2019 (6) TMI 941 - HC - VAT and Sales Tax

Court overturns tax assessment, emphasizes fair treatment for input tax credit

The court set aside the re-assessment orders and demand notices issued by the prescribed authority for tax periods 2011-12 and 2012-13. It found that ... Input tax credit - input tax restrictions - burden of proof under Section 70 - bona fide purchasing dealer - re-assessment and demand notices - writ jurisdiction to challenge re-assessmentInput tax credit - input tax restrictions - bona fide purchasing dealer - burden of proof under Section 70 - Whether remittance of tax by the registered selling dealer is a condition precedent for the purchasing dealer to claim input tax credit against a valid invoice with tax component paid - HELD THAT: - The Court held that a bona fide purchasing dealer who demonstrates that he paid the tax component to a registered selling dealer is entitled to claim input tax credit and his entitlement cannot be made conditional upon the selling dealer having deposited that collected tax with the Government. The statutory scheme distinguishes between input tax and specified input tax restrictions; Section 11(a)(9) restricts credit where goods are purchased from a person required to be registered but who failed to register, but there is no provision making allowance of input credit contingent on the subsequent remittance by the selling dealer. Reliance was placed on earlier decisions of this Court and the Delhi High Court (confirmed by the Apex Court) which establish that once the purchaser satisfactorily proves payment to the selling dealer, loss to the revenue from the selling dealer's default is a matter for the Revenue to pursue against that selling dealer and cannot automatically defeat the purchaser's entitlement. The Court further observed that input credit may be disallowed where invoices are shown to be bogus, procured through collusion, or where the purchaser fails to discharge the burden of proof under Section 70 by producing genuine invoices and corroborative material; however, mere subsequent deregistration of the selling dealer or non-remittance by the selling dealer does not, by itself, disentitle a bona fide purchaser to credit. [Paras 6, 12, 17, 20]Remittance of tax by the selling dealer is not a condition precedent to allow input tax credit to a bona fide purchasing dealer who has discharged the evidentiary burden; denial is only permissible where invoices are fraudulent, collusive, or the purchaser fails to prove the claim.Re-assessment and demand notices - writ jurisdiction to challenge re-assessment - Validity of the impugned re-assessment orders and demand notices and appropriate remedy - HELD THAT: - The Court found that the prescribed authority disallowed input credit principally on the ground that the selling dealers had not remitted tax, a conclusion which cannot automatically defeat a bona fide purchaser's claim. The Court also noted factual issues regarding dates of deregistration and the genuineness/timing of transactions that require re-examination by the assessing authority. While there is no absolute bar to exercise writ jurisdiction, the Court set aside the re-assessment orders and demand notices and restored the proceedings to the prescribed authority for reconsideration in accordance with law. The assessing authority is directed to re-consider in light of the observations made, afford the petitioner an opportunity of hearing, and conclude reassessments expeditiously; if purchases relate to periods after de-registration of selling dealers, credit cannot be allowed. [Paras 21, 22]Impugned re-assessment orders and demand notices set aside; proceedings remitted to the prescribed authority for fresh consideration and hearing in accordance with law.Final Conclusion: Writ petitions allowed in part: the Court held that a bona fide purchasing dealer who proves payment to a registered selling dealer is not to be denied input tax credit merely because the selling dealer did not remit the tax; the re-assessment orders and demand notices for 2011-12 and 2012-13 are set aside and the matter is remitted to the prescribed authority for reconsideration after affording opportunity of hearing and in accordance with the observations made. Issues Involved:1. Validity of re-assessment orders and consequent demand notices.2. Legitimacy of disallowing input tax credit (ITC) based on the selling dealer's tax compliance.3. Jurisdiction and procedural fairness in issuing re-assessment orders.4. Burden of proof under Section 70 of the KVAT Act.5. Interpretation of Sections 10(2), 10(3), and 11(a)(9) of the KVAT Act.Issue-wise Detailed Analysis:1. Validity of Re-assessment Orders and Consequent Demand Notices:The petitioner challenged the re-assessment orders and consequent demand notices issued by the prescribed authority for the tax periods 2011-12 and 2012-13. The petitioner, a dealer registered under the KVAT Act, had availed ITC on purchases from registered dealers. The re-assessment orders disallowed ITC on the grounds that the selling dealers either did not file VAT returns, did not pay taxes, or were deregistered. The petitioner argued that deregistration should only have a prospective effect and that there was no restriction on ITC if the selling dealer failed to remit the collected tax. The court found that the prescribed authority's decision to disallow ITC was contrary to the provisions of the KVAT Act and set aside the re-assessment orders and demand notices.2. Legitimacy of Disallowing ITC Based on the Selling Dealer's Tax Compliance:The court examined whether the remitting of tax by the registered selling dealer is a condition precedent for the purchasing dealer to claim ITC. The relevant provisions, Sections 10(2) and 10(3), and 11(a)(9) of the KVAT Act, were analyzed. The court found that there is no provision in the KVAT Act restricting ITC on purchases from defaulting dealers. Citing previous judgments, the court held that once the purchasing dealer demonstrates that they have paid VAT to the selling dealer, the entitlement to ITC should not be affected by the selling dealer's failure to remit the tax. The court emphasized that the revenue should proceed against the defaulting selling dealer, not the purchasing dealer.3. Jurisdiction and Procedural Fairness in Issuing Re-assessment Orders:The petitioner argued that the re-assessment orders were passed without providing sufficient opportunity to be heard, making them perverse, arbitrary, and illegal. The court acknowledged that while there is no absolute bar to exercising writ jurisdiction, procedural fairness must be maintained. The court found that the prescribed authority exceeded its jurisdiction by disallowing ITC based on the selling dealer's tax compliance and emphasized the need for procedural fairness.4. Burden of Proof Under Section 70 of the KVAT Act:The prescribed authority argued that the petitioner failed to provide sufficient proof for ITC claims, including original purchase invoices and proof of physical movement of goods. The court, however, clarified that the burden of proof under Section 70 cannot be enlarged beyond its scope. The court reiterated that the purchasing dealer's entitlement to ITC should not be contingent upon the selling dealer's compliance with tax remittance. The court found that the petitioner had satisfactorily demonstrated compliance with the requirements for claiming ITC.5. Interpretation of Sections 10(2), 10(3), and 11(a)(9) of the KVAT Act:The court analyzed the relevant provisions of the KVAT Act. Section 10(2) defines ITC in relation to a registered dealer, and Section 10(3) outlines the net tax payable by a registered dealer. Section 11(a)(9) specifies input tax restrictions, particularly for dealers required to be registered but who have failed to register. The court found that these provisions do not restrict ITC on purchases from defaulting dealers. The court cited previous judgments to support the interpretation that ITC should not be denied to the purchasing dealer based on the selling dealer's non-compliance.Conclusion:The court set aside the re-assessment orders and demand notices and restored the proceedings to the prescribed authority for reconsideration. The prescribed authority was directed to re-assess the matter in accordance with the court's observations, ensuring procedural fairness and providing an opportunity for the petitioner to be heard. The court emphasized that ITC should not be denied to the purchasing dealer based on the selling dealer's failure to remit the collected tax, and the revenue should proceed against the defaulting selling dealer instead.