Denial to grant Input tax credit on Flimsy Grounds by the VAT Authorities without following the settled law laid down by Hon’ble Supreme Court of India and by the High Courts.

Every Registered Dealer is the agent of Department of Excise & Taxation as while granting the registration, every registered dealer is authorized to collect the tax while selling the goods to the purchasers to make the accountability different types of annexures alongwith return are prescribed beside the maintenance of account books but unfortunately, now a days, VAT Authorities has failed to understand the basic spirit of Value Addition Tax as well as the concept of registration and cancellation.        

As Registration is birth and cancellation is death so both are having their own role in the tax fields. Here it is pertinent to point out that while exercising both the powers which deals with grant of registration and cancellation must be exercised with extra cautious. As the scheme of the VAT Act clearly classifies the liability of seller and purchaser but now a days VAT Authorities are disallowing the input tax credit mainly on the below mentioned grounds:

(a)Purchase from cancelled dealer

(b)Paper Transactions

(c)  Purchase from bogus dealer

(d)Purchase from the sellers who has not deposited the tax

(e)Purchase from the sellers who has purchased the goods from the persons whose registration stands cancelled

That before arriving any conclusion the authority must apply their mind as they are enjoying the vast powers one of them is cross examination but number of times inspite of repeated requests, the authorities are denying the same although it is one of the effectious mode to arrive at the truth as well settled by the Hon’ble Supreme Court of India and by the different High Courts while deciding the below mentioned case:

1)                39-STC Page-478

2)                30-STC Page-211

3)                5-PHT Page-350

4)                10-PHT Page-263

5)                1-PHT Page- 79 (M/s. Devi Das Gopal Kishan Vs. State of Punjab)

6)                Swadeshi Polytex Ltd vs Collector of Central Excise, Meerut 2000 (122) ELT 641 has held at para 4 of the judgement as under: “In the facts and circumstances of the present case, we consider that this contention is well-founded. When the collector has to decide afresh, he should, if he intends to rely upon the statement of any such person, give an opportunity of cross-examination to the appellant.”

Flimsy Grounds on the basis of which VAT Authorities are disallowing the claims of genuine purchasers

(a) Purchase from cancelled dealer  

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Inspite of the settled law laid down by the Hon’ble Punjab and Haryana High Court delivered in the case of Arjan Radio House Vs. Assessing Authority reported in 31-STC-49 1973 on the Issue of cancelled dealer Authorities working under the Act failed to appreciate the same why so reason best known to them.

The Judgement throws the flood of light on the concept of credit from the purchases made from cancelled dealer as the Hon’ble Judges has observed that the knowledge regarding cancellation of TIN cannot in law be attributed to the purchasing taxable person like the appellant till the cancellation is published as provided in rule 13(6) of the Punjab VAT Act, 2005.

This issue was also clinched by the Delhi High Court while deciding the case of CST Vs. Hari Om Oil Co. (Delhi High Court 87-STC-493) and by different other High Courts like Bombay High Court while deciding the case of Suresh Trading Company Vs State of Maharashtra which was later on confirmed by the Hon’ble Supreme Court of India while deciding the case of State Of Maharashtra vs Suresh Trading Company on 7 February, 1996

1996 (3) SCALE 536, (1997) 11 SCC 378, 1998 109 STC 439 SC

It is equally well settled that registration cannot be cancelled retrospectively. Your kind consideration is invited to the judgments reported as ADM Stores Vs. Commissioner of Sales Tax 18-STC-305 and M.C. Aggarwal Vs. Sales Tax Officer 64-STC-298.

That inspite of settled law the authorities working under the Act are not following the same even the provision of the Act are followed whereas it is well settled by the Hon’ble Supreme Court of India that the authorities working are bound by the provisions of the Act. Kind attention is invited Reliance is placed upon Supreme Court of India Ruling in the case of CCC Vs. Doaba Cooperative Mills 1198 (37) ELT –478 wherein, it has been that: -“ Authorities functioning under an Act bound by its provisions”

(b) Paper Transaction

It is astonishing that department is also rejected the claim of ITC on the ground that goods were not physical received by the purchaser and only bill was raised without appreciating that physical delivery is the basic ingredient to complete sale and in the absence of same the figure cannot be added in GTO if still department want to disallow the credit on purchases then automatically output tax is to be reduced. It is equally well settled by the Hon’ble Punjab and Haryana High Court while deciding the case Pahar Chand & Sons vs State of Punjab 30 STC 211. Even in certain circumstances where pre- intimation in the shape of E-Trips were given to the department in those cases too the department is raising the eyebrows by quoting that it is a case of paper transaction.

(c)Purchase from bogus dealer

That in number of cases department is rejecting the claim on the ground that seller is a bogus dealer but no action is usually taken against the seller and the claim of ITC of purchaser is disallowed without appreciating that the liability of seller cannot be shifted to buyer. Even this type of approach is burdening the purchaser as well as seller which ultimately resulted in excess recovery then the actual loss whereas it is well settled that assessee may be bad but assessing authority should not

(d) Purchase from the sellers who has not deposited the tax

That every seller is an agent of government who is to collect the tax and under an obligation to deposit the same but unfortunately the authorities are recovering their tax from the purchasers by disallowing their ITC inspite of the fact it is not permissible as per the scheme of the Act as the primary liability cannot be shifted as settled by the Hon’ble Supreme Court of India.

