Allowability of Input Tax Credit under Rajasthan Value Added Tax Act 2003

CA Dr Arpit Haldia

Analysis of the recent Judicial Rulings in the Matter of Allowability of Input Tax Credit under Rajasthan Value Added Tax Act 2003:

Recently there have been a slew of decisions on the matter of allowability of Input Tax Credit by various High Courts including Hon’ble Rajasthan High Court and Rajasthan Tax Board. This article aims to critically analyse the effect of recent judgments in terms of provisions of Rajasthan Value Added Tax Act 2003 and earlier judgments relating to Input Tax Credit delivered by Bombay and Delhi High Court.

1. RAJASTHAN HIGH COURT IN THE MATTER OF SHREE BALAJI TRADING COMPANY VS. STATE OF RAJASTHAN & ORS. (S.B.CIVIL WRIT PETITION NO.5388/14).

The issue before the Hon’ble High Court in both the matters can be divided in two parts as follows:

a) Genuineness of the Purchase Transaction: The Hon’ble High Court in its decision observed that

“But then, as per provisions of sub-section (3) (v) of Section 18, no input tax credit shall be allowed where purchasing dealer fails to prove genuineness of the purchase transaction on being asked to do so by the Assessing Authority.”

Later on it further observed with regard to the genuineness of the Transaction that

“Further, the involvement of the petitioner in alleged first sale in the series of sales, which is found to be suspicious and bogus, is presumed without there being any justifiable reason available on record.”

b) Deposit of Tax Collected by the selling dealer in the series of Transaction: The second issue was if the selling and purchasing dealers have collected and deposited the tax on the value of the underlying sale, whether any anterior or posterior link in the series should have bearing on the transactions.

The Hon’ble High Court observed that

Indisputably, a registered dealer other than the dealers covered under sub-section (2) of Section 3 or Section 5 of the Act are entitled for input tax credit in respect of the purchase of any taxable goods for the purposes specified under Section 18 of the Act, to the extent and in such manner, as may be prescribed.

Later on it further observed with regard to the deposit of the tax collected by the selling dealer that

“There is no finding recorded by the Assessing Authority regarding the collected tax being deposited by the selling dealer in respect of the purchase transactions entered into by the petitioner.”

The Hon’ble High Court then finally held that

‘Thus, on the facts and in the circumstances of the case, in the considered opinion of this court, without considering the submissions of the petitioner and the material placed on record in their entirety and objectivity, the finding recorded by the Assessing Authority discarding the purchase transactions in question as not genuine, is not sustainable in the eyes of law.”

Analysis of the Judgement: Therefore the issue on which the matter was remanded by the Hon’ble Rajasthan High Court was that the firstly the Assessing Authority discarded the purchase transaction holding it as not genuine and secondly tax was not deposited by selling dealer, without considering the submissions of the petitioner and material placed on record by the petitioner. The Judgement although lays down clearly that a transaction can only be held ingenuine provided the submissions submitted by the assessee are verified and enquired and should not be summarily rejected without them being considered in entirety and objectively.

There was no specific findings of law on provisions of Input Tax Credit however only an observation was made regarding the allowability of the Input Tax Credit for the purposes specified under section 18 to the extent and in such manner as may be specified and as per provisions of Section 18(3)(v) providing for genuineness of purchase.

2. Divisional Bench of Rajasthan Tax Board in the matter of Rajasthan Marketing Jaipur Vs AC, Commercial Taxes, Circle M, Jaipur: The Judgement was significant in respect of following issues

a) Distinguishing the Judgement of Hon’ble Punjab and Haryana High Court in the Matter of Gheru Lal Bal Chand: The Bench of Rajasthan Tax Board first distinguished the provisions of Section 18(2) of the Rajasthan Value Added Tax Act and Section 8(3) of the Haryana Value Added Tax Act and then proceeded to hold that

“It is clear in the instant case that the allowance of the ITC under the Act is solely governed by the section 18 of the Act and it cannot be influenced by the assessment proceedings of the errant or tax defaulters dealers and undoubtedly is fiercely independent of the charging sections of the assessment proceedings provided in the Act in this regard.

b) Distinguishing the Judgement of Hon’ble Apex Court in the matter of Suresh Trading Company: The Bench of Rajasthan Tax Board reproduced the relevant portion of the decision of Hon’ble Apex Court as follows:

“The condition precedent for becoming entitled to make a tax free resale was the purchase of the goods which were resold from a registered dealer and the obtaining from that registered dealer of a certificate in this behalf. This condition having been fulfilled, the right of the purchasing dealer to make a tax free sale accrued to it.”

