Sri. Kanaheyallal Patel vs The Assistant Commissioner of Commercial Taxes

Both the learned counsels at the bar agree that the controversy involved in these writ petitions is squarely covered by a decision of this Court in

Writ Petition No.58917-928/2016 and connected matters (Kirloskar Electric Company Limited Vs. State of Karnataka and another) decided on

10/01/2018 with regard to the claim of Input Tax Credit under Section 10(3) of the KVAT Act, 2003, wherein it is held as under:-

A closer look at the contextual facts of the case and as explained in bracketed portion in the aforesaid quote from the Division Bench decision

in Centum Industries Private Limited case in the light of the provisions of Section 10(3) and Section 35(4) of the KVAT Act, 2003, would reveal

that the claim of ITC was disallowed by the Division Bench not on the basis of an interpretation of the substantive provisions contained in Section

10(3) of the KVAT Act, 2003, or any restriction of period to be read therein but because of the belated claim made by the assessee much after

the lapse of a reasonable period viz., six months from the month of June 2006 in the month of February 2007 and while referring to the belated

claim beyond six months, the Division Bench referred to Section 35 of the KVAT Act, 2003, which prescribes 20 days period for filing of the

Returns for the month ended and in case of omissions or errors, the assessee is permitted to file a revised Return under Section 35 (3) and (4) of

the KVAT Act, 2003, within a period of six months from the end of relevant tax period respectively.

In the aforequoted paragraph 14 of the judgment of the Division Bench in Centum Industries Private Limited case, from the words ""........

However, the Tribunal without reference to the statutory provisions proceeds on the assumption that allowing input tax is a statutory promise made

to the dealer buying the goods from the registered dealer by paying that tax mentioned in the tax invoice. There is nothing in law stipulating that if

input tax is not claimed during the month succeeding the month in which purchase is effected, the dealer would forfeit his claim to claim input tax

appear to be the quotation from the order of the Karnataka Appellate Tribunal, though inverted commas ("" - "") have not been used by the Division

Bench in the said Paragraph 14 of its judgment, but immediately thereafter, the Division Bench says ""In coming to the said conclusion, the Tribunal

has not applied its mind to sub Section (3) of Section 10 ..... "" makes it obvious. Therefore it appears that what precedes these words is the

reasoning given by the Tribunal while deciding the Appeal in favour of the petitioner assessee which, however, the Division Bench of this Court did

not approve as aforesaid, mainly for the reason of delay in making the claim of input tax credit beyond a period of six months. Though, with great

respects, there was no such time period restriction in the substantive provisions of Section 10(3) of the KVAT Act, 2003 but on that aspect of the

matter, this Court sitting singly cannot express a different view due to the judicial discipline. But the facts and context before Centum''s case were

entirely different and therefore that judgment is of little help to the Revenue - Department in these cases.

The learned Additional Advocate General also contended before the Court that the amendments were effected in Section 10(3) of the KVAT

Act, 2003 in the year 2015 and 2016, though for the period of assessments in question before this Court in the present batch of writ petitions are

admittedly and without any dispute from either side are much prior to these amendments in Section 10(3) and therefore the question of effect of

these amendments upon the assessments in hand as challenged before this Court need not be even gone into. However, the learned Additional

Advocate General pointed out that these amendments would only now after 01/04/2015 allow the Input Tax Credit to the dealers, if the input tax

pertains to a tax period of five months prior to the tax period in which such ITC is claimed, as how an amendment beneficial to the interest of the

assessees and realizing their practical difficulties, the State has effected these amendments to facilitate the claim of the ITC after these amendments.

However, at the same time, the learned Additional Advocate General''s argument is that, by necessary implication therefore for the previous

periods, it should be inferred that since there was no such relaxation available to the assessees, therefore unless the ITC invoice pertains to the

same tax period, such ITC cannot be allowed.

This argument of the learned Additional Advocate General cuts the arguments of the learned AAG himself, when he submits that the amendment

was effected to facilitate the claim of ITC by the State realizing the difficulties of the assessees. If the restrictive and narrow interpretation put forth

by the learned counsel for the Respondents is accepted, the same would lead to absurd, impractical and totally unintended results. While on the

one hand, the Dealer is enjoined with the legal obligation to maintain the Books of Accounts in the ordinary course of its business on a day-to-day

basis as required under Section 31(1) of the KVAT Act and well settled Accounting Principles and he would record the purchases only when he

purchases the goods and the goods are so received by him and depending upon the terms of contract, the contract is finally executed completely

by recording such purchase in the Books of accounts, if on the other hand, the same is sought to be negatived and Dealer is called upon to file a

revised return to claim the ITC in the ''Tax period'' to which ITC invoice or sale invoice pertains, that would not only render the reversal of these

entries illegal and wrong but against all canons of the settled Accounting principles and would make the Books of Accounts a total mess, while

there is no good reason to interpret the provisions of Section 10(3) of the KVAT Act, 2003, in such a restrictive manner.

