Case Law Details

Case Name : Jalandhar Vs State of Punjab and others (Punjab & Haryana High Court)
Appeal Number : CWP-5625-2014
Date of Judgement/Order : 20/05/2015
Related Assessment Year :
Courts : All High Courts (4306) Punjab and Haryana HC (220)

The Jalandhar Iron & Steel Merchants Association (Regd.),

Punjab & Haryana High Court in the case of The Jalandhar Iron and Steel Merchants Association(Regd), Jalandhar vs State of  Punjab has held that the State Government did not have power to legislate Rule 21(8) of Punjab VAT Rules, 2005 before 01.04.2014 so as to restrict ITC on stock of iron and steel goods as existing on the date of reduction of tax on such goods.

 First proviso to 13(1) of the Act which imposed condition on claim of ITC that ITC will be available only if the goods are actually sold or used in manufacturing or processing of taxable goods, the said proviso came into existance w.e.f. 01.04.2014. Hence a restriction of ITC to the reduced rate of tax as provided under Rule 21(8) could not have been legislated before 01.04.2014.
The Court held that the ITC becomes crystalize at the time when the goods are purchased for the purpose of sale as per the provisons of section 13(1) as existed before 01.04.2014. Before 01.04.2014 the only condition was that the goods are purchased for the purpose of sale or for use in manufacturing and processing of taxable goods for sale.  Therefore Section 13(1) did not give any power to the State Government to legislate a rule such as Rule 21(8) of Punjab VAT Rules, 2005 so as to restrict ITC on stock of goods only at the reduced rates, where the rate of tax is reduced.
However., the court has also simultaneously held that if the public exchequer is adversely affected on account of the fact that we have held the notification of Rule 21(8) of the Rules to be an act of excessive delegation, the respondents may roll back the lowered rates of taxation, as per law, for the period between 21.01.2014 to 31.03.2014 to the level at which it was existing prior to the notification lowering such rate.
Brief Facts: Rate of tax on Iron and steel was reduced from 4.95% to 2.75%. Simultaneously Rule 21(8) was introduced to provide that the ITC on the stock of goods as existing on the date of reduction of tax, will be available at the reduced rate only despite the fact that tax on purchase of goods lying in such stock had been paid at earlier higher rate. The State asked the iron and steel merchants to reverse input tax credit @ 2.20% on the stock of goods as existing on the date of reduction in rate of tax.
A representation was filed by the petitioner to the State Government regarding the illegality of Rule 21(8) as it took away the vested rights of claiming input tax credit of the petitioners. The said representation was prepeared by me on behalf  of petitioners. The representation was not accepted, hence the writ petition was filed before the Punjab & Haryana High Court.
Contentions of the petitioners before the HC: Section 13(1) of the Punjab Value Added Tax Act, 2005 provides that a taxable person i.e. a dealer, is entitled to input tax credit on purchases made during the tax period, subject however to such conditions as may be prescribed. The first proviso to Section 13 of the Act, before it was amended, clarified that input tax credit shall not be available unless the goods are “for sale” within the State or in the course of inter-State trade or commerce etc. Section 13(5) of the Act places certain impediments on the right to claim input tax credit i.e. sets out a negative list which does not apply to iron and steel merchants. Section 15 of the Act which bears the title “Net tax payable by a taxable person” provides that the net tax payable for the tax period shall be determined by deducting the amount of input tax credit available to such person and would include input tax credit carried forward from the preceding tax period, if any.
The input tax credit was, therefore, earned by a taxable person on the date of purchase of taxable goods during a particular tax period and fructified into a tangible right on the date of purchase, provided the goods were “for sale” etc. but did not relate to the stock in hand or any reduced rate of tax. The State of Punjab, however, reduced the rate of taxation on iron and steel goods from 4% to 2% w.e.f. 25.01.2014 and in the exercise of its rule making powers notified Rule 21(8), on 21.01.2014 but w.e.f 01.04.2014, to provide that input tax credit on goods lying in stock as input or output would earn input tax credit on the “sale” etc. of such goods “at the reduced rate of tax”. The effect of this amendment is that goods that had already earned input tax credit, lying in stock with a dealer, at the time of purchase would be reduced by reference to the reduced rate of taxation, in force on the date of the sale.
