Input Tax Credit is a concession granted by legislature, must be strictly construed : HC

Madras High Court in a very important case namely USA Agencies vs The Commercial Tax Officer has held that input tax credit under system of VAT is merely a concession granted by the Legislature under the sales tax law, therefore the provisions relating to such concession must be strictly construed. In this Judgement the Madras High Court very well explained the concept of input tax credit and also the scheme of the VAT system.

It a very good judgment and a must read for every professional practising VAT laws.

Facts: In this case the challenge was made to the provisions of section 19(11) of Tamil Nadu VAT Act, 2006, which prescribed time limit for claiming input tax credit by a dealer, if such dealer fails to claim the Input Tax Credit in respect of any transaction of taxable purchase in any month, he shall make the claim before the end of the financial year or before ninety days from the date of purchase, whichever is later.

It was stated by the petitioners that the said provision is inconsistent with the charging section 3(3) of the said Act.

Held: Explaining the whole concept of input tax credit the High Court held as under:

“Provision for availing concession is to be strictly construed and followed:-

Input tax credit , which is in the nature of concession or indulgence, could be availed only in the manner prescribed under Section 19. Law is well settled that the person, who claims exemption or concessional rate, must obey and fulfil the mandatory requirements exactly. Unless there is strict compliance with the provisions of the statute, the registered dealer is not entitled to claim Input tax credit’. Apart from Section 19 of TN VAT Act, there is no independent right to claim Input tax credit . When Section 19(11) stipulates time frame for availment of Input tax credit , the registered dealer must strictly follow the mandatory requirements of the provision.(Para 38)

The availment of Input Tax Credit is creature of Statute. The concession of Input Tax Credit is granted by the State Government so that the beneficiaries of the concession are not required to pay the tax or duty which they are otherwise liable to pay under TN VAT Act. While so extending the concession, it is open to the Legislature to impose conditions. Section 19(11) is one such condition imposed making it mandatory for the registered dealer to claim Input Tax Credit before the end of the financial year or before ninety days from the date of purchase, whichever is later. The entitlement to claim Input Tax Credit is created by TN VAT Act and the terms on which Input Tax Credit can be claimed must be strictly observed.(Para 39).

It is a settled position in law that a person claiming benefit of exemption must show that he satisfies the eligibility criteria and for that purpose the provision must be strictly construed. If exemption is available on complying with certain conditions, the conditions have to be mandatorily complied with. In (2011) 1 SCC 236 [Commissioner of Central Excise v. Hari Chand Gopal], the Hon’ble Supreme Court held as under:-

“9. The law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. A provision providing for an exemption, concession or exception, as the case may be, has to be construed strictly with certain exceptions depending upon the settings on which the provision has been placed in the statute and the object and purpose to be achieved. If exemption is available on complying with certain conditions, the conditions have to be complied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, though at times, some latitude can be shown, if there is a failure to comply with some requirements which are directory in nature, the non-compliance of which would not affect the essence or substance of the notification granting exemption.”

The same principle was reiterated in (2009) 12 SCC 735 [Commissioner of Customs (Preventive), Amristar v. Malwa Industries Ltd.].

Scheme of VAT Act as explained by Madras High Court: 

In order to examine the controversy raised in these writ petitions and to test the validity of the impugned provision, a bird’s eye view of the design of the VAT Act, its concept, coverage, the compulsory requirement to be complied with and other relevant details has to be looked into. The essence of VAT is in providing set off for the tax paid earlier and this is given effect through the concept of Input Tax Credit/rebate. VAT is based on value addition to goods and related VAT liability of the dealer is calculated by deducting Input Tax Credit from tax collected on sales during the payment period. The Input Tax Credit was available on both manufacturer and the trader for purchase of inputs/supplies meant for both sale within the State and sale in the course of inter-State Trade. Consequently, it reduced the immediate tax liability. In cases where, tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over. The entire design of VAT with Input Tax Credit is crucially based on documentation of tax invoice, cash memo or bill. There is a statutory obligation for every registered dealer having turnover of sales above the amounts specified to issue a tax invoice serially numbered containing the prescribed particulars. Failure to comply with the mandatory requirements attracts penalty. The basic simplification of VAT is that VAT liability will be self assessed by the dealer themselves in terms of submissions on returns upon setting of the credit limit. This has done away with the requirement of compulsory assessment as in the sales tax regime. The correctness of self assessment is subject to check through the departmental audit. Therefore, the net effect of the VAT system is to rationalise the tax burden and bring down in general the price level and to bring in simplicity and transparency in the tax structure thereby improving the tax compliance and eventually to ensure revenue growth. The above in broad terms is the concept of VAT.

Download full judgment as follows:

USA AGENCIES VS COMMERCIAL TAX OFFICER