Another situation which in many of the cases under the Punjab VAT, which dealers are facing is the disallowance of input tax credit on the ground that the registration of seller of the goods has been cancelled or normally it is stated in the assessment orders that the person from whom goods have been purchased is a cancelled dealer.

No disallowance in the absence of proper mechanism: In such situation the most important thing which must be noted is, whether the registration was cancelled after the date of purchase in question or before such date.

If a purchase is made from a person whose registration has already been cancelled before such purchase, then tax credit of tax paid on such purchase cannot be denied to the purchaser of goods, unless due procedure for cancellation of registration is followed as provided in the law, for e.g. publication of cancellation in newspapers or in official gazette, as required in rule 13(6) etc,.

The reason for it is that unless there is a mechanism whereby a person can verify about the factum of cancellation of registration and unless the due process as prescribed under the law for the cancellation is followed, benefit of input tax credit cannot be disallowed. This view is supported by the verdict of Delhi high Court in Shanti Kiran India Pvt. Ltd. vs Commissioner of Trade and Taxe Deptt. st. Appll. 34-39 of 2012.

Disallowance of ITC in cases where cancellation is subsequent to the date of purchase: In many of the cases, input tax credit is disallowed on the ground that since, the registration certificate of seller has been cancelled and such seller has not paid any tax on his sale of goods, despite the fact that at the time when the purchase was made from seller, then the registration of the said seller was active.

In such type of cases no disallowance of input tax credit can be made where purchase was made during the period when seller’s registration certificate was active, it is immaterial that seller has paid tax or not. A purchaser of goods cannot be expected to become tax auditor of his seller and moreover for the irregularities committed by the seller, purchaser should not be placed in a dis-advantageous position.

Moreover as explained in earlier article on the same issue, the seller’s liability continues untill the date of cancellation of his registration. Therefore, Department preserves the right to collect tax from the seller concerned for his sales tax liability, till the date of his cancellation of registration. In such case department can recover the tax sooner or later from the seller on the sales made by him. In such a scenario it will be unfair to ask purchaser to pay tax i.e.  by disallowing ITC, which is the primary liability of seller concerned to pay.

Seller’s liability to pay sales tax is primary liability: At this juncture it is very important to understand that whenever a seller makes sale of goods, the liability to pay tax on his sales is his primary liability to pay the tax irrespective of the fact whether he has or has not collected the tax on his sales from buyer.

The above view is supported by the Supreme Court’s verdict in Tata Iron & Steel Co., Ltd. v. State of Bihar [1958] 9 STC 267 (SC); AIR 1958 SC 452, wherein, a Constitution Bench of the Supreme Court, while considering the provisions of the Bihar Sales Tax Act, 1947, observed that the primary liability to pay sales tax, so far as the State is concerned, is on the seller”

It was observed by SC in above case as follows:

“From the point of view of the economist and as an economic theory, sales tax may be an indirect tax on the consumer, but legally it need not be so. Under the 1947 Act the primary liability to pay the sales tax, so far as the State is concerned, is on the seller. The circumstance that the 1947 Act, after the amendment, permitted the seller who was a registered dealer to collect the sales tax as a tax from the purchaser does not do away with the primary liability of the seller to pay the sales tax.”

Why purchaser should be asked to pay primary of liability of seller in the absence of fraud or connivance: Thus once it is clear that primary liability to pay sales tax is of the seller concerned, therefore if he makes a default in payment of taxes, then the purchaser should not be asked to pay the primary liability of the seller, unless some fraudulent or connivance is proved between seller and purchaser.

A registered dealer’s liability to pay tax under the Punjab VAT Act, 2005 continues until his registration certificate is cancelled. If, however, such dealer’s liability continues till that date, so also would the advantages continue, which accrue to him by reason of his registration, as also those would continue, which would accrue to others by reason of their dealing with him.

The above observation was made by Bombay High Court in Suresh Trading Co. vs State of Maharashtra [1981] 48 STC 207 (Bom.), which was subsequently upheld by the Supreme Court.

Moreover Supreme Court in the above noted case also made following observation:

“The High Court noted that the effect of disallowing the deductions claimed by the respondents was, in substance, to tax transactions which were otherwise not taxable. 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 him. Thereafter to hold, by reason of something that had happened subsequent to the date of the purchase, namely, the cancellation of the selling dealers’ registration with retrospective effect, that the tax free resale had become liable to tax, would be tantamount to levying tax on the resale with retrospective effect.

 In our view, the High Court was right. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current”.

Effects of amendment in section 13(12): Section 13(12) of Punjab VAT Act, 2005 has been amended w.e.f. 15.11.2013 prospectively so as to provide that input tax credit shall not exceed the tax actually payable in the Government Treasury. Would that mean, if seller does not deposit tax in the Government treasury, the corresponding input tax credit will not be available to the purchaser?

In my view unless and until a mechanism is provided by the Government to enable the buyer of goods to know whether tax has been paid by the seller in the Government Treasury, no input tax credit can be disallowed on the basis of section 13(12), because in the absence of such a mechanism, it will be iniquitous to place an onerous burden on the purchaser to keep vigil over the seller whether he has deposited any tax in the treasury or not. Without providing any mechanism to the purchaser, he is indirectly asked to become a tax auditor of the seller, which is clearly unfair and inequitable.

The above view is also supported by Delhi High Court’s verdict in Shanti Kiran case (supra) in the following terms:

“In the present case, section 9(1) grants input-tax credit to purchasing dealers. Section 9(2), on the other hand, lists out specific situations where the benefit is denied. The negative list, as it were, is restrictive and is in the nature of a proviso. As a result, this court is of the opinion that the interpretation placed by the Tribunal that there is statutory authority for granting input-tax credit, only to the extent tax is deposited by the selling dealer, is unsound and contrary to the statute. It is also iniquitous because an onerous burden is placed on the purchasing dealer-in the absence of clear words to that effect in the statute-to keep a vigil over the amounts deposited by the selling dealer. The court does not see any provision or methodology by which the  purchasing dealer can monitor the selling dealer’s behavior, vis-a-vis the latter’s VAT returns. Indeed, section 28 stipulates confidentiality in such matters.”

In nut shell, the need of the hour is to develop a system or mechanism to enable buyers to get to know about the taxes deposited by sellers and the cancellation of dealers. Such mechanism can be provided with the help of e-governance. A form like 26AS, provided by the Income Tax Department, to get to know the credit of one’s TDS, must be provided to bring down litigation and proper implementation of the amended law.

For Part-I of the article click at below  link:

Disallowance of input tax credit on the ground that seller is bogus or cancelled dealer

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Read Other Articles from Advocate Amit Bajaj

(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

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