2018 (2) TMI 524 - HC - VAT and Sales Tax

Input Tax Credit (ITC) - Section 10(3) of the KVAT Act, 2003 - denial on the ground that the claim of Input Tax Credit against the Output Tax Liability of the assessees did not pertain to the same Tax period for which Output Tax Liability and Net Tax Liability was to be determined in accordance with Section 10(3) of the Act - interpretation of statute. Whether the claim of deduction or set off of Input Tax Credit against Output Tax Liability of the dealer can be restricted or denied on the ground of any time frame within which such Sales Invoices on the basis of which ITC is claimed should pertain or information or record of such ITC Invoices should be informed in the Returns to be filed, particularly if such time frame is restricted to the period of Tax Period which can be as short as a month or a quarter, or the period of filing of Returns being 20 days from the end of month concerned or maximum six months from the end of Tax period even for filing of Revised Returns disclosing errors and omissions? What is the true meaning and purport of Section 10(3) of the KVAT Act, 2003 vis- -vis Section 35 of the same Act, 2003? Held that - The substantive provision of Section 10(3) of the KVAT Act, 2003, did not lay down any such restrictive time frame for allowing the deduction of ITC against the OPT in a particular tax period to determine the net tax payable for that tax period and therefore there is no justification whatsoever to accept such an interpretation put forth by the learned counsels for the Respondent State. Such contentions had not only been negatived and with great respects - this Court can safely conclude that the machinery provisions cannot be allowed to override and defeat the substantive claim of the Input Tax Credits under Section 10(3) of the KVAT Act, 2003, which without any restriction of the time frame, allowed such deduction or credit of the ITC against the OPT liability of the Dealer in question. When the Assessing Authority could pass the impugned re-assessment order, Annexure C dated 29/04/2016 for the whole year in one go, disallowing the ITC claim illegally by restricting it on the basis of monthly Tax Periods, what can be the justification for disallowing the same, without it being found to be an unverified claim, not supported by valid Sales Invoices ? None - is the simple answer The claim of credit of input tax is indefeasible as was the case of CENVAT under Excise law and such credit of ITC under VAT law which is equivalent to tax paid in the chain of sales of the same goods, cannot be denied on the anvil of machinery provisions or even provisions relating to time frame which is law of limitation only bars the remedy rather than negativing the substantive claims under the taxing statutes. The impugned assessment orders/re- assessment orders passed by the Respondent - Assessing Authorities to this extent of denying the claim of ITC to the petitioners assessees are illegal and unsustainable and deserve to be quashed and set aside by this Court. The matters would stand restored to the file of the Respondent Assessing Authorities to pass fresh orders in accordance with law - petition allowed.

Summary

Issues Involved:

1. Whether the claim of Input Tax Credit (ITC) against Output Tax Liability can be restricted or denied based on a time frame within which the sales invoices should pertain.
2. The interpretation of Section 10(3) of the Karnataka Value Added Tax Act, 2003 (KVAT Act, 2003) vis-à-vis Section 35 of the same Act.

Detailed Analysis:

1. Restriction or Denial of ITC Based on Time Frame:

The court addressed whether the claim of ITC against Output Tax Liability can be restricted or denied based on the time frame within which sales invoices should pertain. The controversy arose due to a narrow and distorted interpretation of Section 10(3) of the KVAT Act, 2003 by the Commercial Taxes Department. The department disallowed ITC claims on the ground that the invoices did not pertain to the same 'Tax period' for which Output Tax Liability was to be determined.

The court noted that Section 10(3) of the KVAT Act, 2003, prior to its amendments in 2015 and 2016, did not provide any time limit for claiming ITC against the Output Tax Liability of a particular 'Tax Period'. The court observed that the substantive provision of Section 10(3) did not lay down any restrictive time frame for allowing the deduction of ITC against the Output Tax in a particular tax period. Therefore, the court concluded that there was no justification for the restrictive interpretation put forth by the respondents.

The court relied on previous judgments, including State of Karnataka Vs. K. Bond Polymers Pvt. Ltd. and State of Karnataka Vs. Manyata Promoters Pvt. Ltd., which supported the view that ITC could be claimed irrespective of the month in which the purchase invoices were raised. The court emphasized that the claim of ITC is indefeasible and cannot be denied based on machinery provisions or time frame limitations.

2. Interpretation of Section 10(3) vis-à-vis Section 35 of the KVAT Act, 2003:

The court examined the true meaning and purport of Section 10(3) of the KVAT Act, 2003, in relation to Section 35 of the same Act. Section 10(3) deals with the calculation of net tax payable by a registered dealer, allowing the deduction of ITC against Output Tax payable in the same period. Section 35 pertains to the filing of returns by the dealer.

The court highlighted that the machinery provisions of filing returns under Section 35 cannot override the substantive provisions of Section 10(3). The court noted that the provisions of Section 10(3) did not specify any time frame for claiming ITC and that the claim could be made as long as it was supported by valid purchase invoices.

The court distinguished the case of Centum Industries Private Limited, where the claim of ITC was disallowed due to a belated claim made beyond a reasonable period of six months. The court clarified that the Division Bench in Centum Industries did not restrict the claim of ITC to the same tax period but disallowed it due to the delay in making the claim.

Conclusion:

The court concluded that the impugned assessment/re-assessment orders denying ITC claims based on the restrictive interpretation of Section 10(3) were illegal and unsustainable. The court quashed the impugned orders and restored the matters to the Assessing Authorities for passing fresh orders in accordance with the law. The court directed the Commissioner of Commercial Taxes to issue a circular in terms of the judgments favoring assessees to avoid further litigation on this issue and cautioned the authorities against taking contrary views in the future.