On the date of coming into force of Rule 21(8) there was no enabling provision in the Act, that empowered the State to reduce the rate of input tax credit already earned by reference to the sale of goods lying in stock or the reduced rate of tax. The amendment in the Act empowering the State of Punjab, to notify such a rule i.e. the first proviso to Section 13 of the Act came into effect on 01.04.2014. The new proviso deleted the words “are for sale” and replaced them with the words “are sold”. Similarly, the words “for use in the manufacture” etc. were replaced with the words “are used in the manufacture” etc., thereby enabling the State in the exercise of its rule making power to reduce input tax credit already earned on stock in trade, by reference to the reduced rate of taxation in force on the date of sale. The amended proviso to Section 13 of the Act having come into effect from 01.04.2014, the amendment in Rule 21(8) of the Rules could not come into force before the amendment of the first proviso to Section 13 of the Act. The State of Punjab has, however, applied Rule 21(8) of the Rules, before the amendment of the proviso to Section 13 of the Act.
Contentions of State Government:  Input tax credit is available only when the dealer further sells the goods. This apart, Section 13 of the Act clearly postulates that input tax credit can be earned in such manner and subject to such conditions as may be prescribed. The State was, therefore, well within its power to notify Rule 21(8) of the Rules and prescribe further terms and conditions for availing input tax credit. The amendment applies only to the rate prevalent on the date of sale of stock in hand and, therefore, does not in any manner affect the rights of a dealer or in any manner reduce input tax credit on transactions that have already concluded. Counsel for the State of Punjab relies upon the following judgments: –
1. United Riceland Limited Vs. State of Haryana and another (2011) 2 SCC 423;
2. R.K.Garg Vs. Union of India and others (1981) 4 SCC 675; and
3. Union of India and others Vs. Nitdip Textile Processors Private Limited and another (2012) 1 SCC 226.
Verdict of HC: A conjoint appraisal of these provisions reveals that value added tax paid at the rate in force on the date of purchase of goods from a taxable person, becomes input tax credit on the date of purchase, if the purchased goods are for resale etc., in the manner prescribed, thereby providing that input tax credit earned by a taxable person on the date of purchase of taxable goods, at the rate of taxation in force, during a particular tax period would be his input tax credit provided the goods are for resale/sale etc. in the State of Punjab or for inter-state trade or commerce or in the course of export or for use in the manufacture, processing or packing of taxable goods for sale within the State or inter State transaction and in the course of export etc. The respondents do not deny that members of the petitioners-association purchased goods for resale/sale and manufacture etc., in the State of Punjab and had already earned input tax credit, regarding the goods lying in stock, on 21.01.2014. The dispute is confined to Rule 21(8) of the Rules.
A perusal of Rule 21(8) of the Rules reveals that with respect to goods lying in stock the input tax credit already earned shall be admissible at the reduced rate i.e. the rate of taxation prevalent on the date of their sale. As referred to above, the rate of taxation was reduced from 4% to 2% from 21.01.2014. The input tax credit already earned would, therefore, be availed with respect to goods lying in stock, at 2%. The petitioner-members, as is apparent from the facts, had paid tax @ 4% while purchasing the goods and had earned input tax credit @ 4%. The goods having been purchased for resale within the State of Punjab, the right to avail input tax credit @ 4% per annum stood crystalised, as a determinate right subject to availing this right during the return period or by carrying it forward. The State, however, by enacting Rule 21(8) of the Rules, has reduced the admissible amount of input tax credit already earned from 4% to 2%. We cannot possibly dispute the legislative competence of the State in the exercise of its power of delegated legislation to enact such a rule but the question, as we have also noticed, is not the legislative competence of the State but is whether on 21.01.2014 there was any provision in the statute that empowered the State of Punjab to notify Rule 21(8) of the Rules to provide that goods that have already earned input tax credit would avail input tax credit at the reduced rate of taxation applicable on the date of sale thereby reducing input tax credit already earned on goods lying in stock by reference to the reduced rate of tax prevalent on the date of their sale etc.
