Introduction:- it is observed by me on the various decision of the HC as well as SC on the account of allowance of the ITC , the decision of M/s. Mahalaxmi Cotton Ginning vs State Of Maharashtra & others, Bombay High court is always referred by the revenue which was in their favor for the disallowance of the ITC, it is observed that this decision was not a normal decision or it cannot be applied in the case of bonafide purchasing dealer case in my view, so I am presenting the details analysis of this judgment for the reference of the viewer which include the contention of the assessee, department, observation of the high court, decision not considered by HC for this case decision with reason thereof and final outcome.
Ground of the assessee in the high court:- Section 48(5) of Maharashtra VAT Act disallow the ITC, if same is not deposit with the government similar as CGST Act 16(2)(d) clause for the payment of tax to the government, further the ground raised by the assessee is as summarized below.
1) Constitutional validity of the Section 48(5) of the MVAT Act on account of unequal treatment to the equal being taken all the dealer as culprit in the case of non-deposit of ITC
2) No Provision of refund, if the selling dealer deposit the tax to the government on later stage after the assessment at their own, then refund is applicable for the purchasing dealer after their assessment and payment tax thereon.
3) burden on the purchasing dealer
1) Unequal treatment to the equal :-. The Act does not provide any machinery for the purchaser to ascertain whether the seller has actually paid VAT. Section 48(5) does not protect the purchaser in a case where the seller has not paid the tax into the Government Treasury which he had collected from the purchaser. This constitutes an unreasonable classification between the seller and the purchaser;
2) No provision for refund – Section 48(5) is arbitrary in operation in that it contemplates disallowance of ITC claimed by the purchaser if the seller has not deposited tax into the Treasury. However, no provision for refund has been made if tax is recovered from the seller by the State in future. The claim of refund can be made only in eighteen months which is arbitrary.
3) burden on the purchasing dealer – it is impossible to perform since the Act and the Rules do not empower the purchasing dealer to seek any document from the vendor other than the tax invoices for the purchases made. Denying the purchaser of the benefit of a set off for the failure of the selling dealer to deposit the tax would be to impose a condition which is impossible to perform. Selling dealers are registered by the State and collect tax as agents for or on behalf of the State. The State has statutory powers to recover tax from a defaulting dealer by taking recourse to the coercive arm of the law, including by way of assessment, recovery, attachment and prosecution. If Section 48(5) contemplates the disallowance of ITC without the performance of the statutory duty imposed upon the State, it must be held to be unconstitutional;
Dealer has paid tax to the vendor, if a set off is disallowed, he would be liable to pay the same amount to the Revenue once again together with interest and penalty which may result in a closure of business contrary to Articles 14 and 19(1)(g).
Contention of the petitioner :-
1) Having regard to the plain language of Section 48(5)and its legislative history, the provision has no application to a situation involving the non-payment of tax by a selling dealer in a bonafide case where there is no fraud, connivance or collusion between the selling and purchasing dealers
2) if the benefit of a set off is denied in every case because of the non-payment of tax by the selling dealer, the provision will be rendered unreasonable and violative of Article 14;
3) the duty of a selling dealer to pay tax, it is the duty of the State to enforce the obligation of the selling dealer to pay tax into the Treasury. Though the purchasing dealer has paid the tax to the selling dealer, he is yet denied the benefit of a set off which is arbitrary;
4) The purpose of a Value Added Tax is to avoid a cascading effect and the tax is an indirect tax. The purchasing dealer does not factor the tax as a cost and what is passed on to the customer is the tax that is actually paid. Consequently, even if the immediate selling dealer has not paid tax, a set off would be available to the purchasing dealer against the tax paid in the earlier link in the chain.
