2013 (2) TMI 80 - HC - VAT and Sales Tax

Input credit claimed - Whether the VAT authorities were justified in disallowing the claim of assessee a purchasing dealer - appellant trades in electrical goods and is a registered dealer under the VAT Act - Held that - Section 9(1) grants input credit to purchasing dealers & Section 9(2) lists out specific situations where the benefit is denied. The negative list, as it were, is restrictive and is in the nature of a proviso. As a result, this Court is of the opinion that the interpretation placed by the Tribunal that there is statutory authority for granting input credit, only to the extent tax is deposited by the selling dealer, is unsound and contrary to the statute. It is also iniquitous because an onerous burden is placed on the purchasing dealer to keep a vigil over the amounts deposited by the selling dealer. The Court does not see any provision or methodology by which the purchasing dealer can monitor the selling dealer s behavior, vis- -vis the latter s VAT returns. Indeed, Section 28 stipulates confidentiality in such matters. Nor is this Court in agreement with the Tribunal s opinion that insertion of clause (g) to Section 9(2) is clarificatory. As Section 9(2) is an exception to the general rule granting input tax credit to dealers who qualify for the benefit. The conditions for operation of the exception are well defined. The absence of any condition such as the one spelt out in clause (g) and its addition in 2010 rules out legislative intention of its being a mere clarification of the law which always existed. This Court is further of the opinion that the Bombay High Court judgment in M/S.Mahalaxmi Cotton Ginning 2012 (5) TMI 152 - BOMBAY HIGH COURT is of no assistance to the revenue, because there, the Court had to deal with the Constitutionality of Section 48(5) of the local VAT law as in the present case, as noticed previously, the VAT Act is silent, Section 9(2) (g) was introduced only with effect from 1-4-2010. This Court is of the opinion that in the absence of any mechanism enabling a purchasing dealer to verify if the selling dealer deposited tax and in the absence of notification that can be ascertained by men in business that a dealer s registration is cancelled (as has happened in this case) the benefit of input credit, under Section 9(1) cannot be denied. As the cancellation of both selling dealers registration occurred after the transactions with the appellant. The VAT authorities observed that the scanty amounts deposited by the selling dealers was incommensurate with the transactions recorded, and straightaway proceeded to hold that they colluded with the appellant. Such a priori conclusions are based on no material, or without inquiry, and accordingly unworthy of acceptance - thus appellant is entitled to the credit claimed after due verification, in accordance with law, within two months from today - in favour of the assessee.

Summary

Issues Involved:
1. Justification of VAT authorities in disallowing input credit claimed by the appellant.
2. Interpretation of Section 9(1) and Section 9(2) of the Delhi Value Added Tax Act, 2004.
3. Applicability and impact of the amendment to Section 9(2) introduced in 2010.
4. Liability of the purchasing dealer for the selling dealer's tax compliance.
5. Imposition of penalties on the purchasing dealer.

Issue-wise Detailed Analysis:

1. Justification of VAT authorities in disallowing input credit claimed by the appellant:
The VAT authorities disallowed the input credit claimed by the appellant, a purchasing dealer of electrical goods, on the grounds that the selling dealers, M/s. Balaji Enterprises and M/s. R.S. International, operated for short periods with high turnover compared to the tax deposited. The VAT Officer (VATO) demanded tax, interest, and penalties for various periods between 2007 and 2008, which was confirmed by the Objection Hearing Authority (OHA) and the VAT Tribunal.

2. Interpretation of Section 9(1) and Section 9(2) of the Delhi Value Added Tax Act, 2004:
Section 9(1) grants input credit to purchasing dealers, while Section 9(2) lists specific situations where the benefit is denied. The Tribunal interpreted that input credit is permissible only to the extent the tax is deposited by the selling dealer, relying on the amendment to Section 9(2) introduced in 2010. However, the Court found this interpretation unsound and contrary to the statute, emphasizing that the negative list in Section 9(2) is restrictive and acts as a proviso to the general rule granting input tax credit.

3. Applicability and impact of the amendment to Section 9(2) introduced in 2010:
The amendment to Section 9(2), effective from 01.04.2010, introduced clause (g), which clarifies that input tax credit is admissible only when the tax is actually deposited by the selling dealer. The Court held that this amendment was not clarificatory but introduced a new condition, ruling out the legislative intention of it being a mere clarification. Therefore, the Tribunal's reliance on this amendment for transactions prior to its introduction was incorrect.

4. Liability of the purchasing dealer for the selling dealer's tax compliance:
The appellant argued that as a purchasing dealer, they had no control over the selling dealers' tax compliance and could not be held liable for their defaults. The Court agreed, noting that there was no mechanism for the purchasing dealer to verify if the selling dealer deposited tax or if their registration was canceled. The Court referenced the Supreme Court's decision in Suresh Trading Co., which held that a purchasing dealer is entitled to rely on the selling dealer's registration certificate and cannot be penalized for subsequent cancellations.

5. Imposition of penalties on the purchasing dealer:
The appellant contended that the necessary conditions for imposing penalties under Section 86(1) were not met. The Court found that the VAT authorities' conclusion of collusion between the appellant and the selling dealers was based on no material evidence and was unworthy of acceptance. Consequently, the imposition of penalties was unjustified.

Conclusion:
The Court concluded that the appellant is entitled to the input credit claimed, as the VAT Act did not impose an obligation on the purchasing dealer to ensure the selling dealer's tax compliance. The appeals were allowed, and the VAT authorities were directed to verify and grant the input credit within two months. No order as to costs was made.