The Divisional Bench of Tax Board then distinguished the decision of Hon’ble Apex Court with regard to the Provisions of allowability of Input Tax Credit holding that

“A study of the facts of the aforesaid case revealed that the facts of the aforesaid case were distinguishable from those in the instant case and were not applicable here where a different sort of denial, i.e. ITC was in place and denial did not emnate from subjecting tax free sales to tax thereby taxing it retrospectively.”

The Hon’ble Bench then made an independent analysis of the provisions of Section 18(2) of the Rajasthan Value Added Tax Act 2003 as follows:

“In the present context, ITC could not be allowed to the appellant assessee because the seller of the goods had not deposited the tax in the government treasury on the basis of VAT invoices issued by him and scheme of section 18 from Clause A to G thereof of the Act made law clear on the point that ITC was a right of the dealer who paid the tax for goods purchased as laid down in clause A to G of sub-section 1 of the section 18 of the Act for business purposes herein, but only when the inevitable condition as expressed in the conjoining adjunct of the construct i.e. sub section 2 of section 18 of the Act was achieved in the process of sale.”

The Hon’ble Bench of Tax Board held that

“On analysis of the factual and legal matrix of the case in the foregoing account, it is held without deliberating on the merit of the aforesaid case that balance of convenience prima facie lies in favour of the respondent Revenue and since the selling dealer was not found to have deposited due tax collected from the appellant buyer, in the present case cannot be allowed claim of ITC in terms of the scheme of input tax credit set out in the aforesaid section 18 of the Act.”

Analysis of the Judgement: Thus it has been very clearly and categorically held by Hon’ble Divisional Bench of the Rajasthan Tax Board that Input Tax Credit would be allowed to the buyer only when the selling dealer has deposited the tax collected. The decision is a landmark decision in many ways than one as it has now put an end to the controversy arising out of differing judgments of the Bench of the Tax Board on the basis of Judgement of Apex Court in the matter of Suresh Trading Company and secondly it has now distinguished the provisions of Haryana Vat Act and thereby distinguishing the decision of Hon’ble Punjab and Haryana High Court in the matter of Gheru Lal Bal Chand with respect to the provisions prevailing in Rajasthan Value Added Tax Act.

3. Hon’ble Madras High Court in the matter of Infiniti Wholesale Limited vs The Assistant Commissioner (Ct) on 6 November, 2014 held as follows:

“The only conclusion that could be arrived is the ITC availed by the petitioner could not have been proposed to be reversed or reversed on the grounds stated by the respondent, i.e., the selling dealer has not filed returns or not paid taxes or they were unregistered dealers or their registrations were retrospectively cancelled.”

However the decision of Hon’ble Madras High Court can be distinguished and cannot be applied in the context of Rajasthan Value Added Tax Act as the condition for allowability of the Input Tax Credit as per Tamil Nadu Value Added Tax Act is different. The Hon’ble Madras High Court in the decision of Infiniti Wholesale Limited referred to its decision in the matter of Vinayak Agencies as follows:

“Section 19 (1) states that input-tax credit can be claimed by a registered dealer, if he establishes that the tax due on such purchase has been paid by him in the manner prescribed and that was accepted at the time when the self-assessment was made. The pre-revision notices and the orders clearly stated that the petitioner-dealer had paid the tax to the selling dealer. If that be the case, it was held that the petitioner’s case therein squarely fell under the proviso to Section 19 (1) of the Act. Further, it was another matter that the selling dealer had not paid the collected tax. The liability had to be fastened on the selling dealer and not on the petitioner-dealer which had shown proof of payment of tax on purchases made.

Distinguishing the applicability of the Judgement of Hon’ble Madras High Court in context of Provisions of Rajasthan Value Added Tax Act: It can be observed from above that condition for allowability of Input Tax Credit in the Tamil Nadu Value Added Tax Act was that the tax due on the purchases has been paid by buyer to the seller in the manner prescribed. Once the purchaser has paid the due tax on purchases, the fact that the selling dealer has not paid the tax collected from the purchaser is all together a different matter and liability in such cases cannot be fastened on the purchasing dealer but has to be fastened on the selling dealer. This condition is very different from the condition existing in Rajasthan Value Added Tax Act which provides that the purchasing dealer has to prove that tax has been deposited by the Selling Dealer to the Government Treasury. Therefore the decision of Hon’ble Madras High Court has no applicability in the context of provisions appearing in Rajasthan Value Added Tax Act.

