The Appellant is engaged in trading of Electrical goods and is registered under DVAT Act. The Appellant purchased goods from dealers registered under DVAT Act on the basis of tax invoices and on payment of VAT at applicable rates. During the Assessment proceedings, the VATO disallowed the ITC claimed against 2 suppliers contended that the sellers have operated for a short period of time and their turnover was high in comparison to the tax deposited by them. Accordingly, the demand was raised of tax, interest and penalty. The VATO order was upheld by OHA and VAT tribunal. Therefore, the Appellant filed an appeal before Hon’ble Delhi High Court.
Hon’ble High Court relied on judgment of Hon’ble Supreme Court in the Suresh Trading Co wherein it was held that a purchasing dealer is entitled to rely upon the certificate of registration of the selling dealer and to act upon it. Retrospective cancellation can’t have effect upon any person who has acted upon the strength of a registration certificate when the registration was current. The argument of the department that it was the duty of persons dealing with registered dealers to find out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to notify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.
The interpretation placed by the Tribunal that there is statutory authority for granting input credit, only to the extent tax is deposited by the selling dealer, is unsound and contrary to the statute. There is no provision or methodology by which the purchasing dealer can monitor the selling dealer's behavior, vis-à-vis the latter's VAT returns.
Therefore, in the absence of any mechanism enabling a purchasing dealer to verify if the selling dealer deposited tax, for the period in question, and in the absence of notification in a manner that can be ascertained by men in business that a dealer's registration is cancelled (as has happened in this case) the benefit of input credit, under Section 9(1) cannot be denied.
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The VAT authorities observed that the scanty amounts deposited by the selling dealers was incommensurate with the transactions recorded, and straightaway proceeded to hold that they colluded with the appellant. Such a priori conclusions are based on no material, or without inquiry, and accordingly unworthy of acceptance. Therefore, the appellant is entitled to the credit claimed.
1. Brief Facts of the case:
- The Appellant is engaged in trading of electrical goods and is a registered dealer under the VAT Act.
- The appellant purchased goods from dealers registered under DVAT Act on the basis of tax invoices issued by them and on the payment of VAT at applicable rates.
- The appellant received notices for assessment of tax and interest under Section 32 of the DVAT Act and for penalty assessment under Section 33 of the Act.
- The VAT Officer (VATO) disallowed the ITC Claimed on account of purchases made from two dealers namely M/s. Balaji Enterprises and M/s. R.S. International (hereafter referred to as the "selling dealers").
- The respondent was of the opinion that the selling dealers operated for short periods and their turn-over was high in comparison to the tax deposited by them. Consequently, the demand was raised for corresponding tax, interest and penalty.
- The appellant moved an application to the Objection Hearing Authority (OHA) under Section 74 against the order of VATO where the OHA confirmed the VATO's order.
- The Appellant further filed an appeal before the Tribunal, which upheld the disallowance and the penalties imposed. The Tribunal was of the view that Section 9(1) permits tax credit to a purchasing dealer to the extent the tax is actually deposited by the selling dealer.
- The VAT Tribunal also took into consideration the amendment to Section 9(2) which was brought into force on 01.04.2010, i.e. after the appeals were preferred. The Section 9(2)(g) clarifies that ITC is admissible to purchasing dealers only when tax is actually deposited by the selling dealer.
2. Relevant Legal Extract
Relevant provisions of the Act is reiterated below for ready reference:
Section 9(2) of the DVAT Act lists situations when input tax credit cannot be allowed and the same is reiterated below for ready reference:
(a) in the case of the purchase of goods for goods purchased from a person who is not a registered dealer;
(b) for the purchase of non-creditable goods;
(c) for the purchase of goods which are to be incorporated into the structure of a building owned or occupied by the person;
Explanation.- This sub-section does not prevent a tax credit arising for goods and building materials that are purchased either for the purpose of re-sale in an unmodified form, or for the performance of a works contract on a building owned or occupied by another;
(d) for goods purchased from a dealer who has elected to pay tax under section 16 of this Act;
(e) for goods purchased from a casual trader;
(f) to the dealers or class of dealers specified in the Fifth Schedule except the entry no.1 of the said Schedule
(g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period."
