2021 (7) TMI 345 - HC - VAT and Sales Tax

Input Tax Credit - denial of credit capital goods of the unit -2 on the ground that credit cannot be availed before the commencement of commercial production as per Section 12(2) of the KVAT Act - sale of taxable goods or commencement of commercial production - HELD THAT - It is well settled rule of statutory interpretation in relation to the taxing statute that the subject is not to be taxed unless the words of the taxing statute unambiguously impose tax on him. The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible. It is equally well settled legal proposition that the word 'or' is normally disjunctive and the word 'and' is normally conjunctive. It is well settled rule of statutory interpretation that where the provision is clear unambiguous, the word 'or' cannot be read as 'and' and the expression 'or' is disjunctive. The deduction of input tax has to be allowed on fulfillment of one of the conditions namely (1) after commencement of commercial production, (2) sale of taxable goods and (3) sale of any goods in the course of export out of the territory of India by the registered dealer. Rule 133 of the Rules provides for deduction of input tax subject to the conditions mentioned therein. It is pertinent to note that none of the conditions prescribed in Rule 133 provide that each unit of the petitioner has to be an independent unit to avail of the benefit of input tax. There is no element of any mens rea that the petitioner had the intention to evade tax. The petitioner had paid taxes according to the information furnished in the return and therefore, it should not have been penalized subsequently after the assessment proceedings are finalized and the amount of tax is determined. It is well settled in law that penalty cannot be imposed merely because it is lawful to do so. The substantial questions of law are answered in favour of the petitioner and against the respondent.

Summary

Issues Involved:
1. Eligibility for input tax credit on capital goods under Section 12(2) of the Karnataka Value Added Tax Act, 2003 (KVAT Act).
2. Timing of availing input tax credit before commencement of commercial production.
3. Relation of input tax credit conditions to the petitioner’s Phase III expansion project.
4. Applicability of penal provisions under Section 72 of the KVAT Act.

Detailed Analysis:

Issue 1: Eligibility for Input Tax Credit on Capital Goods
The primary issue was whether the petitioner could avail input tax credit on capital goods under Section 12(2) of the KVAT Act. The court noted that Section 12(1) allows deduction of input tax for capital goods used in the business of sale of taxable goods or export. Section 12(2) specifies that this deduction is permissible after the commencement of commercial production, sale of taxable goods, or export. The court concluded that the petitioner had fulfilled these conditions by effecting sales of taxable goods and exports, thus making them eligible for input tax credit.

Issue 2: Timing of Availing Input Tax Credit
The court examined whether input tax credit could be availed before the commencement of commercial production. The petitioner had availed input tax credit during the Phase III expansion before commercial production began. The court held that the use of the word "or" in Section 12(2) is disjunctive, meaning that fulfilling any one of the conditions (commencement of commercial production, sale of taxable goods, or export) would suffice. Since the petitioner was already selling taxable goods and exporting, they were eligible to avail the input tax credit even before the commencement of Phase III commercial production.

Issue 3: Relation to Phase III Expansion Project
The court addressed whether the conditions for input tax credit must specifically relate to the Phase III expansion project. The Tribunal had previously held that the petitioner could only claim credit after the commencement of production or sale from Phase III. The court found this interpretation erroneous, emphasizing that Section 12(2) does not require each unit to be independent for availing input tax credit. The petitioner’s overall business activities, including sales and exports, satisfied the statutory conditions.

Issue 4: Applicability of Penal Provisions
The court considered the imposition of penalties under Section 72 of the KVAT Act. It was argued that there was no mens rea or intention to evade tax by the petitioner, as they had paid taxes based on the information provided in their returns. Citing legal precedents, the court held that penalties should not be imposed merely because it is lawful to do so. Since the petitioner had met the conditions for input tax credit, the imposition of penalties and interest was deemed unjustified. Consequently, the court ruled that the petitioner was entitled to a refund of the interest and penalties paid under protest.

Conclusion:
The court answered all substantial questions of law in favor of the petitioner. The impugned orders by the Tribunal and the Joint Commissioner of Commercial Taxes were quashed, and the petitioner was granted a refund of the interest paid under protest. The petition was allowed, affirming the petitioner’s eligibility for input tax credit and negating the penalties imposed.