Introduction
After introduction of VAT in Maharashtra, getting input tax credit (ITC) has become a herculean task for dealers. A number of objections are raised while granting ITC (set off of tax paid on purchases). The basic objection is that it is the claimant buyer dealer who has to obtain confirmation of tax payment from the vendor. Thus, an impossible task is required to be accomplished by the buying dealers.
The difficulties are much more with the issue of ‘hawala’ dealers having surfaced. Everyone is now well aware that the Sales Tax Department has put up a list of more than 2,000 dealers as suspicious dealers, commonly described as ‘hawala’ dealers, on the website. In respect of ‘hawala’ dealers, no set-off is allowed irrespective of producing confirmation or any other supporting document. Neither assessment orders of the said vendors (so-called havala dealers) are passed nor crossexamination, to rebut the charge of non-genuine transactions etc., is allowed. Such actions of disallowing setoff, in the hands of purchasers, are against the principles of natural justice and invalid in the eyes of law.
Judgment in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom)
In almost all such cases, the Department is relying on the judgment of the Hon’ble Bombay High Court in the above case. No doubt, in the above judgment, the Hon’ble High Court has upheld the Constitutional validity of section 48(5) of the MVAT Act, which provides that the ITC should not exceed the amount of tax paid on the said goods into the State Treasury. However, the Sales Tax Department is taking a stand that after above judgment the Department has nothing to do with vendors. Once the Department’s records show that there is no payment by the vendor, set-off can be disallowed without complying with any other process. For this purpose, the Department is verifying tax payment of vendors by their own means like non-filing of returns, non-availability of vendor or listed suspicious (hawala) dealer, etc.
We understand that if the Government has not received money on the same goods in its treasury than the set-off can be disallowed to the buyer as per the above judgment. But the disallowance cannot be a unilateral action. The Department has to follow the principles of natural justice.
It may be worthwhile to note that in above judgment Hon’ble High Court has not directed disallowance of set-off in the hands of all the buyers without assessment of vendor/s or without giving other opportunities as per law to the claimant buyer/s.
Ascertainment of tax payment on transactions is required
Therefore, the present procedure adopted by the Sales Tax Department is grossly erroneous. As per law, no set-off can be disallowed without ascertainment of tax payment on the given transaction and more particularly on the ‘goods’ involved.
The above position is reiterated as per the recent judgment of the Hon’ble Maharashtra Sales Tax Tribunal.
Gallery 7 vs. State of Maharashtra (VAT S.A. No.120 of 2011 dated 17-12-2012)
This is the judgment in which, amongst others, the issue of disallowance of set-off in relation to ‘hawala’ dealer is discussed and considered by the Hon’ble Tribunal. There were different reasons due to which set-off was disallowed on various purchase transactions. One of the purchases, on which set-off was disallowed, was from a declared ‘hawala’ dealer namely, M/s. Venkatesh Mercantile Pvt. Ltd. In the first appeal the set-off disallowance was confirmed. Therefore, this second appeal was filed before the Hon’ble Tribunal. After discussing the facts, the Hon’ble Tribunal has remanded the matter back to the first appellate authority with following directions:-
“14. We have considered the rival submissions. We have gone through the record underlying the assessment and the audit done by the assessing officer. We have also gone through the record underlying the appeal order.