Hon’ble High Court relied on judgment of Hon’ble Supreme Court in the Suresh Trading Co wherein it was held that a purchasing dealer is entitled to rely upon the certificate of registration of the selling dealer and to act upon it. Retrospective cancellation can’t have effect upon any person who has acted upon the strength of a registration certificate when the registration was current. The argument of the department that it was the duty of persons dealing with registered dealers to find out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to notify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.
3. Contention of the Appellant
The Appellant contended that:
- The VAT authorities have misconstrued the relevant provisions and that the impugned order of the Tribunal upholding the objection hearing authority's order is based on an erroneous interpretation of the VAT Act.
- The VATO was influenced by the fact that the two selling dealers had transacted business for a short duration and that their registrations had been cancelled.
- The appellant had no control over the affairs and functioning of the selling dealers and that in the absence of any statutory authority during the relevant period, could not be held liable for such parties' default.
- The subsequent cancellation and the registration of the selling dealers could not be the basis for tax liability of a purchaser.
- The necessary ingredients enabling the tax administrators in this case to impose penalty, i.e. where a tax deficiency arose in terms of Section 86(1), did not occur. Consequently there was no warrant for penalty.
- Further, the purchasing dealer could not ascertain the selling dealers' registration certificates had been cancelled as they were not notified at the relevant time.
- In fact, the dates of the cancellation order were unknown. The appellant became aware of the cancellation only after the VATOs order.
4. Contention of the Respondent
The Respondent contended that:
- The records scrutinized by the Audit Department revealed that both the selling dealers had deposited proportionately less tax in respect of the transactions which they reported.
- The OHA was justified in concluding that the transactions shown were sham and only paper transactions and that the appellant was in collusion with the said dealers.
- Further, the Tribunal cannot be faulted for relying on Section 9(2)(g) which was brought into force with effect from 01.04.2010.
- Interpretation of Section 9(1), i.e., that input credit would be only to the extent the selling dealer deposits the tax, is appropriate and based upon a reasonable interpretation of the statute.
5. Findings and Analysis by Hon’ble High Court
- In Suresh Trading Co, the Supreme Court made following observations:
- 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.
- The argument on behalf of the department that it was the duty of persons dealing with registered dealers to find our whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to notify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.
- Dealing with the rationale behind State tax legislation such as Sales tax law (a forerunner for tax on sale of goods), The Supreme Court had held in George Oakes (Private) Ltd. v. State of Madras, AIR 1962 SC 1037 that the law does not:
"mean that in law the tax as imposed by government is a tax on the buyer making the dealer a mere collecting agency so that the tax must always remain outside the sale price"
- In the present case, Section 9(1) grants input 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 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-à-vis the latter's VAT returns.
- Indeed, Section 28 stipulates confidentiality in such matters. Nor is this Court in agreement with the Tribunal's opinion that insertion of clause (g) to Section 9(2) is clarificatory. As observed earlier, Section 9(2) is an exception to the general rule granting input tax credit to dealers who qualify for the benefit. The conditions for operation of the exception are well defined.
- The absence of any condition such as the one spelt out in clause (g) and its addition in 2010 rules out legislative intention of its being a mere clarification of the law which always existed.
- This Court is of the opinion that in the absence of any mechanism enabling a purchasing dealer to verify if the selling dealer deposited tax, for the period in question, and in the absence of notification in a manner that can be ascertained by men in business that a dealer's registration is cancelled (as has happened in this case) the benefit of input credit, under Section 9(1) cannot be denied.
- Furthermore, this Court notices that the cancellation of both selling dealers' registration occurred after the transactions with the appellant. The VAT authorities observed that the scanty amounts deposited by the selling dealers was incommensurate with the transactions recorded, and straightaway proceeded to hold that they colluded with the appellant. Such a priori conclusions are based on no material, or without inquiry, and accordingly unworthy of acceptance.
6. Final Order of Hon’ble Delhi High Court
Hon’ble Delhi high Court held that:
- This Court answers the substantial question framed in favour of the assessee, and against the revenue.
- It is held that the appellant is entitled to the credit claimed, which shall be worked out and given, after due verification, in accordance with law, within two months from today.
- The appeals are allowed in the above terms, with no order as to costs.
