IS REVERSAL OF INPUT TAX CREDIT MAINTAINABLE WHEN THE SELLING DEALER’S RC IS CANCELLED?

[KAMARAJ RENGARAJ]

Introduction:

When a dealer purchases his inputs from his vendor and claims the eligible Input Tax Credit (ITC), with a bonafide belief, in his monthly VAT return and later the selling dealer’s RC is cancelled, whether he should reverse the ITC?. In such a situation, when the Department issues notice to the assessee dealer to reverse the ITC availed from the seller, in view of the seller’s RC cancellation, the dealer is entitled to avail such a credit or has to reverse the ITC under TNVAT Act?. In the recent decision of the Hon’ble Madras High Court, in the case of Infiniti Wholesale Limited, (formerly known as Woolworths Wholesale (India) Private Limited) Vs The Assistant Commissioner (CT) 2015 (1) TMI 590 - MADRAS HIGH COURT and also in the case of Jinsasan Distributors Versus The Commercial Tax Officer (CT) 2013 (4) TMI 615 - MADRAS HIGH COURT it has been held that the ITC availed by the dealer is eligible as long as the vendor is found to be a registered dealer at the time of supply of materials.

Relevant legal provisions:

Section 2(24) of the TNVAT Act, 2006, defines "input tax" as follows:

"2 (24) 'input tax' means the tax paid or payable under this Act by a registered dealer to another registered dealer on the purchase of goods including capital goods in the course of business."

"Section 19. (15) Where a registered dealer has purchased any taxable goods from another dealer and has availed input-tax credit in respect of the said goods and if the registration certificate of the selling dealer is cancelled by the appropriate registering authority, such registered dealer, who has availed by way of input-tax credit, shall pay the amount availed on the date from which the order of cancellation of the registration certificate takes effect. Such dealer shall be liable to pay, in addition to the amount due, interest at the rate of one and a quarter per cent, per month, on the amount of tax so payable, for the period commencing from the date of claim of input-tax credit by the dealer to the date of its payment."

Section 19 (13) Where a Registered Dealer without entering into a transaction of sale, issues an invoice, bill or cash memorandum to another registered dealer, with the intention to defraud the Government revenue, the assessing authority shall, after making such enquiry as it thinks fit and giving a reasonable opportunity of being heard, deny the benefit of input tax credit to such registered dealer who has claimed input tax credit based on such invoice, bill or cash memorandum from such date.

Issue:

The question now to be considered is whether the cancellation of the registration certificates of the selling dealers with retrospective effect will entitle the Department to reverse the input-tax credit already availed of by the petitioners/assessees consequent to assessment orders passed by competent authority based on records.

Discussion:

In the Infiniti wholesale limited case, reliance is placed in Althaf Shoes (P) Ltd. Versus Assistant Commissioner (CT), Valluvarkottam Assessment Circle, Chennai-6 [2011 (10) TMI 567 - Madras High Court] in which it has been held that the circular issued by the Commissioner clearly states that so long as the vendor is found to be a registered dealer on the files of the Revenue, the claim of the assessee for refund could not be rejected nor delayed in so long as the purchasing dealer has complied with the requirements as given under Rule 10(2), the claim of the purchasing dealer cannot, by any length of reasoning, be denied by the Revenue and thus, the ITC availed by the petitioner could not have been proposed to be reversed or reversed on the grounds stated by the respondent, i.e., the selling dealer has not filed returns or not paid taxes or they were unregistered dealers or their registrations were retrospectively cancelled. Further, the exercise of the jurisdiction by the respondent itself is ex-facie arbitrary and the proceedings are not only vitiated by serious procedural infirmities, but are arbitrary and unreasonable and without jurisdiction and held to be illegal and thus, the order of the Department is set aside

"On the sale and purchase of goods by us, in terms of Section 3 of the TNVAT Act, 2006 the tax payable on such sale has been paid and is supported by statutory Tax invoice and the same is not in dispute. At the time when the sale was effected by the selling dealer to us, the registration certificate was valid.