Star judgments of the Hon’ble Supreme Court and Hon’ble High Court

Kind attention is invited towards the judgement of the Hon’ble Madras High Court in the case of the state of Tamil Nadu Vs. Raichael Chacko Reported in 59 STC 144, in which it was observed as under:

“The assessee purchased rubber from the two persons, who were registered dealers and also had license from the rubber board, and claimed that those purchases were not the first purchases in the state and therefore the assessee was not liable to pay the purchase tax. The assessing authority rejected the claim on the ground that the two persons had merely lent their names without actually handling the goods and therefore the assessee should be taken to be the first purchaser of the rubber in the state. The Assessee’s appeal to the appellate assistant commissioner failed. The tribunal in the appeal held that the purchases of the rubber made by the assessee from the two persons were second purchases and therefore the sale of rubber being taxable only on first sales, the assessee who was not the first purchaser could not be made liable to pay the tax. The Tribunal also held that the ad hoc addition made by the Appellate Assistant Commissioner could not be legally sustained. On revision:

 Held that the tribunal came to the right conclusion. So long as the assessee’s purchases were second purchases from a person or persons who were then registered dealers, the assessee could not made liable to tax under section 3(2) of the Tamil Nadu General Sales Tax Act, 1959. Once there had been earlier purchase inside the state, it was for the revenue to proceed against the forst purchaser and merely had not paid the tax, they could not proceed against the second purchaser when the statute admittedly exempted the second sales from tax.”

Second Authority on this point is 35 STC Page No. 50

To claim benefit of tax on the ground that the sales effected by the assessee were second sale they need not show that their seller had in fact paid the tax at the first point and it was enough for them to show that the earlier taxable sales and that the tax was really payable by their sellers.

That this decision was affirmed by the Hon’ble Supreme Court of India in the state of Tamil Nadu Vs. Raman & Co. and others (93 STC 185), which is as under:

“ From the decision of the Madras High Court in State of Madras Vs. Raman & Co. [1974] 33 STC Page no.1 to the effect that the assessee, which purchases condemned railway coaches sold by the railway department and components of nissen huts sold by the director of supplies and disposals and later dismantled them and sold the resultant timber and iron materials in bulk as scrap, was exempted from tax, because what the assessee purchased was scrap and when he sold the scrap later he was only a second seller, the state preferred an appeal to the supreme court. The Supreme Court dismissed the appeal holding that there was no merit in the appeal.”

Decision of the Madras High Court in State of Madras Vs. Raman & Co. [1974] 33 STC page No. 1 affirmed.

From the decision of the madras High court in Govindan & Co. Vs. State of Tamil Nadu [1975] 35 STC 50 to the effect that to claim benefit of tax on the ground that the sales effected by the assesses were second sales, they need not show that their sellers had in fact paid the tax at the First point and it was enough for them to show that the earlier sales were taxable sales and that the tax was really payable by their sellers, the state preferred an appeal to the Supreme Court. The Supreme court dismissed the appeal holding that there was no merit in the appeals.”

 From the above judgement it is crystal clear that once a proper vat invoice is given as prescribed under the law in a prescribed form has been furnished by a dealer to the assessing authority. The appellant is entitled to claim input tax credit from the payment of Vat tax. On a subsequent sales for the goods on which the vat tax has been paid at the stage of the first seller and it is not the duty of the subsequent seller to pay vat tax if the first seller has not paid the vat tax and it is the duty of the department to proceed against him and not the purchasing dealer.

(e) Purchase from the sellers who has purchased the goods from the persons whose registration stands cancelled

Number of times the authorities raising the eyebrow while granting the input tax credit that the seller who has sold the goods has purchased the goods from the cancelled dealer and try their level best to deny the claim which is totally against the basic principle of concept of VAT.

Conclusion-  It is worthwhile to discuss that the officers who are passing the orders without following the settled law and the provision of the Act are just creating paper demands which is ultimately creating a mess for the revenue as well as the dealer as in these type of cases the department is not getting any revenue rather the machinery of the department is involved in unnecessary litigation and it has been rightly observed by the Hon’ble Judges of the Madras High Court reported in 92 STC Page No 621 that incompetent officer without knowledge of law are harmful both for the revenue and the state on the one hand and assessee on the other hand, if officers who do not have the knowledge and correct appreciation of the law and the principles upon which power to assess and realize tax is exercised, are appointed and allowed to hold office of responsibility, their such acts bring a bad name to the revenue administration so it is very necessary that while dealing with these situations the assessee should not be denied of his legitimate claim of input tax credit on flimsy grounds.

(Author – J S BEDI Advocate, Email: bediadvocate@yahoo.co.in, Mobile: 98140-66336)

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