Sonal Apparel Private Limited Vs State of Karnataka (Karnataka High Court)
The petitions challenged the vires and interpretation of Section 10(3) of the Karnataka Value Added Tax Act, 2003 (KVAT Act), contending that the Assessing Authorities had interpreted the provision in a manner inconsistent with the object and scheme of the Act.
The KVAT Act was introduced to address the cascading effect of taxation under the earlier Karnataka Sales Tax Act, 1957, by allowing set-off of input tax against output tax so that tax is levied only on value addition. Under this scheme, the net tax payable by a dealer is the output tax minus input tax paid on purchases.
The petitioners, engaged in manufacturing activities, purchased taxable goods as inputs and claimed input tax credit in the month in which purchases were accounted in their books. Due to practical reasons such as audit checks, quality and quantity verification, return and replacement of goods, and timing differences between invoicing and receipt of goods, purchases were often accounted for in a different month than when invoices were raised. Despite this, the petitioners consistently claimed input tax credit in the accounting month.
A judicial interpretation in an earlier case had held that input tax credit must be claimed in the month in which input tax is paid, leading the Revenue to deny credit where it was claimed in a different month than the invoice date. Consequently, reassessment orders were issued disallowing such claims.