And hence the input tax credit was availed by us on the basis of valid documents and the benefit given cannot be reversed in this manner."

Facts of the Case:

The petitioners, registered dealers under the Tamil Nadu Value Added Tax Act, 2006, availed of input-tax credit under section 19 of the Act on the amount of tax paid on purchases from registered dealers of taxable goods specified in Schedule I to the Act. Subsequently, the Department proceeded to take action against the selling dealers, who sold goods to the petitioners, for one reason or the other and cancelled their registration certificates retrospectively, i.e., after the assessment orders granting the benefit of input-tax credit have been passed. Based on the cancellation of the registration certificates issued to the selling dealers, the Department issued notices to the petitioners for reversal of input-tax credit in some cases and passed revised assessment orders or provisional assessment orders reversing the input-tax credit availed of in some cases. On writ petitions:

Held, allowing the petitions, that the petitioners had purchased the taxable goods from registered dealers who had valid registration certificates, paid the tax payable thereon, availed of input tax credit and the assessing officers had passed orders granting such benefit. Therefore, the assessment orders granting input-tax credit were validly passed. There was no cancellation of the registration certificates of the selling dealers at that point of time. The retrospective cancellation of the registration certificates issued to the selling dealers could not affect the right of the petitioners who had paid the tax on the basis of the invoices and thereafter claimed the benefit under section 19 of the Tamil Nadu Value Added Tax Act, 2006. Therefore the notices, revised assessment orders and the provisional assessment order, seeking to deny the benefit of input-tax credit to the petitioners only on the ground that the registration certificates of the selling dealers had been cancelled with retrospective effect, were set aside.

The fact that the petitioners herein/assessees under the TNVAT Act have purchased goods from registered dealers on paying the input tax is not in dispute. The fact that they have availed of input-tax credit in terms of section 19(1) of the TNVAT Act, 2006 is also not in dispute and in all these cases the assessment orders have been passed based on documents furnished. The cause of action for issuing the notices for reversal of input tax credit or the order revising the assessment is based on the cancellation of the registration certificates of the selling dealers, who sold the goods to the petitioners herein. It is also not in dispute that the registration certificates of the selling dealers have been cancelled with retrospective effect. That appears to be the one and only ground for initiating the action and therefore the challenge.

On the sale and purchase of goods by the registered dealers, in terms of section 3 of the TNVAT Act,2006, the tax payable on such sale has been paid and is supported by statutory records like invoices, etc., and the same is not in dispute. At the time when the sale was effected by the selling dealers to the petitioners, the registration certificates were valid. On the basis of the sale documents, input-tax credit was availed of by all the petitioners/assessees based on assessment made by the competent authority. It therefore follows that as and when the Department seeks to cancel the registration certificates of the selling dealers, the provisions of section 19(15) of the TNVAT Act,2006 will come into operation. The petitioners/ assessees in these cases will be liable to pay the input-tax credit availed of on taxable goods if the goods have been purchased from dealers whose registration certificates have been cancelled by the appropriate registering authority. There is no dispute on this proposition. What is the effect of cancellation of the registration certificate and how and when the reversal of the input-tax credit will take effect is the question to be considered.

Section 19(15) of the TNVAT Act, 2006 provides that the registered dealer who availed of the input-tax credit should pay the amount availed of on the date from which the order of cancellation of the registration certificate takes effect. In all these cases, without dispute, the orders cancelling the registration certificates of the selling dealers is given with retrospective effect, that is to say, after the assessment orders have been passed granting the benefit of input-tax credit.

