the Department's narrow interpretation that treated the words 'in that period' as a limitation on when ITC invoices must have been issued, observing that such a construction would frustrate the VAT scheme and accounting practices and risk double taxation; it endorsed the view that ITC is, in substance, indefeasible unless invalidly taken. [Paras 22, 25, 26, 29, 30]Claim of ITC cannot be restricted or denied solely because the invoice does not pertain to the same tax period or because the claim was not made in the immediately following month; machinery provisions under Section 35 cannot override Section 10(3).Indefeasibility of input tax credit (pari materia with CENVAT) - Article 265 of the Constitution of India - verification of genuineness of invoices - Whether the State can retain tax paid by the selling dealer by denying corresponding ITC to the purchasing dealer - HELD THAT: - The Court held that denying valid ITC would amount to the State retaining tax paid by the selling dealer and would be contrary to the VAT scheme and Article 265. The Court relied on the principle that input credit under VAT is akin to CENVAT credit under excise law and is available to be utilised without temporal limitation once validly taken; only where the credit is irregular, bogus or duplicate can it be denied or reversed. Consequently, the Department's power is limited to verifying genuineness of invoices and the correctness of the claim, not to read temporal forfeiture into Section 10(3). [Paras 23, 28, 29, 30]State cannot retain tax by denying a valid ITC; ITC is available unless shown to be invalid, duplicate or bogus, and Article 265 does not permit denial of substantive credit rights.Remand for fresh assessment - verification of genuineness of invoices - Whether the impugned assessment/re-assessment orders should be quashed and the matters remitted for fresh consideration - HELD THAT: - The Court concluded that the impugned orders to the extent they denied ITC on the restricted interpretation were illegal and unsustainable. It quashed those orders and restored the matters to the files of the respective Assessing Authorities for passing fresh orders in accordance with law as interpreted by the Court, permitting the Department to verify the authenticity and validity of the ITC claims but not to disallow claims solely on timing grounds. [Paras 32, 33]Impugned assessment/re-assessment orders quashed to the extent of denying ITC; matters remitted to Assessing Authorities to pass fresh orders after lawful verification.Final Conclusion: Writ petitions allowed: restrictive denial of Input Tax Credit on the ground that invoices did not pertain to the same tax period or were not claimed immediately is impermissible; impugned orders disallowing ITC on that basis are quashed and matters are remitted to Assessing Authorities for fresh assessment consistent with this judgment; Department directed to issue a circular to ensure uniform compliance with the Court's decisions. Issues Involved:1. Whether the claim of Input Tax Credit (ITC) against Output Tax Liability can be restricted or denied based on a time frame within which the sales invoices should pertain.2. The interpretation of Section 10(3) of the Karnataka Value Added Tax Act, 2003 (KVAT Act, 2003) vis-à-vis Section 35 of the same Act.Detailed Analysis:1. Restriction or Denial of ITC Based on Time Frame:The court addressed whether the claim of ITC against Output Tax Liability can be restricted or denied based on the time frame within which sales invoices should pertain. The controversy arose due to a narrow and distorted interpretation of Section 10(3) of the KVAT Act, 2003 by the Commercial Taxes Department. The department disallowed ITC claims on the ground that the invoices did not pertain to the same 'Tax period' for which Output Tax Liability was to be determined.The court noted that Section 10(3) of the KVAT Act, 2003, prior to its amendments in 2015 and 2016, did not provide any time limit for claiming ITC against the Output Tax Liability of a particular 'Tax Period'. The court observed that the substantive provision of Section 10(3) did not lay down any restrictive time frame for allowing the deduction of ITC against the Output Tax in a particular tax period. Therefore, the court concluded that there was no justification for the restrictive interpretation put forth by the respondents.The court relied on previous judgments, including State of Karnataka Vs. K. Bond Polymers Pvt. Ltd. and State of Karnataka Vs. Manyata Promoters Pvt. Ltd., which supported the view that ITC could be claimed irrespective of the month in which the purchase invoices were raised. The court emphasized that the claim of ITC is indefeasible and cannot be denied based on machinery provisions or time frame limitations.2. Interpretation of Section 10(3) vis-à-vis Section 35 of the KVAT Act, 2003:The court examined the true meaning and purport of Section 10(3) of the KVAT Act, 2003, in relation to Section 35 of the same Act. Section 10(3) deals with the calculation of net tax payable by a registered dealer, allowing the deduction of ITC against Output Tax payable in the same period. Section 35 pertains to the filing of returns by the dealer.The court highlighted that the machinery provisions of filing returns under Section 35 cannot override the substantive provisions of Section 10(3). The court noted that the provisions of Section 10(3) did not specify any time frame for claiming ITC and that the claim could be made as long as it was supported by valid purchase invoices.The court distinguished the case of Centum Industries Private Limited, where the claim of ITC was disallowed due to a belated claim made beyond a reasonable period of six months. The court clarified that the Division Bench in Centum Industries did not restrict the claim of ITC to the same tax period but disallowed it due to the delay in making the claim.Conclusion:The court concluded that the impugned assessment/re-assessment orders denying ITC claims based on the restrictive interpretation of Section 10(3) were illegal and unsustainable. The court quashed the impugned orders and restored the matters to the Assessing Authorities for passing fresh orders in accordance with the law. The court directed the Commissioner of Commercial Taxes to issue a circular in terms of the judgments favoring assessees to avoid further litigation on this issue and cautioned the authorities against taking contrary views in the future.