2016 (4) TMI 1390 - HC - VAT and Sales Tax

Validity of Section 22(12)(d)(a) of the West Bengal Value Added Tax Act, 2003 - challenge on the ground that merely because a registered dealer deals with another registered dealer whose registration is subsequently cancelled does not imply that the concerned transaction at a time that both the dealers held valid registration certificates could be questioned - HELD THAT - There appears to be substantial merit to the challenge. All that a registered dealer has to do before entering into any transaction with another registered dealer is to assess whether such other dealer has a valid registration certificate. Once a dealer satisfies himself as to the validity of the registration certificate of other dealer, it may be too harsh to question the transaction upon the subsequent cancellation of the registration of the selling dealer, unless an element of connivance is established. The report dated February 22, 2016 is set aside inasmuch as the same denies the input tax credit cited by the petitioner merely on the ground that the other dealers' registration certificates were cancelled ab intio and without taking into account that at the time that this petitioner entered into the relevant transactions with the other dealers, the other dealers held the valid certificates the other dealers' names figured on the respondents' website. Petition disposed off.

Summary

Issues:
Challenge to vires of Section 22(12)(d)(a) of the West Bengal Value Added Tax Act, 2003 regarding cancellation of registration certificates and its impact on transactions.
Validity of denying input tax credit based on subsequent cancellation of registration certificates.
Allegations of connivance and complicity between registered dealers.
Judicial review of report prepared under Section 43A of the Act.

Analysis:

The petitioner challenged the validity of Section 22(12)(d)(a) of the West Bengal Value Added Tax Act, 2003, arguing that the subsequent cancellation of a dealer's registration certificate should not retroactively affect transactions conducted when both dealers held valid certificates. The court noted that a registered dealer must verify the validity of the other dealer's registration certificate before transacting, and questioning transactions post-cancellation without evidence of connivance is deemed harsh.

The State contended that the petitioner had a connection with a dealer whose registration was cancelled ab initio, an assertion denied by the petitioner. The immediate challenge was to a report prepared under Section 43A of the Act, leading to the reversal of input tax credit due to transactions with the dealer whose registration was cancelled. The court set aside the report, emphasizing that denial of input tax credit solely based on subsequent cancellation of the dealer's registration was unjust, especially when the transactions occurred when the dealer had a valid certificate.

The court directed the Deputy Commissioner to reconsider the issue, allowing authorities to deny input tax credit on other grounds like complicity, but not solely on the basis of retroactive cancellation of the dealer's registration certificate. The petition was disposed, giving authorities six weeks to decide on the input tax credit, with no costs awarded. Certified copies of the order were to be provided to the parties upon request.

This judgment highlights the importance of fair treatment in tax matters, emphasizing the need for evidence of connivance before retroactively questioning transactions due to subsequent cancellation of registration certificates. It underscores the duty of registered dealers to verify the validity of counterparties' registration certificates and restricts authorities from denying input tax credit solely based on retrospective cancellations without establishing complicity.