2016 (9) TMI 1114 - HC - VAT and Sales Tax

Validity of assessment order - cancellation of registration certificate with retrospective effect - reversal of input tax credit when registration was in force - principles of natural justice - requirements of Rule 10(2) of the Tamil Nadu Value Added Tax Rules read with Section 19 of the Tamil Nadu Value Added Tax 2006 - Sections 39(14) and 39(15) of the Act - Section 17 of the VAT Act 2006 - Held that - there cannot be any quarrel that input tax credit availed by any registered dealer is only provisional and that the Assessing Officers are empowered to revoke the same if it appears to the assessing authority to be incorrect incomplete or otherwise not in order. If Section 19(15) of the VAT Act 2006 to be given effect in letter and spirit then no sooner the Registration Certificate of the selling dealer is cancelled by the appropriate authority such registered dealer who had purchased any taxable goods from the selling dealer and availed input tax credit in respect of the said goods has to pay the amount availed on the date from which the order of cancellation of the Registration Certificate takes effect. The buying dealer is also liable to pay any addition to the amount due interest at the rate of two percent per month on the amount of tax payable for the period commencing from the date of claim of input tax from the dealer. Section 39(15) of the VAT Act 2006 is silent as to whether the competent authority is empowered to cancel modify or amend any certificate of registration granted by him retrospectively. The decision in the case of the Hon ble Supreme Court in State of Maharashtra vs. Suresh Trading Co. 1996 (2) TMI 451 - SUPREME COURT OF INDIA is relied upon where it was held that whatever be the effect of 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 such certificate was alive. The retrospective cancellation of the Registration Certificate is set aside - appellant was not provided with an opportunity to file any counter affidavit on the grounds of challenge made in the supporting affidavit to the writ petition filed to quash the Registration Certificate with retrospective effect - matter remanded to writ court - petition dismissed.

Issues Involved:
1. Correctness of the orders passed by the writ court in setting aside the assessment orders by the competent authorities.
2. Retrospective cancellation of Registration Certificates of selling dealers and its effect on input tax credit availed by buying dealers.
3. Compliance with principles of natural justice and relevant judicial precedents.

Issue-wise Detailed Analysis:

1. Correctness of the Orders Passed by the Writ Court:
The common issue in all the writ appeals filed by the Revenue pertains to the correctness of the orders passed by the writ court in setting aside the assessment orders passed by the competent authorities. The respondents in all the appeals, except one, are the buying dealers who had their input tax credits reversed due to the retrospective cancellation of the selling dealers' Registration Certificates by the Commercial Tax Department. The writ court had allowed the petitions based on the principles of natural justice and relevant judicial precedents, including the decision of the Hon'ble Apex Court in the case of *State of Maharashtra vs. Suresh Trading Co.* (1998) 109 STC 439 (SC).

2. Retrospective Cancellation of Registration Certificates and Input Tax Credit:
The core issue revolves around whether the retrospective cancellation of the selling dealers' Registration Certificates can justify the reversal of input tax credits availed by the buying dealers. The writ court, referencing the Supreme Court's decision in *Suresh Trading Co.*, held that the retrospective cancellation of the selling dealers' registration cannot affect the buying dealers who acted in good faith when the registration was valid. The court emphasized that the input tax credit availed by the buying dealers should not be denied merely because the selling dealers' registration was later cancelled retrospectively.

3. Compliance with Principles of Natural Justice and Judicial Precedents:
The respondents argued that the reversal of input tax credits was contrary to the principles of natural justice and various judicial decisions. The writ court agreed, noting that the buying dealers had complied with the requirements of Rule 10(2) of the Tamil Nadu Value Added Tax Rules and Section 19 of the Tamil Nadu Value Added Tax Act. The court cited the decision in *Suresh Trading Co.*, where it was held that the effect of a retrospective cancellation upon the selling dealer cannot impact those who acted upon the registration certificate when it was current. Additionally, the court referenced other decisions, such as *Jinsasan Distributors vs. Commercial Tax Officer* and *Deputy Commissioner of Sales Tax vs. Debi Prasad Shyam Sunder & Sons*, supporting the view that the buying dealers' input tax credits should not be reversed due to retrospective cancellations.

Separate Judgment for W.A.No.753/2016:
In W.A.No.753/2016, the issue was the cancellation of the Registration Certificate of M/s. Vijayshree Metals with retrospective effect. The writ court quashed the order of cancellation based on the decision in *Jinsasan Distributors vs. Commercial Tax Officer*. The appellate court noted that the appellant was not provided an opportunity to file a counter affidavit and remanded the matter back to the writ court for reconsideration, allowing the department to file a counter affidavit.

Conclusion:
The High Court dismissed all the writ appeals concerning the reversal of input tax credits, affirming that the retrospective cancellation of the selling dealers' Registration Certificates cannot affect the buying dealers who acted in good faith. The court upheld the principles of natural justice and relevant judicial precedents, ensuring that the buying dealers' rights were protected. For W.A.No.753/2016, the matter was remanded to the writ court for fresh consideration.

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