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VAT - ITC is a substantive right and it cannot be denied merely on basis of some machinery provisions or flimsy technical error or even on ground of limitation: HC

By TIOL News Service

BANGALORE, JAN 20, 2018: THE issue is - Whether ITC is a substantive right and it cannot be denied merely on the basis of some machinery provisions or flimsy technical error or even on ground of limitation. YES is the verdict.

Facts of the case

The assessee-company manufactures & sells Electrical Motors, Generators, Transformers, amongst other things. For this, the assessee purchased materials such as Steel, Copper, Bearings and Consumables and other goods required, from local registered dealers as well as from dealers outside the State of Karnataka. In respect of the tax paid by them on such purchases @ 4% and 12.5%, the assessee claimed this Input Tax Credit (ITC) against the output tax liability in respect of the sales made by it. Such claim was made in the relevant tax period. Notably, the term 'tax period' is defined u/s 2(33) of the Karnataka Value Added Tax Act, 2003, which is further as defined in Rule 37 of the KVAT Rules, wherein each calendar month meant a separate tax period. However, the Revenue denied ITC on grounds that, ITC was deductible only in the particular ‘tax period’ in which the invoices of the selling dealer were raised, and the accumulated VAT ITC available in the various months preceding the ‘tax period’ in question, could not be used by way of ITC against the Output Tax for the ‘tax period’ of a particular month. Thus the Revenue passed several assessment & re-assessment orders for the entire year in one go, following which duty demands were raised, with imposition of interest & penalty. Hence the assessee and other dealers filed the present writs, by-passing the option of regular appeal.

On hearing the writ petitions, the High Court held that,

++ the substantive provision of Section 10(3) of the KVAT Act, 2003, did not lay down any such restrictive time frame for allowing the deduction of ITC against the OPT in a particular tax period to determine the net tax payable for that tax period and therefore there is no justification whatsoever to accept such an interpretation put forth by the counsels for the Respondent State. Such contentions had not only been negatived and with great respects, rightly so by the Single Judge in the case of Sonal Apparel Private Limited case, but this Court is of the considered opinion that the Respondent Department is taking an unnecessarily distorted view of the observations made by the Division Bench of this Court in the case of Centum Industries Private Limited, where the Division Bench while disallowed the said claim of ITC made at a belatedly stage and observed simply as an obiter that the claim of ITC should relate to the tax period in question. The Division Bench never said that the ITC Invoice or Sale Invoice should also be pertaining to the same tax period, in which the credit of such ITC is claimed by the Dealer.

++ the counsels for the Respondent State were at complete loss of words to the question put by the Court as to, under what authority of law the State can retain the tax paid by the selling Dealer to the State as collected under the Sale Invoice which is passed on to the purchasing Dealer who are the assessees before this Court, if ITC in respect of such sale invoice was to be disallowed, contrary to the very concept of VAT law and the unrestricted language of Section 10(3) of the KVAT Act, 2003 and in apparent violation of Article 265 of the Constitution of India, there was simply no answer on behalf of the Respondent State to this query of the Court, except relying on the obiter from the judgment of the Division Bench of this Court in Centum Industries Private Limited case, which as explained above, does not support the case of the Revenue at all.

++ in the peculiar facts of the Centum Industries Private Limited case, the claim of ITC credit was disallowed on the basis of the belated claim made by it and not while interpreting the substantive provisions of Section 10(3) of the Act in a narrower way, as is sought to be canvassed by the Respondent State before this Court even now. The counsels for the Respondent State were again without any answer to the question of the Court as to how the machinery provisions of filing of the returns under Section 35 of the KVAT Act, 2003 for assessing the tax liability including the OPT, ITC and Net Tax liability u/s 10 of the KVAT Act, 2003, can be allowed to override the substantive provisions of Section 10 of the KVAT Act, 2003, contained in chapter II of the said KVAT Act, 2003. In the absence of any valid answer and submission on behalf of the Respondent State, this Court can safely conclude that the machinery provisions cannot be allowed to override and defeat the substantive claim of the Input Tax Credits u/s 10(3) of the KVAT Act, 2003, which without any restriction of the time frame, allowed such deduction or credit of the ITC against the OPT liability of the Dealer in question.

