Set Off vis-a-vis Gross Receipts for Rule 53(6)(B) of The MVAT Rules

Introduction

The grant of set off is
prerogative of the legislature. In other words, set off is not right of the
dealers. The set off is to be given as per Scheme, Rules and conditions
attached therewith.

Under MVAT Act, there is
broad scheme of granting set off including almost on all goods like Capital
goods, trading goods and expenses are eligible for set off. However, there are
certain conditions where set off can be reduced or it can be denied.

There is Rule 53(6)(b)
which has attracted long litigation. The rule is reproduced below for ready
reference.

“53. Reduction in
set-off

The set-off available under
any rule shall be reduced and shall accordingly be disallowed in part or full
in the event of any of the contingencies specified below and to the extent specified.

(6) If out of the gross
receipts of a dealer in any year, receipts on account of sale are less than
fifty per cent. of the total receipts, –

(b) in so far as the dealer
is not hotel or restaurant, the dealer shall be entitled to claim set-off only
on those purchases effected in that year where the corresponding goods are sold
or resold within six months of the date of purchase or are consigned within the
said period, not by way of sale to another State, to oneself or one’s agent or
purchases of packing materials used for packing of such goods sold, resold or
consigned:

Provided that for the
purposes of clause (b), the dealer who is a manufacturer of goods not being a
dealer principally engaged in doing job work or labour work shall be entitled
to claim set-off on his purchases of plant and machinery which are treated as
capital assets and purchases of parts, components and accessories of the said
capital assets, and on purchases of consumables, stores and packing materials
in respect of a period of three years from the date of effect of the
certificate of registration.

Explanation.-For the
purposes of this sub-rule, the “receipts” means the receipts pertaining to all
activities including business activities carried out in the State but does not
include the amount representing the value of the goods consigned not by way of
sales to another State to oneself or one’s agent.”

It can be seen that if the
receipts from sale are less than 50% of gross receipts, than set off is restricted
to the purchases which are sold within six months. If such condition is
applicable, then the dealer has to give the data about purchase and sale of
corresponding goods and then claim set off.

The major issue arises
about interpretation of “gross receipts”. One of the issues is what is the
scope of gross receipts?

Case of Mutual Funds

In case of Mutual Funds,
they run various different schemes. Separate accounts are kept for each scheme.
If receipts of all the schemes are considered then the mutual funds attract
above rule. However, if the scheme relating to particular commodity like gold
is considered separately then the above rule may not apply.  

There was controversy about
the scope of gross receipt in relation to mutual fund i.e. whether to take
receipts from all the schemes to compute the gross receipts or to take only
receipts of each scheme. The matter has reached to Hon. Bombay High Court in
case of Axis Mutual Fund (WP No. 710 of 2018 dt.6.8.2018).

The brief facts narrated by
Hon. Bombay High Court are reproduced below.

“3.  By the Deed of Trust dated 27.06.2009 made by
and between Axis Bank Limited, a settlor, and Axis Mutual Fund Trustee Company
Limited, trustee, an irrevocable trust/trusts called Axis Mutual Fund was
created.

4.  Axis Mutual Fund Trustee Company Limited
(“Trustee Company”), incorporated under the provisions of the Companies Act,
1956, was approved by Securities and Exchange Board of India (“SEBI”) to act as
a Trustee of the various scheme(s) of the Axis Mutual Fund.

5. Axis Asset Management
Company Limited (“Axis AMC”), incorporated under the provisions of the
Companies Act, 1956, was approved by SEBI to act as the Asset Management
Company for the scheme(s) of the Axis Mutual Fund.

6.  By the Deed of Trust dated 27^th
June, 2009, the settlor, inter-alia, declared and agreed that the Trustee
Company shall manage the mutual fund in accordance with the  applicable regulations. Further, as per para
6.1.1 of the Deed of Trust dated 27^th June, 2009, the Trustee
Company is allowed to float one or more schemes for the issue of units to be
subscribed by the public.

