2020 (6) TMI 682 - HC - VAT and Sales Tax

Assessing Authorities Must Justify ITC Loss Reversal Percentages, Show Cause Notices Required

The court ruled that Assessing Authorities cannot apply a uniform percentage for invisible loss reversal of Input Tax Credit (ITC) without proper ... Non-statutory circular - input tax credit - invisible loss - refund under Section 18(2) of the TNVAT Act - restrictions under Section 19 of the VAT Act - uniform percentage as invisible loss - show cause notice and opportunity of personal hearingNon-statutory circular - input tax credit - refund under Section 18(2) of the TNVAT Act - Challenge to the circular dated 20.10.2011 issued by the first respondent - HELD THAT: - The Court held that the impugned circular is a non-statutory circular and is in the nature of a guideline; quashing the circular was unnecessary. The decision in Interfit Techno Products Ltd. was applied, which treats Section 18 as subject to other provisions of the Act (including Section 19) and requires the Assessing Authority to undertake fact-finding before calling for reversal of input tax credit. The Court reiterated that Assessing Authorities are not justified in adopting a uniform percentage as invisible loss and issuing blanket reversals of input tax credit without individualized enquiry. [Paras 4]The petition seeking quashment of the circular is dismissed.Invisible loss - uniform percentage as invisible loss - restrictions under Section 19 of the VAT Act - show cause notice and opportunity of personal hearing - Validity of the notice dated 20.02.2014 issued by the second respondent relating to assessment year 2012-13 and the correctness of proposed reversal of ITC on account of alleged invisible loss - HELD THAT: - The Court set aside the impugned notice as it pertains to assessment year 2012-13 and required the Assessing Officer to reconsider the matter afresh. Following the precedent, the Court directed that the Assessing Officer must issue an appropriate show cause notice clearly stating the circumstances under which revision or reversal of refund is proposed, afford the dealer an opportunity to file objections with supporting documents, and provide personal hearing. The reasoning emphasises that any determination of invisible loss and entitlement to retain refund must involve a fact-finding exercise and verification against the restrictions and conditions in Section 19 (including Section 19(9)), rather than mechanical application of an adhoc percentage. Timelines for issuing notice, filing objections and passing orders were prescribed. [Paras 4]The notice dated 20.02.2014 is set aside and the matter is remitted to the Assessing Officer for fresh consideration in accordance with the directions given.Final Conclusion: Challenge to the circular is dismissed as unnecessary; the notice for assessment year 2012-13 is set aside and remitted to the Assessing Officer to issue a detailed show cause notice, receive objections and documents, afford personal hearing and decide the matter on merits in accordance with law within the timelines directed. Issues:Challenge to circular dated 20.10.2011 and notice dated 20.02.2014 regarding ITC reversal for invisible loss for assessment year 2012-13.Analysis:The petitioners challenged a circular and a notice issued by the respondents regarding the reversal of Input Tax Credit (ITC) for an alleged invisible loss. The issue was covered by a previous decision of the court in Interfit Techno Products Ltd. v Principal Secretary/ Commissioner of Commercial Taxes, where it was held that the circular in question was non-statutory and served as a guideline. Section 18 of the TNVAT Act was discussed, emphasizing that claiming a refund under this section required satisfying the Assessing Authority that the claim was not restricted by Section 19 of the Act. The court ruled that Assessing Authorities cannot adopt a uniform percentage for invisible loss and reverse ITC without proper justification. The Assessing Officer was directed to issue appropriate show cause notices, allowing the petitioners to present objections before any further action. The court dismissed one writ petition while allowing another, directing the Assessing Officer to decide the issue afresh after receiving objections from the petitioner.The judgment clarified that the circular in question was non-statutory and acted as a guideline. It highlighted the importance of satisfying the Assessing Authority that the refund claim was not restricted by Section 19 of the VAT Act. The court emphasized that Assessing Authorities cannot apply a uniform percentage for invisible loss without proper justification and directed them to issue show cause notices before taking any action. One writ petition was dismissed, while another was allowed, with the Assessing Officer instructed to reconsider the issue after receiving objections from the petitioner.The court's decision was based on the interpretation of relevant provisions of the TNVAT Act and previous case law. It emphasized the need for Assessing Authorities to conduct a fact-finding exercise to determine the validity of refund claims under Section 18(2) and ensure compliance with Section 19 restrictions. The judgment provided clarity on the process to be followed by the Assessing Officer in such cases, including issuing show cause notices, considering objections, and making decisions based on merits and in accordance with the law. The court's ruling aimed to ensure a fair and thorough assessment of refund claims related to invisible losses, protecting the rights of the petitioners while upholding the provisions of the VAT Act.