4. It would be pertinent here to also refer the decision of Hon’ble Delhi High Court in the matter of Shanti Kiran India Pvt. Ltd. vs Commissioner Trade & Tax Deptt. on 4 January, 2013 where it was held as follows:

The Hon’ble Delhi High Court also held that Input Tax Credit cannot be disallowed to the purchasing dealers if tax has not been deposited by the selling dealer. It would be pertinent here to mention that this decision was relating to the provisions which existed in Delhi Value Added Tax Act prior to 1^st April 2010. The Statute at that time did not contain pre-condition regarding mandatory deposit of tax by the selling dealer for allowability of the claim of Input Tax Credit to the purchasing dealer.

“As a result, this Court is of the opinion that the interpretation placed by the Tribunal that there is statutory authority for granting input credit, only to the extent tax is deposited by the selling dealer, is unsound and contrary to the statute.”

However it would be appropriate here to refer the observation of the Hon’ble Delhi High Court which was as follows:

Section 9(2) lists situations when input tax credit cannot be allowed. It reads as follows:

(g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.”

“Concededly, clause (g) to Section 9(2) was introduced by an amendment, made effective, in 2010. It was not in existence when the dispute which is the subject matter of these appeals, arose.”

Hon’ble Delhi High Court further referred to the decision of Hon’ble Bombay High Court in the matter of M/S Mahalaxmi Cotton Ginning as follows:

“In the present case, as noticed previously, the VAT Act is silent; Section 9(2) (g) was introduced only with effect from 1-4-2010. Therefore, the Bombay High Court decision is not of any assistance to the revenue.”

The decision of Hon’ble Delhi High Court also lays down that the law as prescribed by Hon’ble Bombay High Court. Therefore, the decision of Rajasthan Tax Board is also in line with the principles as enunciated above by Hon’ble Delhi High Court.

5. Applicability of the Judgement of Mahalaxmi Cotton Ginning in case of non-deposit of Tax in a chain of Transaction of Sale by any one dealer: It would be pertinent here to refer to the decision of Hon’ble Bombay High Court in the matter of Mahalaxmi Cotton Ginning regarding the Tax not paid to the treasury of the Government in any chain of transaction and how the matter is to be dealt with. This pronouncement gains importance as similar matter was before Hon’ble Rajasthan High Court but judgement was not given on the merits of the provision of the section but was remanded back to the Assessing Officer. The Hon’ble Bombay High Court highlighted on the statement of step that would be pursued against defaulting selling dealers, submitted by Learned Advocate General appearing on behalf of the State. The Statement contained following steps

“Set off will be denied to dealers where at any stage in the chain of sales a tax invoice/certificate by Defaulter is or has been relied on:

a) In the event of no returns having been filed by the Defaulter, the dealers will be denied the corresponding set off;

b) In the case of short filing, dealers who have purchased from the Defaulter will be granted set off pro rata to the tax paid;

c) In the case of undisclosed sales, the dealers will be denied the entire amount being claimed as set off in relation to the undisclosed sale;

d) To prevent a cascading effect, the tax will be recovered only once. As far as possible, the Sales Tax Department will recover the tax from the dealer who purchases from the Defaulter. However, the Sales Tax Department will retain the option of denying a set off and of pursuing all selling dealers in the chain until recovery is ultimately made from any one of them.”

Thereby it can be seen that Hon’ble Bombay High Court in its land mark Judgement dealt with the issue of allowability of Input Tax Credit in case there is default in payment of tax in a chain of sale by one of the dealers.

Conclusion: It can be concluded on following issues as follows:

a) Issue of disallowance of Input Tax Credit as per the provisions of Rajasthan Value Added Tax Act on account of the sole reason that Tax has not been deposited by selling dealer: Although Hon’ble Rajasthan High Court did not pass any clear finding in this regard but the decision of Rajasthan Tax Board is based on the principles enunciated by Hon’ble Bombay High Court and Hon’ble Delhi High Court and further it has clearly distinguished the decision of Hon’ble Haryana High Court and Hon’ble Madras High Court. Therefore as the situation stands today, Tax Credit as per the provisions of Rajasthan Value Added Tax Act would not be allowable to the purchasing dealer if tax has been not deposited by the selling dealer.

b) Disallowance of the Tax credit in the matter of chain transaction of sales, where one of the dealers has defaulted in the chain of transaction of sales with regard to the payment of sales tax: The decision of Hon’ble Bombay High Court in the matter of Mahalaxmi Cotton Ginning lays down the guideline.

c) Procedure to be followed for assessing the genuineness of transaction of Purchase for the purpose of claiming of Input Tax Credit: The decision of Hon’ble Rajasthan High Court lays down that a transaction can only be held ingenuine provided the submissions submitted by the assessee are verified and enquired and should not be summarily rejected without them being considered in entirety and objectively.

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