2016 (3) TMI 1286 - HC - VAT and Sales Tax

Vires of Section 10(3) of the Karnataka Value Added Tax Act, 2003 - interpretation of statute - petitioners claim that they purchase various taxable goods to be used as inputs and consumables in the manufacture of finished products. In respect of such purchases, the petitioners pay taxes applicable to its selling dealers, and as the said tax paid qualifies as input tax under Section 10(2) of the KVAT Act, the petitioners had deducted the same while calculating the net tax liability as per Section 10(3) of the KVAT Act - Held that - Section 10(3) as it stood originally provided for the assessee to claim credit for the input tax paid, subject to making a claim for the same within the tax period. If the assessee failed to make such a claim within the period, he would. The right to claim input tax credits subject to the right to file corrected returns under Section 35(4) of the Act. Therefore the provisions of Section 10(3) of the Act is a Substantive provision vesting in the assessee a right to get input tax credit subject to the claim be made within the time frame and creating a liability on the assessee to forfeit the right to input tax credit if fails to make the claim on time and the rights on the revenue to demand payment of the input tax claim that is disallowed. Section 10(3) of the KVAT Act, prior to its amendment vide the Karnataka Value Added Tax (Amendment) Act, 2015, shall be read down to enable the petitioners to calculate the net tax liability by deducting the input tax paid on its purchases from its out put tax liability, irrespective of the month in which the selling dealer raises invoices - petition allowed.

Issues Involved:
1. Constitutionality of Section 10(3) of the Karnataka Value Added Tax Act, 2003 (KVAT Act).
2. Interpretation of Section 10(3) of the KVAT Act regarding the timing of availing input tax credit.
3. Retrospective application of the amendment to Section 10(3) introduced by the Karnataka Value Added Tax (Amendment) Act, 2015.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 10(3) of the Karnataka Value Added Tax Act, 2003 (KVAT Act):
The petitioners challenged the vires of Section 10(3) of the KVAT Act, arguing that its interpretation by the Assessing Officer rendered it ultra vires the Constitution of India and the object and scheme of the KVAT Act. The court examined the legislative intent behind the KVAT Act, which aimed to avoid the cascading effect of taxes and reduce the quantum of taxes embedded in the price of goods. The court observed that the scheme of the KVAT Act allowed for the deduction of input tax from output tax to calculate net tax liability, thereby ensuring tax was levied only on value addition at each sale.

2. Interpretation of Section 10(3) of the KVAT Act regarding the timing of availing input tax credit:
The petitioners contended that they consistently availed input tax credit in the month in which they accounted for their purchases, not necessarily the month in which the purchase invoices were raised. They argued that practical constraints often delayed the accounting of purchases. The court noted that the KVAT Act did not explicitly mandate that input tax credit must be availed in the month the selling dealer raised the invoice. The court referenced the case of State of Karnataka v. Centum Industries Limited, which interpreted Section 10(3) to mean that input tax credit should be claimed in the month the input tax was paid. However, the court clarified that this did not imply that input tax credit must be availed in the month the selling dealer raised the invoice.

The court also referred to the case of State of Karnataka v. Manyata Promoters Private Limited, which confirmed that there was no time limit prescribed under the KVAT Act for availing input tax credit and that it did not have to be claimed in the same month the purchase invoices were raised.

3. Retrospective application of the amendment to Section 10(3) introduced by the Karnataka Value Added Tax (Amendment) Act, 2015:
The amendment to Section 10(3) allowed dealers to avail input tax credit for purchases made in the preceding five months. The petitioners argued that this amendment should be applied retrospectively, as it was a beneficial and clarificatory amendment. The court agreed, noting that the amendment was intended to facilitate dealers in claiming input tax credit according to their business practices and to clarify the confusion caused by the Centum Industries case. The court held that the amendment should be given retrospective effect from the date of the original provision's introduction, i.e., April 1, 2005.

The court concluded that Section 10(3) of the KVAT Act, prior to its amendment, should be interpreted to allow dealers to deduct input tax paid on purchases from output tax liability, regardless of the month the selling dealer raised invoices. The impugned orders and notices of demand were quashed, and the petitioners were allowed to independently address any other incidental issues raised in their petitions.

Conclusion:
The court allowed the petitions, reading down Section 10(3) of the KVAT Act to enable the petitioners to calculate net tax liability by deducting input tax paid on purchases from output tax liability, irrespective of the month the selling dealer raised invoices. The amendment to Section 10(3) by the 2015 KVAT Amendment Act was given retrospective effect from April 1, 2005. The impugned orders and notices of demand were quashed, and the petitioners were permitted to work out remedies for any other incidental issues independently.

← Previous Next →