A perusal of the Act reveals that on 21.01.2014 there was no provision in the Statute that empowered the State to enact a rule to provide that input tax credit already earned on goods lying in stock shall now be availed and calculated by reference to the reduced rate of taxation prevalent on the date of their sale. The amendment conferring such a power by amending the first proviso to Section 13 of the Act, admittedly, came into force on 01.04.2014 by deleting the words “are for sale” etc. and replacing them with the words “unless such goods are sold” etc., thereby for the first time linking the availing of input tax credit to the rate prevalent on the date of the “sale of goods” etc. to the rate of taxation in force on the date of sale. The amended proviso to Section 13 of the Act, reads as follows:-
Provided that the input tax shall not be available as input tax credit unless such goods “are sold” within the State or in the course of inter-State trade or commerce or in the course of export or are used in the manufacture, processing or packing of taxable goods for sale within the State or in the course of inter-State trade or commerce or in the course of export.” 
The amendment in the first proviso to Section 13 of the Act introducing the words “are sold” etc. came into effect on 01.04.2014. The State of Punjab was, therefore, empowered in the exercise of its power of delegated legislation to notify a rule linking the availing of input tax credit already earned, to their sale, on 01.04.2014. Rule 21(8) of the Rules which resonates the first proviso to Section 13 of the Act by linking the availing of input tax credit to goods sold and thereby to the reduced rate of taxation, came into effect on 21.01.2014 on which date there was no statutory provision enabling the State, in the exercise of its power of delegated legislation, to notify a rule that input tax credit would be “availed” on the sale of goods lying in stock or their manufacture etc. by reference to the reduced rate of taxation, prevalent at the time of “sale/manufacture” etc. of goods that had already earned a determinate amount of input tax credit.
The State may be well within its power to alter the terms & conditions of availing input tax credit by a piece of subordinate legislation but as subordinate legislation may only be notified if it is relatable to statutory power enabling the State to notify such a rule, but the absence of such a provision in the statute, empowering the State to notify such a rule, between 21.01.2014 and 01.04.2014, in our considered opinion, did not empower the State, in the exercise of its power of delegated legislation to notify Rule 21(8) of the Rules on 21.01.2014.
We, therefore, have no hesitation in holding that on the date of introduction of sub Rule (8) of Rule 21 of the Rules, the State did not possess any power, emanating from the Act, to confine the availing of input tax credit to the reduced rate of tax on stock in trade i.e. transactions that had concluded with the dealer already earning input tax credit. A further perusal of the amendment in the first proviso to Section 13 of the Act reveals that it is not retrospective but applies to transactions after 21.01.2014. The amendment in the rule, which came into effect prior to the amendment the Act could, therefore, not be enforced, by the respondents before 01.04.2014 to take away a vested right already determined without statutory sanction.
We, therefore, allow the writ petitions and hold that in the absence of any provision in the statute enabling the State of Punjab to notify Rule 21(8) of the Rules w.e.f. 21.01.2014, the said provision would come into effect from 01.04.2014. However, since the notification by which Rule 21(8) of the Rules was added to the Rules, was obviously issued in view of the fact that the respondents were simultaneously, or soon thereafter, reducing the rate of taxation on various goods and as such, the notification was intended to ensure that the public exchequer does not suffer a loss by granting input tax credit at higher rates than the tax actually deposited (after lowering the rate of taxation), we grant liberty that if the public exchequer is adversely affected on account of the fact that we have held the notification of Rule 21(8) of the Rules to be an act of excessive delegation, the respondents may roll back the lowered rates of taxation, as per law, for the period between 21.01.2014 to 31.03.2014 to the level at which it was existing prior to the notification lowering such rate.

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

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