Introduction Availability of set off (input tax credit) is the backbone of the Value Added Tax (VAT ) system. A dealer is entitled to claim set off of the tax paid by him to his vendors on all such purchases which are categorised as inputs. The system works in a manner whereby there is no undue burden on the dealer. The amount of VAT payable by a dealer is the difference between the tax payable on sale price less the tax already paid on purchases (inputs). Thus, the tax paid on purchases gets set-off against the tax payable on sale. Denial of set off may cause many problems and the system of VAT will not be workable. A dealer, while selling goods, works out the sale price on the basis of the cost of goods sold. As the tax paid on purchases (inputs) are available as setoff, the same are normally not considered in the cost. But, if the set off is not allowed for any reason, the vendor will be at great risk. This will cause economic loss to vendor with added burden for interest and penalty.
Set off is subject to conditions and not absolute right
It is now well settled that availability of set off is subject to provisions under the Act. In other words, when to give set off, how to give set off and with what reductions etc. is as per the provisions made by the respective State Governments. The dealer cannot ask for the same as a right. The above position is well settled by number of judgments and under MVAT Act, the well known judgment is in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom). In this case, the Hon. High Court observed that set off is not a constitutional right but a statutory right, hence it can be subject to conditions as may be prescribed.
Vital condition under MVAT Act
There are various conditions for grant of set off in the MVAT Rules. However, one very important condition is in section 48(5), which provides that the set off will be allowable if the government has received money on the same goods in the government treasury. In other words, if the vendor has paid tax on the same goods, which are purchased by the buyer, then the buying dealer is entitled to get set off. If the vendor has defaulted, then set off can be denied to the buyer. Although this is such a condition which is beyond the control of the buyer, but still it is held valid in the judgment of Mahalaxmi Cotton Ginning Pressing and Oil Industries (supra).
New Concept of Hawala/R. C. Cancellation
In addition to disallowance of set off on the ground of non-payment by vendors, the sales tax authorities in Maharashtra have found one new way of disallowing set off. Under this new method, the setoff can be denied even without assessing the vendors. The Sales Tax Department of Maharashtra has published on its own website a list of ‘suspicious dealers’ (called hawala vendors) and also a list of dealers whose Registration certificates (R.C.) have been cancelled. The assessing authorities are indiscriminately disallowing set off on all the purchases from such listed vendors.
Principles of Natural justice not followed
Under the guise of hawala vendors and R.C. cancellation, the principles of natural justices are also kept aside by the learned assessing authorities. It is said that the names of hawala dealers or retrospective cancellation of R.C. of the vendors is based on certain materials collected from such vendors and on the basis of their statements under oath or their affidavits, etc. However, these materials used for considering the vendors as defaulters as well as hawala vendors is not delivered to the concerned buyers in whose case the set off is being disallowed. Further, no cross examination opportunity is granted. Therefore, amongst others, such disallowance is against the principles of natural justice and cannot be upheld in the eyes of law.
Right of cross examination is a crystallised right
There are a number of judgments laying down the principle that when the authorities use outside material, delivery of copies of the same and cross examination of the author of such material is required to be given to the concerned opposite party. Amongst others, reference can be made to the judgment of the Madras High Court in the case of Tilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295 ELT 195) (Mad.)
In this case, the Hon. High Court has held that such a cross examination opportunity is required to be given even without the same being asked for by the opposite party. Thus, this is a very settled principle of natural justice and flouting of the same will render the order invalid. However, in case of hawala and R.C. cancellation cases, the authorities in Maharashtra are having a view that what is declared on their website is the final word and no such opportunity is required to be given.
With due respect, it is submitted that this is a wrong notion.
Shree Bhairav Metal Corporation vs. State of Gujarat (Special Civil Application No. 2149 of 2015 dated 26.3.2015)(Guj. H.C.)
Now the position is also clear in respect of hawala and R.C. cancellation. In the above case before Hon. Gujarat High Court, the facts as considered by the Hon. High Court are narrated as under:
“It appears that while claiming the aforesaid ITC, the petitioner dealer showed purchases of Rs.48,12,825 alleged to have been purchased from one M/s Lucky Enterprises. The petitioner also produced the bills with respect to purchase of goods alleged to have been purchased from M/s Lucky Enterprises. Thus, the assessee dealer claimed Rs.1,92,513 out of total ITC claimed of Rs.6,49,561/- on the purchases alleged to have been made from M/s Lucky Enterprises. That the Assessing Officer passed assessment order dated 30.12.2010 allowing the ITC as claimed by the petitioner dealer including the purchases made by the petitioner alleged to have been purchased from M/s Lucky Enterprises.
It appears that the registration certificate of M/s Lucky Enterprises came to be cancelled ab initio from 22.2.2006 on the ground that M/s Lucky Enterprises is not a genuine dealer and had indulged into billing activities only and all the transactions made by M/s Lucky Enterprises were found to be bogus and non-genuine.”
Thus the set off was disallowed on the ground of hawala and R. C. cancellation. However, the copy of the R.C. cancellation was not delivered to the appellant. Noting the above facts, the Hon. High Court has remanded the matter back while observing as under:
“9.4 As observed earlier, the impugned order has been passed by the adjudicating authority denying the ITC claimed by the petitioner on the alleged purchases made by the petitioner from M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises– seller has been cancelled ab initio on the ground that the seller had involved into the billing activities only and all the transactions by M/s Lucky Enterprises are held to be bogus. The petitioner has been denied the ITC on the ground of the aforesaid activities/alleged transactions between the petitioner and M/s Lucky Enterprises. However, as observed herein above, the petitioner was not served with the copy of the order in the case of M/s Lucky Enterprises. Now, the copy of the order passed in the case of M/s Lucky Enterprises is available with the petitioner. Therefore, after giving an opportunity to the petitioner with respect to observations made in the case of M/s Lucky Enterprises insofar as the alleged transactions between the petitioner and M/s Lucky Enterprises and after giving an opportunity to the petitioner to prove the genuineness of the transaction between them and M/s Lucky Enterprises in light of the observations made herein above, therefore, the matter is required to be remanded to the adjudicating authority to consider the claim of the petitioner for ITC on the alleged purchases made by the petitioner from M/s Lucky Enterprises.”
Thus, the Hon. High Court has reiterated the principles of natural justice and remanded the matter for allowing opportunity to buyer to substantiate its claim after delivery of copies of adverse order. The truth can be established only upon such exercise.
Conclusion
Under MVAT Act also, wherever the set off is disallowed on the basis of default of vendor including hawala allegation and R.C. cancellation, the above principle is required to be followed. Therefore, the assessments made today without following such principle cannot be said to be valid in the eyes of law.
