Joint Commissioner of Commercial Taxes (Appeals) Vs Rajshreee Impex (Karnataka High Court)
The Karnataka High Court considered a revision petition filed by the Revenue challenging the order dated 19.09.2018 passed by the Karnataka Appellate Tribunal (Tribunal) in S.T.A. No. 895/2016. The respondent, a registered dealer under the Karnataka Value Added Tax Act, 2003 (KVAT Act), was engaged in the business of trading in iron and steel. For the tax period April 2011 to March 2012, the respondent filed returns claiming Input Tax Credit (ITC) on purchases made from registered dealers.
The Assessing Authority passed a reassessment order dated 30.05.2014 disallowing the ITC claimed in respect of purchases from three dealers on the ground that they were non-existent and bogus dealers who had merely issued tax invoices to enable the respondent to claim ITC. The Assessing Authority also levied penalty under Section 70(2) and interest under Section 36 of the KVAT Act. Subsequently, the reassessment order was rectified by a fresh order dated 29.11.2014 after one of the alleged bogus dealers had paid the tax relating to the sales made to the respondent.
The respondent’s appeal before the First Appellate Authority under Section 62 of the KVAT Act was dismissed by order dated 09.08.2016. Thereafter, the respondent preferred a second appeal before the Karnataka Appellate Tribunal, which allowed the appeal and set aside the orders of the Assessing Authority and the First Appellate Authority. The Tribunal held that ITC could not be denied merely because the selling dealer had failed to discharge its tax liability. Aggrieved by this order, the Revenue filed the present revision petition.
The Revenue contended that bogus invoices were generated to deprive the State of revenue and to enable fraudulent claims of ITC. It submitted that the provisions of the KVAT Act empowered the Department to proceed against the purchasing dealer, the selling dealer, or both where the tax collected by the selling dealer was not deposited with the Government, was not lawfully adjusted against the selling dealer’s input tax liability, or was not correctly reflected in the selling dealer’s returns.
The respondent submitted that there was no basis for treating the transactions as bogus. It pointed out that it possessed original tax invoices as well as E-Sugam receipts and that payments to the selling dealers had been made through account payee cheques. According to the respondent, it had taken all steps required under the KVAT Act to ensure that the transactions were genuine and lawful.
The High Court referred to the statement of objects and reasons of the KVAT Act, which provides for set-off of tax paid on purchases within the State through the input rebating mechanism. The Court observed that the Act also provides for registration of dealers, detection of fraudulent ITC claims, audit mechanisms, and prosecution of dealers generating bogus invoices.
The Court noted that the selling dealers from whom the respondent had purchased goods were registered dealers and that it was not the Revenue’s case that they were untraceable or unregistered. Consequently, the Court held that the Revenue could not contend that the transactions themselves were bogus merely because the selling dealers had failed to deposit the VAT collected from the respondent.
Referring to earlier judicial precedents, the Court observed that a bona fide purchaser cannot be put in jeopardy after complying with all legal requirements, as the purchasing dealer has no means of ensuring that the selling dealer complies with the provisions of the KVAT Act. The Court further observed that in the present case, apart from alleging collusion between the respondent and the selling dealers, the Revenue had failed to establish such collusion. The respondent had made payments through account payee cheques and, therefore, it could not be concluded that the respondent had conspired with the selling dealers to fraudulently avail ITC. The Court clarified that if the Revenue is able to establish such conspiracy, it would remain open to initiate appropriate proceedings against the assessee.
Holding that the revision petition lacked merit, the Karnataka High Court dismissed the revision petition and directed the Revenue to ensure that the Input Tax Credit claimed by the assessee for the financial year 2011-12 was credited to the assessee’s account within one month from the date of receipt of the certified copy of the order.
Cases Discussed
- ARUN JAIN (HUF) VS. COMMISSIONER, VALUE ADDED TAX (Delhi High Court), W.P.(C).NO.4704/2016 decided on 26.10.2017
- CORPORATION BANK VS. SARASWATI ABHARANSALA AND ANOTHER (Supreme Court), (2009) 19 VST 84
- M/S CENTRAL WINES, HYDERABAD VS. SPECIAL COMMERCIAL TAX OFFICER (Supreme Court), (1987) 2 SCC 371
- STRP No.82/2018
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This revision petition is filed by the Revenue challenging the order of the Karnataka Appellate Tribunal, Bengaluru (henceforth referred to as ‘the Tribunal’ for short) dated 19.09.2018 passed in S.T.A.No.895/2016. The respondent is a Proprietor and a dealer registered under the provisions of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as ‘K.V.A.T. Act’ for short) and is engaged in the business of trading in Iron and Steel. During the tax period April 2011 to March 2012, the respondent had filed its returns and claimed Input Tax Credit (hereinafter referred to as ‘ITC’ for short) on the purchases made from the registered dealers. The Assessing Authority passed a reassessment order dated 30.05.2014 disallowing the ITC claimed in respect of the purchases from three dealers, 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. The Assessing Authority levied penalty under Section 70(2) and interest under Section 36 of the K.V.A.T. Act. The Assessing Officer thereafter passed an order of reassessment on 30.05.2014 which was later rectified and a fresh order dated 29.11.2014, as one of the alleged bogus dealers had paid the tax on the sales brought about him to the respondent.
