2021 (7) TMI 307 - HC - VAT and Sales Tax

Validity of reassessment order - Input tax credit on purchases from three dealers - bogus transaction - denial on the ground that the said three dealers were non-existent but bogus dealers and that they had not sold any goods to the respondent but had only issued tax invoice in order to enable the respondent to claim ITC - HELD THAT - The provisions of the Act provide for registration of dealers and provides for detection of fraudulent acts to claim ITC and also provide a detailed mechanism for conducting audit of the registered dealers and also launch prosecution against dealers who indulge in generating bogus invoices to avail the ITC etc. It is seen from the case on hand that the selling dealers from whom the assessee had purchased the goods were all registered dealers. It is not the case of the revenue that these selling dealers were not traceable and or that they were not registered. Consequently, the revenue cannot contend that merely because the selling dealers have failed to deposit the VAT collected from the assessee, the transaction itself is bogus and is designed to claim ITC - This question is no longer res-intigra in view of the judgment of the Hon ble Apex Court in the case of CORPORATION BANK VERSUS SARASWATI ABHARANSALA AND ANOTHER 2008 (11) TMI 387 - SUPREME COURT where it was held that the bona fide buyer cannot be put in jeopardy when he was done all the law requires him to do so. The purchasing dealer has no means to ascertain and secure compliance by the selling dealer. In CENTRAL WINES VERSUS SPECIAL COMMERCIAL TAX OFFICER (AND OTHER APPEALS) 1987 (1) TMI 442 - SUPREME COURT , the Supreme Court inter-alia observed that the seller acts an agent of the buyer while collecting the tax. Therefore, a bonafide purchaser cannot be put at jeopardy, when he has done all that the law expects him to comply. The purchasing dealer has no means to ascertain and secure compliance provisions of the KVAT Act by the selling dealer - it cannot be said that the assessee has conspired with the selling dealers to avail the ITC fraudulently. If the revenue is able to demonstrate that the assessee and the selling dealers have conspired, then it is still open for the Revenue to initiate necessary steps against the assessee as well. This revision petition lacks merit and the same is dismissed.

Summary

Issues involved:
Challenge to order of Karnataka Appellate Tribunal disallowing Input Tax Credit (ITC) claimed by respondent on purchases made from alleged bogus dealers.

Detailed Analysis:

1. Background: The respondent, a dealer registered under the Karnataka Value Added Tax Act, claimed ITC on purchases made from certain dealers during the tax period April 2011 to March 2012. The Assessing Authority disallowed the ITC on the ground that the dealers were non-existent and had issued tax invoices solely for claiming ITC.

2. Appeals Process: The respondent's appeal was dismissed by the First Appellate Authority, leading to a second appeal before the Karnataka Administrative Tribunal. The Tribunal set aside the previous orders, holding that ITC cannot be denied solely based on the selling dealer's failure to discharge tax liability, prompting the Revenue to file the revision petition.

3. Revenue's Argument: The Revenue contended that bogus invoices are generated to claim ITC, making it challenging for the government to track transactions. The Act empowers the department to take action against purchasing or selling dealers when tax payments are not deposited or adjusted correctly.

4. Assessee's Defense: The assessee argued that transactions were legitimate, supported by original tax invoices and E-Sugam receipts. Payments to selling dealers were made through account payee cheques, ensuring compliance with the K.V.A.T. Act.

5. Judicial Analysis: The Court examined the legislative intent behind the K.V.A.T. Act, emphasizing the set-off mechanism and provisions to prevent fraudulent ITC claims. It noted that the selling dealers were registered, making it unreasonable to label transactions as bogus solely based on tax non-payment.

6. Legal Precedents: Referring to Supreme Court judgments, the Court reiterated that a bona fide purchaser should not suffer due to the selling dealer's actions. The Department's remedy lies in pursuing defaulting selling dealers for tax recovery, not denying ITC to purchasing dealers unless collusion is proven.

7. Court's Decision: The Court held that the assessee was entitled to claim ITC as no collusion between the assessee and selling dealers was established. The Revenue could take action if collusion is proven. The revision petition lacked merit and was dismissed, with a directive to credit the claimed ITC to the assessee's account promptly.

In conclusion, the judgment upheld the assessee's right to claim ITC, emphasizing the need for concrete evidence of collusion to deny ITC. The decision underscored the importance of ensuring compliance with tax laws while safeguarding legitimate purchasers from fraudulent practices.