2025 (10) TMI 607 - SCH - VAT / Sales Tax

Section 9(1) and 9(2)(g) permit input tax credit for registered purchasing dealers when seller is registered and invoices verified

The Commissioner Trade And Tax Delhi Versus M/s. Shanti Kiran India (P) Ltd.

SC dismissed the appeal and upheld the HC order directing grant of ITC to registered purchasing dealers who paid tax to registered selling dealers. The ... Benefit of Input Tax Credit (ITC) - registered purchaser dealers (respondents herein) who paid taxes to registered seller dealer(s) in terms of invoice(s) raised, even though those seller dealers did not deposit the collected tax with the Government - HELD THAT:- Section 9(1) of DVAT Act permits ITC to a registered dealer in respect of turnover of purchases occurring during the tax period where the purchase arises in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making sales which are liable to tax under Section 7 of the DVAT Act. Subsection (2) of Section 9 sets out the conditions under which such ITC would not be allowed. Clause (g) of sub-section (2) of Section 9 made ITC benefit available to a purchasing dealer only when the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period. There is no dispute regarding the selling dealer being registered on the date of transaction and neither the transactions nor invoices in questions have been doubted, based on any inquiry into their veracity, there are no good reason to interfere with the order of the High Court directing for grant of ITC benefit after due verification. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a registered purchaser is entitled to Input Tax Credit (ITC) where it has paid tax to a seller who was registered at the time of the transaction but subsequently failed to deposit the tax collected with the Government. 2. Whether the proviso in clause (g) of Section 9(2) (denial of ITC unless tax is actually deposited by selling dealer or reflected in returns) must be read down so as not to deprive bona fide purchasing dealers of ITC, consistent with principles of equality and legitimate expectation. 3. The proper remedial course: whether the Revenue may deny ITC to a purchasing dealer as against proceeding against the defaulting selling dealer, and the standard for invoking collusion to deny ITC (relation to Section 40A). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to ITC where seller was registered at time of transaction but later failed to deposit tax Legal framework: Section 9(1) grants ITC to a registered dealer for purchases used in taxable sales; Section 9(2)(g) lists conditions when ITC is not allowed, including where tax paid by purchaser has not been deposited by the selling dealer or reflected in returns. Precedent treatment: The Delhi High Court in the cited authority construed Section 9(2)(g) so as not to operate to deny ITC to bona fide purchasing dealers who dealt with validly registered selling dealers and received tax invoices; that decision was not disturbed by this Court (special leave disposed without interference). Interpretation and reasoning: Where the selling dealer was validly registered on the date of the transaction and tax invoices were issued, and where neither the invoices nor the transactions are shown to be false or questionable on inquiry, the purchaser acted bona fide. In such circumstances, the purchaser's entitlement to ITC should not be negated merely because the selling dealer later failed to deposit the collected tax. The appropriate focus is on the bona fides of the purchasing dealer and the veracity of documentary transactions. Ratio vs. Obiter: Ratio - A bona fide purchasing dealer who entered into a purchase transaction with a validly registered selling dealer and received tax invoices is entitled to ITC notwithstanding the subsequent failure of the selling dealer to deposit the tax, subject to verification of invoices and absence of collusion. Obiter - ancillary remarks about administrative remedies against sellers and practical implementation were explanatory. Conclusions: The Court upheld the High Court's direction to grant ITC to such purchasing dealers after due verification of invoices, dismissing appeals challenging that principle. Issue 2 - Reading down Section 9(2)(g) and Article 14 implications Legal framework: Clause (g) of Section 9(2) negates ITC where tax paid by a purchaser is not deposited by the selling dealer or correctly reflected in returns. Fundamental rights considerations (equality before law) inform statutory interpretation when a provision would otherwise produce arbitrary or discriminatory outcomes. Precedent treatment: The High Court read down the phrase 'dealer or class of dealers' in Section 9(2)(g) to exclude bona fide purchasing dealers who transacted with validly registered selling dealers issuing tax invoices; this reading was accepted by this Court by not disturbing the High Court's order. Interpretation and reasoning: The provision, if read literally to deny ITC to all purchasers whose sellers defaulted post-transaction, would punish purchasers who had no role in the seller's subsequent default and would risk arbitrariness. Reading down to protect bona fide purchasers aligns the statutory scheme with principles of equality and avoids disproportionate consequences. The correct construction limits the Department's ability to deny ITC to purchasers in such circumstances. Ratio vs. Obiter: Ratio - Clause (g) must be read so as not to operate to deny ITC to bona fide purchasing dealers who obtained valid tax invoices from sellers validly registered at the time of transaction; such reading prevents violation of Article 14. Obiter - discussion of hypothetical applications and broader policy implications are illustrative. Conclusions: The Court affirmed the read-down interpretation: the Department cannot invoke Section 9(2)(g) to deny ITC to bona fide purchasing dealers in the described situation; the remedy lies against the defaulting selling dealer unless collusion is shown. Issue 3 - Remedy against defaulting selling dealer; role of collusion and Section 40A Legal framework: The statutory scheme contemplates enforcement action against defaulting dealers for recovery of tax; Section 40A (as applied by the High Court) addresses situations of collusion or contrived transactions enabling the Department to deny ITC or take other action. Precedent treatment: The High Court held that where collusion between purchaser and seller is established, the Department may invoke provisions (such as Section 40A) to deny ITC; absent material showing of collusion, the Department's remedy is to proceed against the defaulting selling dealer and not to strip the purchaser of ITC. Interpretation and reasoning: Distinguishing bona fide purchasers from collusive actors is essential. Denial of ITC to innocent purchasers is not an appropriate primary enforcement tool against seller defaults; fiscal recovery must be aimed at the party responsible for non-deposit of tax. However, when material shows collusion, the statutory bar in Section 9(2)(g) and Section 40A permit action against both seller and purchasing dealer to prevent abuse. Ratio vs. Obiter: Ratio - Revenue must pursue recovery from defaulting sellers and may not generally deny ITC to bona fide purchasers; collusion, if materially proved, is an exception permitting denial of ITC under relevant provisions. Obiter - procedural modalities for such investigations and standards of proof were noted but not exhaustively prescribed. Conclusions: The appropriate course is verification of invoices and inquiry into collusion; absent such material, purchasers entitled to ITC should not be penalized for a seller's subsequent non-deposit of tax. The Court upheld the High Court's approach that left denial only where collusion is established and directed grant of ITC after verification.