2019 (6) TMI 941 - HC - VAT and Sales Tax

Input tax credit - KVAT Act - failure to remitting of tax on the part of seller - Whether remitting of tax by registered selling dealer is a condition precedent in claiming input tax credit by the purchasing dealer against a valid invoice with the tax component paid? - HELD THAT - Sections 10 2 and 3 of the KVAT Act contemplates what is input tax in relation to any registered dealer and the net tax payable by a registered dealer in respect of each tax period. Section 11 a 1 to 9 deals with input tax restrictions. Section 11 a 9 would be relevant for the purposes of the present case which spells out about the input tax restrictions inasmuch as the tax paid on goods purchased by a dealer who is required to be registered under the Act, but has failed to register. It is also admitted by the prescribed authority that there is no provision in KVAT Act which restricts input credit on purchases effected from defaulting dealers. It is clear that the benefit of input tax cannot be deprived to the purchaser dealer, if the purchaser dealer satisfactorily demonstrates that while purchasing goods, he has paid the amount of tax to the selling dealer. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the selling dealer - Indisputably, the petitioner has purchased the goods from a registered dealer not from an unregistered dealer. Section 9 of the KVAT Act provides collection of tax by registered dealers. If there is any default on the part of such registered dealers in not remitting the tax, so collected into the Government treasury or any designated bank and furnish monthly returns as specified under Section 35 to the prescribed authority, the proceedings are required to be initiated against such registered selling dealers in accordance with the provisions of the KVAT Act. The re-assessment orders and the demand notices at Annexures A, B, C and D are set aside - proceedings are restored to the file of the respondent No.1 prescribed authority for reconsideration. Respondent No.1 prescribed authority shall re-consider the matter in accordance with law and after providing an opportunity of hearing to the petitioner shall conclude the re-assessments in an expedite manner - Petition allowed by way of remand.

Issues Involved:
1. Validity of re-assessment orders and consequent demand notices.
2. Legitimacy of disallowing input tax credit (ITC) based on the selling dealer's tax compliance.
3. Jurisdiction and procedural fairness in issuing re-assessment orders.
4. Burden of proof under Section 70 of the KVAT Act.
5. Interpretation of Sections 10(2), 10(3), and 11(a)(9) of the KVAT Act.

Issue-wise Detailed Analysis:

1. Validity of Re-assessment Orders and Consequent Demand Notices:
The petitioner challenged the re-assessment orders and consequent demand notices issued by the prescribed authority for the tax periods 2011-12 and 2012-13. The petitioner, a dealer registered under the KVAT Act, had availed ITC on purchases from registered dealers. The re-assessment orders disallowed ITC on the grounds that the selling dealers either did not file VAT returns, did not pay taxes, or were deregistered. The petitioner argued that deregistration should only have a prospective effect and that there was no restriction on ITC if the selling dealer failed to remit the collected tax. The court found that the prescribed authority's decision to disallow ITC was contrary to the provisions of the KVAT Act and set aside the re-assessment orders and demand notices.

2. Legitimacy of Disallowing ITC Based on the Selling Dealer's Tax Compliance:
The court examined whether the remitting of tax by the registered selling dealer is a condition precedent for the purchasing dealer to claim ITC. The relevant provisions, Sections 10(2) and 10(3), and 11(a)(9) of the KVAT Act, were analyzed. The court found that there is no provision in the KVAT Act restricting ITC on purchases from defaulting dealers. Citing previous judgments, the court held that once the purchasing dealer demonstrates that they have paid VAT to the selling dealer, the entitlement to ITC should not be affected by the selling dealer's failure to remit the tax. The court emphasized that the revenue should proceed against the defaulting selling dealer, not the purchasing dealer.

3. Jurisdiction and Procedural Fairness in Issuing Re-assessment Orders:
The petitioner argued that the re-assessment orders were passed without providing sufficient opportunity to be heard, making them perverse, arbitrary, and illegal. The court acknowledged that while there is no absolute bar to exercising writ jurisdiction, procedural fairness must be maintained. The court found that the prescribed authority exceeded its jurisdiction by disallowing ITC based on the selling dealer's tax compliance and emphasized the need for procedural fairness.

4. Burden of Proof Under Section 70 of the KVAT Act:
The prescribed authority argued that the petitioner failed to provide sufficient proof for ITC claims, including original purchase invoices and proof of physical movement of goods. The court, however, clarified that the burden of proof under Section 70 cannot be enlarged beyond its scope. The court reiterated that the purchasing dealer's entitlement to ITC should not be contingent upon the selling dealer's compliance with tax remittance. The court found that the petitioner had satisfactorily demonstrated compliance with the requirements for claiming ITC.

5. Interpretation of Sections 10(2), 10(3), and 11(a)(9) of the KVAT Act:
The court analyzed the relevant provisions of the KVAT Act. Section 10(2) defines ITC in relation to a registered dealer, and Section 10(3) outlines the net tax payable by a registered dealer. Section 11(a)(9) specifies input tax restrictions, particularly for dealers required to be registered but who have failed to register. The court found that these provisions do not restrict ITC on purchases from defaulting dealers. The court cited previous judgments to support the interpretation that ITC should not be denied to the purchasing dealer based on the selling dealer's non-compliance.

Conclusion:
The court set aside the re-assessment orders and demand notices and restored the proceedings to the prescribed authority for reconsideration. The prescribed authority was directed to re-assess the matter in accordance with the court's observations, ensuring procedural fairness and providing an opportunity for the petitioner to be heard. The court emphasized that ITC should not be denied to the purchasing dealer based on the selling dealer's failure to remit the collected tax, and the revenue should proceed against the defaulting selling dealer instead.

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