7.  The responsibility for the daily operations
of the scheme(s) of Axis Mutual Fund has been delegated to the Axis AMC through
an investment Management Agreement dated 27^th June, 2009 executed
between the Trustee Company and Axis AMC. As enumerated in Clause 3 of this
Agreement dated 27^th June, 2009, the delegated responsibilities,
inter alia, include the maintenance of accounts and records, evaluation of investment
operations, carrying out credit assessments in relation to proposes
investments.

8.  It is the contention of the Petitioner that
by the Deed of Trust dated 27^th June, 2009, multiple trust(s), i.e. scheme(s), were created as and when floated. The various clauses of the
Deed of Trust indicating independent existence of each scheme is provided in
the table below:-

The contention of the
dealer was that though there is one trust deed, there are actually multiple trusts
as per the schemes. It was submission that a trust is an obligation annexed to
the ownership of property. It was also submitted that as clearly evident from
Deed of Trust, such obligations are towards the beneficiaries of each scheme
and not towards the beneficiaries of all the schemes put together. Accordingly,
it was argued that the receipts of each scheme to be seen separately. If it so
seen then for Axis Gold ETF Scheme, the condition of 50% of sale of the gross
receipts gets fulfilled and Rule 53(6)(b) will not apply. The reliance was
placed on the judgment of the Hon. Supreme Court in case of Commissioner
of Income Tax, Andhra Pradesh and Anr. vs. Trustees of H. E. H. the Nizam’s
Family Trust (1986) 4 SCC 352.  

On behalf of revenue the
above submission was opposed on the ground that trust is registered as dealer
and hence it is one dealer and the rejection of set off applying Rule 53(6)(b)
is correct.

The Hon. High Court
discussed various aspects including the judgment cited in case of Nizam’s
Family Trust. However, under the scheme of the Rule 53(6)(b), the Hon. High
Court upheld the action of the revenue.

The observations of the
Hon. High Court are as under;

“46. Such is not the case
before us. There is a single Deed of Trust. There may be separate schemes, but
there was never any intent as is now sought to be culled out and to create
separate Trust. This is not a case where separate Trusts were created and
hence, the principle relied upon by Mr. Sridharan from several works on Law of
Trust and to the effect that receipts from Axis Mutual Fund ETF alone have to
be considered for there is formation of more than one trust by the Deed of
Trust and that is permissible, has no application. This has no application here
because the earlier principle and based on the case of Commissioner of Income
Tax, Bombay City 1, Bombay vs. Manilal Dhanji, Bombay 3 is inapplicable. This
is not a case where the settlor has created more trusts under a single Trust
Deed. This is a clear case where the Deed of Trust permits floating one or more
schemes. That is not equivalent to creation of separate Trusts. It is in these
circumstances that the assessing officer, the first appellate authority and the
Tribunal all rightly concluded that the set-off available under Rule 53 has to
be reduced. It shall be accordingly in part or full in the event of any of the
contingencies specified and to the extent specified in sub-rule (6) of Rule 53.
Pertinently, the set-off has not been disallowed in full. It is hold that in
the case clearly specified of gross receipts of a dealer in any year and if
from that, receipts on account of sale are less than 50% of the total receipts,
then, insofar as the dealer, who is not a hotel or restaurant, the set-off is
permissible only on those purchases effected in that year where the
corresponding goods are sold or resold within six months from the date of
purchase. There is no creation of separate Trusts, but separate schemes under a
single Trust Deed are floated.”

Thus, the application of
Rule 53(6)(b) was justified.

Conclusion

The above judgment will be
guiding judgment to interpret the scope of Rule 53(6)(b). However, leaving
aside the legality, the effect is that there will be double taxation in as much
as the set off is denied though on the sale of same goods, tax is collected. It
is for the policy makers to reconsider the issue and to give necessary relief
considering the scheme and object of the VAT system.