2019 (5) TMI 934 - HC - VAT and Sales Tax

Compliance with the pre-deposit - Maintainability of appeal - stay on recovery - denial of CENVAT Credit on the basis of alleged negative cross check reports - section 11(7A) of the GVAT Act - HELD THAT - Having regard to the fact that at the time when the assessment order was made, the petitioners did not have the copies of the assessment orders made in the case of the vendors, the petitioners did not have any opportunity to prove the genuineness of such transactions. Subsection (7A) of section 11 of the GVAT Act envisages disallowance of tax credit in excess of the amount of tax paid in respect of the same goods. Therefore, to disallow tax credit on any purchase, it has to be established that it is in respect of the very goods purchased by a dealer that the tax has not been paid. Input tax credit cannot be disallowed by working out the percentage of purchases made from a dealer whose registration is cancelled, without first establishing that in respect of the goods purchased by the dealer, the vendor had not paid tax. The petitioners have made out a strong primafacie case in their favour - Under the circumstances, the Tribunal and the first appellate authority were not justified in directing payment of huge amount of predeposit for the purpose of admitting the appeal and staying recovery - petition allowed.

Summary

Issues Involved:
1. Disallowance of Input Tax Credit (ITC) based on negative cross-check reports.
2. Justification of predeposit requirement by the first appellate authority and the Tribunal.
3. Assessment proceedings and the applicability of Section 11(7A) of the GVAT Act.

Detailed Analysis:

1. Disallowance of Input Tax Credit (ITC) based on negative cross-check reports:
The petitioners, a proprietorship firm engaged in trading chemicals, claimed ITC for the assessment year 2013-14. This ITC was disallowed based on negative cross-check reports indicating that the vendors from whom the petitioners had purchased goods had their registration certificates retrospectively canceled, leading to dues. The Assessing Officer, relying on Section 11(7A) of the GVAT Act, disallowed the ITC without providing the petitioners with the negative cross-check reports or assessment orders. The petitioners contended that the disallowance was based on extraneous material that should have been furnished to them. They later obtained responses from some vendors confirming that taxes had been duly paid, challenging the basis of the disallowance.

2. Justification of predeposit requirement by the first appellate authority and the Tribunal:
The first appellate authority summarily dismissed the petitioners' challenge to the assessment order due to nonpayment of predeposit. The Tribunal admitted the second appeal but stayed recovery on the condition that the petitioners deposit 20% of the tax demand within a month. The petitioners argued that the demand for a huge predeposit was unjustified given their strong prima facie case. They cited a precedent (Shree Bhairav Metal Corporation v. State of Gujarat) where the court remanded a similar matter to the adjudicating authority for reconsideration, emphasizing that the petitioners should have been given an opportunity to prove the genuineness of their transactions.

3. Assessment proceedings and the applicability of Section 11(7A) of the GVAT Act:
The Assessing Officer disallowed ITC by examining the transaction tree and noting that certain dealers had their Tin registrations canceled and were involved only in billing activities. Section 11(7A) of the GVAT Act was invoked, which states that the amount of tax credit on any purchase should not exceed the tax actually paid into the government treasury. The court noted that to disallow ITC, it must be established that the tax was not paid in respect of the very goods purchased by the dealer. The petitioners later provided evidence that their vendors had no outstanding dues for the relevant period, contradicting the basis for disallowance.

Conclusion:
The court found that the petitioners had a strong prima facie case and that the Tribunal and the first appellate authority were not justified in demanding a huge predeposit for admitting the appeal and staying recovery. The court quashed the orders requiring predeposit and directed the first appellate authority to hear the appeal on merits without insisting on any predeposit. The recovery of the demand raised under the assessment order was stayed until the appeal was finally decided. The petition was allowed with no order as to costs.