2. The respondent filed an appeal under Section 62 of the K.V.A.T. Act, which was dismissed by the First Appellate Authority in terms of the order dated 09.08.2016. The respondent then filed a second appeal before the Karnataka Administrative Tribunal (hereinafter referred to as ‘the Tribunal’ for short). The Tribunal after hearing the parties, passed an order dated 19.09.2018 and allowed the appeals and set aside the orders of Assessing Authority and the First Appellate Authority. The Tribunal held that the ITC cannot be denied merely on the ground that the selling dealer had failed to discharge his tax liability. Being aggrieved by the aforesaid order of the Tribunal, the revenue has preferred the present revision petition.
3. The learned Government Advocate submitted that in order to deprive revenue to the State, bogus invoices are generated and ITC is claimed from the Government. He contended that it is difficult for the Government to keep a track of the transactions that happen between the dealers. He also contended that the provisions of the Act give a free hand to the department to proceed against the purchasing dealers or the selling dealers or both, when it is found that the tax paid by the purchasing dealer is not actually deposited by the selling dealer with the Government or has not been lawfully adjusted against the selling dealers input tax liability and or is not correctly reflected in the return filed by such selling dealer in the respective tax periods.
4. Per contra, learned counsel for the assessee submitted that there was no reason as to why the transaction entered into by the assessee with the dealers could be termed as bogus. He brought to our attention the fact that the assessee is in possession of the original tax invoices as well as the E-Sugam receipts. He also submitted that the payment to the selling dealers were made through account payee cheques and therefore, he contended that the assessee took all steps to ensure that the transaction in question is lawful and brought about in accordance with the provisions of the K.V.A.T. Act.
5. We have given our anxious consideration to the arguments canvassed by the learned counsel for the parties.
6. The statement of objects and reasons to the K.V.A.T. Act provide that the legislation is meant to provide for set off of all tax paid at the earliest points in respect of goods sold against tax payable at any point, the set off scheme being called as ‘input rebating’. It also provides that the tax paid on inputs purchased within the State is permitted to be rebated against goods sold within the state in the course of trade. 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. A similar question fell for consideration before this Court in STRP No.82/2018. This question is no longer res-intigra in view of the judgment of the Hon’ble Apex Court in the case of CORPORATION BANK VS. SARASWATI ABHARANSALA AND ANOTHER reported in (2009) 19 VST 84, where the Hon’ble Supreme Court held:
“Para 48. The decision of he Supreme Court in Corporation Bank (supra) applies to the present case on all fronts. The Court explained there that the selling dealer collects tax as an agent of the Government. Therefore, 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. Again, in Central Wines, Hyderabad (Supra) the Supreme Court inter alia observed that “the seller acts as an agent of the buyer while collecting the tax”.
7. In M/S CENTRAL WINES, HYDERABAD VS. SPECIAL COMMERCIAL TAX OFFICER reported in (1987) 2 SCC 371, the Supreme Court inter-alia observed that the seller acts an agent of the buyer while collecting the tax. The High Court of Delhi in the case of ARUN JAIN (HUF) VS. COMMISSIONER, VALUE ADDED TAX in W.P.(C).NO.4704/2016 decided on 26.10.2017 further held:
“54. The result of such reading down would be that the department is precluded from invokingsection 9(2)(g) of the DVAT to deny ITC to a purchasing dealer who has bon afide entered into a purchase transaction with a registered selling dealer who had issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across the material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act”.
8. 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 K.V.A.T. Act by the selling dealer. Following the aforesaid exposition of law, this Court in similar circumstances in STRP No.82/2018 has held that the assessee is entitled to claim ITC. In the present case, except contending that the assessee in collusion with the selling dealers have created the invoices to claim ITC, the revenue was not able to establish the same. The assessee has made the payment of the invoice through account payee cheques. Therefore, it cannot be said that the assessee has conspired with the selling dealers to avail the ITC fraudulently. As held above, 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.
9. In that view of the matter, this revision petition lacks merit and the same is dismissed. The revenue shall ensure that the Input Tax Credit claimed by the assessee for the financial year 2011-12 shall be credited to the account of the assessee within a period of one month from the date of receipt of the certified copy of this order.