++ when the Assessing Authority could pass the re-assessment order, Annexure C dated 29/04/2016 for the whole year in one go, disallowing the ITC claim illegally by restricting it on the basis of monthly Tax Periods, what can be the justification for disallowing the same, without it being found to be an unverified claim, not supported by valid Sales Invoices? None - is the simple answer. The Input Tax Credit under VAT law is pari materia with the concept of Cenvat or Modvat under Excise Law and dealing with a similar problem, the Supreme Court in the case of Collector of Central Excise, Pune Vs. Dai Ichi Karkaria Ltd. Thus the claim of credit of input tax is indefeasible as was the case of Cenvat under Excise law and such credit of ITC under VAT law which is equivalent to tax paid in the chain of sales of the same goods, cannot be denied on the anvil of machinery provisions or even provisions relating to time frame which is law of limitation only bars the remedy rather than negativing the substantive claims under the taxing statutes.

++ both the questions framed above are therefore liable to be answered in favour of the assessees. The claim of ITC cannot be restricted and denied on the stated grounds by Revenue. It cannot be denied only because ITC claim is not made in respect of Sale Invoices which are not pertaining to same Tax Period, nor it can be denied on the ground that such claim is not made immediately in the month or months following the month of purchase of goods in question. The machinery provisions of filing of Returns u/s 35 of the KVAT Act cannot defeat the substantive claims u/s 10(3) of the Act. The Revenue is entitled only to verify that the Sale Invoices are genuine and valid and such ITC claim is not duplicate, fictitious or bogus. Article 265 of the Constitution of India does not entitle the State to retain such tax paid by Selling Dealers and deny the claim of ITC credit or set off in the hands of the Purchasing Dealers who claim such ITC against their Output Tax Liability when they sell goods further, incurring such Output Tax liability.

++ one wonders whether the subsequent amendments effected by the Respondent State in the year 2015 and 2016 though not applicable to the assessment period involved in this batch of writ petitions presently being decided by this Court, is a ‘relaxation’ or a ‘restriction’ and whether it is for the benefit of the assessees as contended by the Respondent State or seeks to restrict and defeat the claim of ITC in the period of assessment following such amendment. Be that as it may. Since that amendment is neither applicable to the facts of the present case nor any of the sides has called the same in question, this Court need not make any further analysis of these amendments.

++ this Court is, therefore of the considered opinion that the assessment orders & re-assessment orders passed by the Respondent - Assessing Authorities to this extent of denying the claim of ITC to the petitioners assessees are illegal and unsustainable and deserve to be quashed and set aside by this Court. The writ petitions are accordingly allowed and the orders are quashed and set aside. The matters would stand restored to the file of the Respondent Assessing Authorities to pass fresh orders in accordance with law as interpreted above as far as claim of Input Tax Credit is concerned.

++ This Court is of the further opinion that despite more than one judgment interpreting the provisions of Section 10(3) of the KVAT Act, 2003, in favour of the assessees, the tendency on the part of the Assessing Authorities of the Respondent Department to still keep on passing the orders contrary to these judgments is in utter disregard of the judicial and hierarchical discipline which they are bound to observe and it may also amount to a deliberate disobedience on their part and may invite contempt action and therefore to prevent any such further unnecessary litigation on this issue, at the behest of the different Authorities of the Department taking a contrary view, it is directed that the Head of the Respondent Department, namely, the Commissioner of Commercial Taxes shall issue a Circular in terms of the various aforesaid judgments of this Court in favour of assessees, for being followed by the Authorities through out the State to avoid any further multiplicity of litigation before this Court and Appellate Forums. Therefore, such a Circular shall be issued by the Respondent Commissioner of Commercial Taxes and the Respondent - Departmental Authorities, including the Appellate Authorities under the Act are cautioned that now onwards if any contrary view is found to be taken by such Authorities of the Department on aforesaid issue, this Court would initiate suo motu contempt proceedings against the Commissioner of Commercial Taxes as well as the concerned Authorities of the Respondent Department.

(See 2018-TIOL-131-HC-KAR-VAT)


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