Contention of the Department :-
1) Set off is a concession which has been granted by the State legislature in order to prevent a cascading effect. While granting the concession the legislature is entitled to prescribe a condition of the nature provided in Section 48(5) to the effect that in no case shall the amount of the set off exceed the amount of tax in respect of the same goods actually paid into the Government Treasury
2) But for Section 48, there would have been no right to claim a set off. Moreover, under Section 48(1)(a) a set off can be availed of only where tax is paid and hence Section 48(5) is only clarificatory;
3) The liability to pay sales tax on the sale consideration arises at every point where a sale takes place and the liability would be on the full amount of the sale consideration. The liability need not be passed on by the selling dealer to the purchasing dealer. The tax when collected forms a part of the sale price in view of the law laid down by the Constitution Benches of the Supreme Court. The selling dealer is not an agent of the government when he collects the tax from the purchasing dealer. The sequitur is that the purchasing dealer is liable to pay sales tax when he assumes the character of a selling VBC 18/71 wp33.12.resv dealer who sells goods under a sale transaction. That liability is undiminished
4) The grant of a set off is a matter of policy introduced to protect the ultimate consumer against a cascading effect of taxes. While granting a concession in the form of a set off, it is open to the legislature to prescribe reasonable conditions that safeguard the interests of the Revenue;
5) In fiscal and economic matters, the legislature has a large degree of latitude and the court will not readily accept a challenge to constitutionality;
6) Section 48(1)(a)uses the expression “paid” while Section 48(5) uses the expression “actually paid”. The Court cannot rewrite the provisions of the statute. When a provision of law is constitutional, no question of reading down the provision would arise;
7) The power to enact tax legislation includes the power to VBC 19/71 wp33.12.resv enact provisions that would prevent the evasion of tax. In enacting the provisions of Section 48(5)the State legislature has introduced a provision that would ensure that the benefit of a set off is granted only where the tax was in the first instance paid into the Treasury. The intention at all material times has been that a set off should be allowed only where the tax has actually been paid into the Treasury.
Discussion in the case :- court has taken various decision before the final conclusion in this case and also noting why same is applied or not in this case as below.
1) In Tata Iron and Steel Company v. State of Bihar it was held that “This also makes it clear that the sales tax need not be passed on to the purchasers and this fact does not alter the real nature of the tax which, by the express provisions of the law, is cast upon the seller. The buyer is under no liability to pay sales tax in addition to the agreed sale price unless the contract specifically provides otherwise.”
2) Central Wines v. Special Commercial Tax Officer,4 the Supreme Court held that it is evident that “a dealer who sells the goods does not act as an agent for the State in collecting the sales tax from the persons to whom he sells the goods”.
3) They have taken base of the decision of RK Garg for the validity of this section.
4) Gheru Lal Bal Chand vs. State of Haryana not applied in this case because it was on the basis of a certificate issued by the seller and their genuness on the hand of the purchasing dealer, the genuness of the certificate cannt be track upon the purchasing dealer and the fact is different from the this case, this case is related to the hawala racket situation as per the department plea.
5) In the State of Maharashtra vs. Suresh Trading Company is also not applied in this case as in this case, registration has been cancelled by the department of the selling dealer on the retrospective date, purchasing dealer was entitled in law to rely upon the certificate of registration of the selling dealer and the retrospective cancellation of the registration certificate of the selling dealer would have no effect upon any person who had acted upon the strength of a registration certificate when the registration was current.
6) In State of Madras vs. Radio and Electricals Ltd is also not applied in this case as in this case, it is held “ There is nothing in the Act or the Rules that for infraction of the law committed by the purchasing dealer by misapplication of the goods after he purchased them, or for any fraudulent misrepresentation by him, penalty may be visited upon the selling dealer.”.
7) They applied decision of Chuni Lal Parshadi Lal vs. Commissioner of Sales SC in this case, in this case SC held that “The sales tax authorities can examine whether certificate is “farzi” or not, or if there was any collusion on the part of selling dealer – but not beyond – i.e., how the purchasing dealer has dealt with the goods. If in an appropriate case it could be established that the certificates were “farzi” or that there was collusion between the purchasing dealer and the selling dealer, different considerations would arise.” In this case, there is doubt/contain for the existing of a hawala racket and purchasing dealer is benefit from that transaction on account of input tax credit, so same is applicable
Conclusion :– it is a settled principle of law that while interpreting legislation, it is the duty of the Court to interpret legislation as it stands and the Court must give effect to the policy of the legislature as reflected in the ordinary and natural meaning of the words used, Shankar Raju Vs. Union of India,16 the Supreme 15 AIR 1961 SC 736
The grant of a set off without any tax being received into the Government Treasury. The grant of a set off without the receipt of tax into the treasury would result in a loss of revenue, a consequence which the provision for set off does not contemplate
This decision can be applied only in the case of Hawala/billing case, if the buyer are genuine, do process all the details for the received of goods, payment by cheque and department is not having any evidence for the fraud/collusion, then ITC is allowed as per my view.
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“Conclusion :– …..”
In essence, the writer’s conclusion is not but right; thought not necessarily because of the decided cases, in which the court’s opinion do not seem ro be consistent and uniform.
Incidentally, apart from the favourable opinion of courts, both under the VAT law and GST law, if remember right, the ruling uniformly given by the APA and the APAA , – functioning as institutions / arms of the Revenue itself under the GST law- are found to be in favour of the taxpayers / the input buyers < Do check/ verify !
In the context, one is obliged to remind self, of the joke- surgical operation not successful, but the patient still survived.