Insofar as the cancellation of the registration certificates of the selling dealers is concerned, it is for those selling dealers to canvas the plea as to when it will take effect either on the date of the order or with retrospective effect. Insofar as the petitioners are concerned, they have purchased the taxable goods from registered dealers who had valid registration certificates; paid the tax payable thereon; availed of input-tax credit; and the assessing officers have passed orders granting such benefit. Therefore, the assessment orders granting input-tax credit were validly passed. There was no cancellation of the registration certificates of the selling dealers at that point of time. The petitioners/assessees have paid input tax based on the invoices issued by registered selling dealers and availed of input-tax credit. The retrospective cancellation of the registration certificates issued to the selling dealers cannot affect the right of the petitioners/assessees, who have paid the tax on the basis of the invoices and thereafter claimed the benefit under section 19 of the TNVAT Act, 2006. They have utilized the goods either for own use or for further sale. At the time when the sale was made, the selling dealers had valid registration certificates and the subsequent cancellation cannot nullify the benefit that the petitioners/assessees availed of based on valid documents.

An almost identical issue was considered by the Supreme Court in State of Maharashtra v. Suresh Trading Company [1996 (2) TMI 451 - SUPREME COURT OF INDIA]. In that case, the respondents, who were registered dealers under the Bombay Sales Tax Act, 1959, purchased goods during the period from January 1, 1967 to January 31,1967 from one Sulekha Enterprises Corporation, who is also a registered dealer under the Bombay Sales Tax Act,1959. The respondents before the Supreme Court resold the goods and claimed certain benefits. That was disallowed by the Sales Tax Officer on the ground that the registration certificate of M/s.Sulekha Enterprises Corporation was cancelled on August 20, 1967, with effect from January 1, 1967. The claim of the respondents therein/the assessee for deduction of the turnover of sales as above was declined and penalty was also imposed. The assessees failed before the appellate authority as well as the Maharashtra Sales Tax Tribunal.

The High Court however reversed the decision and upheld the claims of the assessees, holding that disallowing the deductions claimed by the respondents would amount to tax on transactions which were otherwise not taxable. The Supreme Court, while dismissing the appeals filed by the Revenue, held as follows (page 441 in 109 STC):

"4. The High Court answered the question in the negative and in favour of the respondents. The High Court noted that the effect of disallowing the deductions claimed by the respondents was, in substance, to tax transactions which were otherwise not taxable. The condition precedent for becoming entitled to make a tax-free resale was the purchase of the goods which were resold from a registered dealer and the obtaining from that registered dealer of a certificate in this behalf. This condition having been fulfilled, the right of the purchasing dealer to make a tax-free sale accrued to him. Thereafter to hold, by reason of something that had happened subsequent to the date of the purchase, namely, the cancellation of the selling dealer's registration with retrospective effect, that the tax-free re-sales had become liable to tax, would be tantamount to levying tax on the resales with retrospective effect.

5. In our view, the High Court was right. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current. The argument on behalf of the Department that it was the duty of persons dealing with registered dealers to find out whether a state off acts exists which would justify the cancellation of registration must be rejected. To accept it would be to nullify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates." (emphasis supplied)

The Supreme Court in the above case has clearly held that the retrospective cancellation of the registration certificate of the selling dealer can have no effect on the person who acted upon the strength of the registration certificate when it was in force. The Supreme Court further rejected the Department's argument that duty is cast on the person who is dealing with the registered dealer to find out whether the registration certificate is valid or cancelled, by stating that such a plea would be against the provisions of the statute.

Conclusion:

In the present cases, it is not in dispute that the registration certificates of the selling dealers have been cancelled with retrospective effect and, therefore, to reverse the input-tax credit on the plea that registration certificates have been cancelled with retrospective effect cannot be countenanced. Whatever benefits that has accrued to the petitioners based on valid documents in the course of sale and purchase of goods, for which tax has been paid cannot be declined. The transaction that took place when the registration certificates of the selling dealer were in force cannot be denied to the petitioners/assessees on the above plea. This is contrary to the law laid down by the Supreme Court in the above-stated case.

The author can be reached at [email protected]