Introduction Input Tax Credit (ITC) or Set Off, is the backbone of the VAT system. The selling dealer is entitled to take the credit of the tax paid on his purchases, while calculating the output tax. In other words, he is required to pay differential tax on the value addition. In fact, he determines the sale price of goods based on the understanding that he will get ITC of the taxes paid on his purchases. If this ITC is not allowed, the selling dealer will be required to bear the said burden, which may cause him unexpected financial loss.
It is also a fact that the relevant statute provides for a scheme of Input Tax Credit including a requirement of obtaining supporting documents. Normally, the requirement is ‘tax invoice’ from the vendor with a certificate on the same about doing genuine transaction which is reflected in his books and returns filed under the VAT Act. It is also a fact that no separate machinery about cross verification of the vendor’s position is made available under the Act and invariably the buyer has to depend upon the tax invoice issued by the vendor.
Vendor should be a registered dealer
Generally, one of the conditions for availing ITC is that the purchase should be from a registered vendor. Whether the vendor is registered or not can be seen from the invoice, wherein the particulars about registration like number, date of effect etc., are mentioned. The revenue side is also safe that since the vendor is registered, he will be filing returns and discharging the liability as per the returns. Therefore, registration of the vendor is the most important factor for the grant of set off.
Retrospective cancellation of Registration Certificate
There are provisions for cancellation of registration certificate including with retrospective effect. The buyer may have made purchases when the seller’s certificate was valid but subsequently the sales tax department may cancel the registration with retrospective effect. One view may be that the purchase becomes a purchase from unregistered vendor, thus automatically disentitling the buyer to take set off. However, this will not be the correct position.
Recently, the Hon’ble Madras High Court had an occasion to deal with such a situation. Reference is to the judgment in the case of Jinsasan Distributors vs. The Commercial Tax Officer (CT) Chintadripet Assessment Circle (W.P.No.12305 of 2012 dated 22.11.2012). In this case, the facts were similar. When the buyers made the purchases, the registrations of respective vendors were valid. Subsequently, the registrations were cancelled for various reasons with retrospective effect. Department sought to disallow the set off to the buyers. This action was challenged before Hon’ble Madras High Court. After recording the arguments and relevant provisions, the Hon’ble Madras High Court observed and held as under;
“12. Insofar as the cancellation of the registration certificates of the selling dealers is concerned, it is for those selling dealers to canvas the plea as to when it will take effect either on the date of the order or with retrospective effect. Insofar as the petitioners are concerned, they have purchased the taxable goods from registered dealers who had valid registration certificates; paid the tax payable thereon; availed input tax credit; and the assessing officers have passed orders granting such benefit. Therefore, the assessment orders granting input tax credit were validly passed. There was no cancellation of the registration certificates of the selling dealers at that point of time. The petitioners/assessees have paid input tax based on the invoices issued by registered selling dealers and availed input tax credit. The retrospective cancellation of the registration certificates issued to the sellingdealers cannot affect the right of the petitioners/ assessees, who have paid the tax on the basis of the invoices and thereafter claimed the benefit u/s. 19 of the TNVAT Act, 2006. They have utilised the goods either for own use or for further sale. At the time when the sale was made, the selling dealers had valid registration certificates and the subsequent cancellation cannot nullify the benefit that the petitioners/assessees availed based on valid documents.
13. An almost identical issue was considered by the Supreme Court in State of Maharashtra vs. Suresh Trading Company, (1998) 109 STC 439. In that case, the respondents, who were registered dealers under the Bombay Sales Tax Act, 1959, purchased goods during the period from 01-01-1967 to 31-01-1967 from one Sulekha Enterprises Corporation, who is also a registered dealer under the Bombay Sales Tax Act, 1959. The respondents, before the Supreme Court, resold the goods and claimed certain benefits. That was disallowed by the Sales Tax Officer on the ground that the registration certificate of M/s. Sulekha Enterprises Corporation was cancelled on 20-08-1967, with effect from 01-01-1967. The claim of the respondents, therein the assessees, for deduction of the turnover of sales, as above, was declined and penalty was also imposed. The assessees failed before the appellate authority as well as the Maharashtra Sales Tax Tribunal. The High Court however reversed the decision and upheld the claims of the assessees, holding that disallowing the deductions claimed by the respondents would amount to tax on transactions which were otherwise not taxable. The Supreme Court, while dismissing the appeals filed by the Revenue, held as follows:
‘4. The High Court answered the question in the negative and in favour of the respondents. The High Court noted that the effect of disallowing the deductions claimed by the respondents was, in substance, to tax transactions which were otherwise not taxable. The condition precedent for becoming entitled to make a tax-free resale was the purchase of the goods which were resold from a registered dealer and the obtaining from that registered dealer of a certificate in this behalf. This condition having been fulfilled, the right of the purchasing dealer to make a tax-free sale accrued to him. Thereafter to hold, by reason of something that had happened subsequent to the date of the purchase, namely, the cancellation of the selling dealer’s registration with retrospective effect, that the tax-free resales had become liable to tax, would be tantamount to levying tax on the resales with retrospective effect.
5. 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 out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to nullify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.’”
Observing as above, the Hon’ble Madras High Court held that retrospective cancellation cannot affect the claim of ITC of the buyer.
Fall out
The legal position, emerging from above judgment, is that the buyer cannot be affected by retrospective cancellation of registration, even if it is relating to ITC.
Applicability to MVAT Act, 2002
Under MVAT Act, 2002, by way of section 48(2) and rules, it is similarly provided that for claim of ITC ‘tax invoice’ issued by registered dealer is required. The above judgment will squarely apply to MVAT Act also.
However, the further situation under MVAT Act, 2002 is that section 48(5) provides that set off will not be allowed to buyer unless the tax is received in the Government treasury. If vendor has not paid tax, Department can disallow set off. Constitutional Validity of Section 48(5) is upheld by Hon. Bombay High Court in case of
Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom).
But, it may be noted that section 48(5) does not provide to disallow set off merely on fact of alleged not payment of tax by the vendor. It is the duty of the Department to assess the vendor and to apply all the recovery measures before disallowing set off to the buyer.
At present, in Maharashtra, set off is disallowed on the ground of cancellation of registration certificate of vendor/s with retrospective effect. Above judgment will be certainly helpful to dealers in Maharashtra. In spite of retrospective cancellation of registration, the dealer (vendor) will be deemed to be registered in view of above judgment. Department may allege that the said vendors whose registrations are cancelled have issued bogus bills and there is a collusion. If that is the charge then the Department is under obligation to prove the same by following principles of natural justice including cross examination opportunity to the buyer.
In a nutshell, retrospective cancellation of registration certificate cannot affect the claim of the buyer.
It also appears that in spite of retrospective cancellation the Department will be under duty to assess them and follow the procedure of recovery before disallowing set off to the buyer, applying section 48(5) of the MVAT Act, 2002. It is expected that the Department will work judiciously to give justice to the purchasing dealers.