i) The main issue in this appeal is about the claim of set-off. The levy of interest u/s. 30(3) is consequent to the dues of taxes which have arisen from disallowance of the claim of set-off. Quantum of penalty u/s. 29(3) is also dependant on the quantum of dues of tax and also the amount of set-off claimed in excess. It would therefore, be necessary to deal with the issue of claim of set-off. It is seen from the perusal of both the assessment order and the appeal order that this issue was not handled seriously by both the assessing officer and the appellate officer. While, in certain instances, the claim of set-off was disallowed by the assessing officer on the ground of non-production of tax invoice, it was allowed by the appellate officer on the ground that the seller was not traceable as reported by the sales tax inspector, the claim was allowed by the appellate officer just by observing that it could not be said that the seller was not doing business in the financial year 2006-2007 and there was no report of the sales tax inspector stating that no returns were filed and no tax was paid by the supplier. Without actually examining whether tax collected from the appellant was in fact paid by the supplier into the government treasury, set-off of an amount of Rs. 78,0375/- which was disallowed by the assessing officer was granted by the appellate officer. We are of the view that, it was necessary for the appellate officer to examine the claim and decide the admissibility of the claim not only on the basis of production or non-production of tax invoice but also after examining whether tax charged in the invoice by the supplier were paid into the government treasury or not. We are of the view that for proper appreciation of the issue, it would be necessary to remand the matter to the appellate officer with direction to him to examine the entire claim of set-off afresh in the light of the provision of section 48(5) of the MVAT Act. It would also be necessary to remand the matter to the appellate officer with the view to examine the appellants claim made in the written submission to grant further set-off in respect of the transactions of purchases allegedly effected by the appellant from M/s. Akshila Trade Ltd. and M/s. Bahubali Trading Pvt. Ltd. and M/s. Venkatesh Mercantile Pvt. Ltd. who were found to have defaulted in paying taxes allegedly collected from the appellant.” (Emphasis supplied)
This judgment lays down the correct position in respect of disallowance of set-off including where there is allegation of ‘hawala’ purchases. Unless there is ascertainment of tax payment on the transaction, the set-off cannot be disallowed. It clearly shows that merely on an allegation of the dealer being a hawala dealer set-off cannot be disallowed. It is expected that the lower authorities will follow the above decision and avoid disallowing set-off on a mere allegation of hawala purchase.
Assessment of hawala dealer
It is surprising that the Sales Tax Department is not taking any interest in the assessment of so called ‘hawala’ dealers or just avoiding the assessment of the suspicious vendors on the ground that they are declared ‘hawala’ dealers by them.
Devyani Trading Company vs. The State of Maharashtra (S.A.No.684 to 687 of 2010 dated 15-09- 2012)
In this judgment, the Hon’ble Tribunal has dealt with a similar situation where the vendor has submitted that his transactions are not of sale/ purchase, but financial transaction. In fact the registration of the vendor was cancelled on account of not doing genuine business.
In spite of the above, the dealer was assessed by the Enforcement Officer. In the second appeal, the stand was repeated that there was no genuine business and no tax should be levied. The Tribunal observed that there are transactions with other dealers and therefore, the stand of the appellant that he has not done genuine business cannot be accepted. The Hon’ble Tribunal observed as under:-
“6. The appellant has routed huge transactions through these banks and the State has definitely lost huge tax. The appellant were provided number of opportunities by the appellate Assistant Commissioner to prove that the transactions on financial transactions not involving sales. The transactions entered into or through the bank account of the appellant and the appellant cannot plead that he is not aware about the nature of these transactions. Crores of rupees transactions have been routed through these bank accounts and the appellant cannot say that these are financial transactions not liable to tax. In fact, the existence of these accounts and concealment of the information about their existence gives rise to mens rea.
The appellants have randomly taken various inspections of accounts and not cooperated with the department in explaining the matter in payment of tax and is squarely liable to pay the tax. Accordingly, we confirm the order passed by the Assistant Commissioner of Sales Tax (Appeals) and reject the Second Appeal petitions. Hence, the order.”
The legal position that emerges is that, under the name of ‘hawala’ no dealer can escape the legal liability. The Sales Tax Department not assessing the vendors under the name of ‘hawala’ is really illegal and it is causing great loss to the Government Treasury. It is expected that the Department will follow the above dictum of the Hon’ble Tribunal and avoid big loss of revenue to the Government. This will also save innocent buyers from illegal disallowance of set-off.
Conclusion
ITC is the lifeline of the VAT system. It has to have a sound, strong and logical apparatus. The dealer, while selling his goods considers the availability of set-off of taxes paid on his purchases. Any disallowance of set-off will be a direct loss to him. Therefore, before disallowing set-off u/s 48(5), due legal process is required to be followed by the Department. The above two judgments in relation to the issue, should certainly be taken as guidance by the Sales Tax Department.
