S.P.Faizal Vs State of Kerala (Kerala High Court)
Conclusion: Input tax credit could be legitimately availed by the purchasing dealer under the Kerala Value Added Tax Act, 2003, even in cases where the selling dealer failed to remit the tax due to the government, provided that the purchasing dealer had strictly complied with all statutory requirements including possession of genuine tax invoices as required under the statute.
Held: In the instant case, the registered dealers under the provisions of the KVAT Act had filed writ petition challenging the denial of input tax credit on certain purchases made from registered selling dealers who, though having issued proper tax invoices and collected the tax component from assessee, subsequently failed to deposit the said tax amounts with the government treasury. Assessee’s case was that denying input tax credit to compliant purchasing dealers due to selling dealers’ subsequent defaults would subvert the VAT system’s objective of preventing cascading taxation. Such denial would effectively impose double taxation by making purchasers bear tax burdens already paid to defaulting sellers, contrary to the basic principles of value-added taxation, while placing an unreasonable compliance burden on dealers. It was held that the decision in C. P. Rasheed v. State of Kerala [OT Rev. No. 104/2015, decided on 10.08.2018] created two sub-classes: one being bona fide purchasers who have remitted tax based on valid invoices, and another comprising fraudulent purchasers colluding with sellers to falsely claim input tax credit and cause loss to the revenue. The purchasers who were identically situated were treated differently only on an arbitrary basis, i.e. on the basis of whether the seller had remitted the tax or not. Yet, under C.P.Rasheed, even a bona fide purchaser, who had paid tax against genuine transactions, was denied input tax credit merely because the seller had defaulted in payment, which violated Article 14 of the Constitution. Despite both purchasers having complied with statutory obligations, only the latter was denied credit. Such a distinction was not based on any rational or intelligible differentia and imposed an impossible burden on purchasers to monitor the compliance behaviour of their sellers. After careful consideration of all aspects of the matter, it was concluded that input tax credit could be legitimately availed by the purchasing dealer under the Kerala Value Added Tax Act, 2003, even in cases where the selling dealer failed to remit the tax due to the government, provided that the purchasing dealer had strictly complied with all statutory requirements including possession of genuine tax invoices as required under the statute. The responsibility for recovering unpaid tax lies properly and primarily with the tax authorities, who must proceed against the defaulting seller, rather than against the innocent purchasing dealer who has fulfilled all obligations imposed by the Act. The view expressed in C.P. Rasheed (supra) was incorrect and, resultantly, overrule the said judgment.