The substantive provision of Section 10(3) of the KVAT Act, 2003, did not lay down any such restrictive time frame for allowing the

deduction of ITC against the OPT in a particular tax period to determine the net tax payable for that tax period and therefore there is no

justification whatsoever to accept such an interpretation put forth by the learned counsels for the Respondent State. Such contentions had not only

been negatived and with great respects, rightly so by the learned Single Judge in the case of Sonal Apparel Private Limited case, but this Court is

of the considered opinion that the Respondent Department is taking an unnecessarily distorted view of the observations made by the Division

Bench of this Court in the case of Centum Industries Private Limited, where the Division Bench while disallowed the said claim of ITC made at a

belatedly stage and observed simply as an obiter that the claim of ITC should relate to the tax period in question. The Division Bench never said

that the ITC Invoice or Sale Invoice should also be pertaining to the same tax period, in which the credit of such ITC is claimed by the Dealer.

The learned counsels for the Respondent State were at complete loss of words to the question put by the Court as to, under what authority of

law the State can retain the tax paid by the selling Dealer to the State as collected under the Sale Invoice which is passed on to the purchasing

Dealer who are the assessees - petitioners before this Court, if ITC in respect of such sale invoice was to be disallowed, contrary to the very

concept of VAT law and the unrestricted language of Section 10(3) of the KVAT Act, 2003 and in apparent violation of Article 265 of the

Constitution of India, there was simply no answer on behalf of the Respondent State to this query of the Court, except relying on the aforesaid

obiter from the judgment of the Division Bench of this Court in Centum Industries Private Limited case, which as explained above, does not

support the case of the Revenue at all.

In the peculiar facts of the Centum Industries Private Limited case, the claim of ITC credit was disallowed on the basis of the belated claim

made by it and not while interpreting the substantive provisions of Section 10(3) of the Act in a narrower way, as is sought to be canvassed by the

Respondent State before this Court even now.

The learned counsels for the Respondent State were again without any answer to the question of the Court as to how the machinery provisions

of filing of the returns under Section 35 of the KVAT Act, 2003 for assessing the tax liability including the OPT, ITC and Net Tax liability under

Section 10 of the KVAT Act, 2003, can be allowed to override the substantive provisions of Section 10 of the KVAT Act, 2003, contained in

chapter II of the said KVAT Act, 2003.

In the absence of any valid answer and submission on behalf of the Respondent State, this Court can safely conclude that the machinery

provisions cannot be allowed to override and defeat the substantive claim of the Input Tax Credits under Section 10(3) of the KVAT Act, 2003,

which without any restriction of the time frame, allowed such deduction or credit of the ITC against the OPT liability of the Dealer in question.

When the Assessing Authority could pass the impugned re-assessment order, Annexure C dated 29/04/2016 for the whole year in one go,

disallowing the ITC claim illegally by restricting it on the basis of monthly Tax Periods, what can be the justification for disallowing the same,

without it being found to be an unverified claim, not supported by valid Sales Invoices ? None - is the simple answer !

The Input Tax Credit under VAT law is pari-materia with the concept of CENVAT or MODVAT under Excise Law and dealing with a similar

problem, the Hon''ble Supreme Court in the case of Collector of Central Excise, Pune Vs. Dai Ichi Karkaria Ltd. 1999 ( 112 ) E.L.T.353 ( SC )

held in paragraph 17 as under:-

It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in

the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use

the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides

for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if

utilized, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer

without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is,

therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if

credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be

taken against the excise duty on a final product manufactured on the very day that is becomes available.

Thus the claim of credit of input tax is indefeasible as was the case of CENVAT under Excise law and such credit of ITC under VAT law

which is equivalent to tax paid in the chain of sales of the same goods, cannot be denied on the anvil of machinery provisions or even provisions

relating to time frame which is law of limitation only bars the remedy rather than negativing the substantive claims under the taxing statutes.

Both the questions framed above are therefore liable to be answered in favour of the petitioners assessees. The claim of ITC cannot be

restricted and denied on the stated grounds by Revenue. It cannot be denied only because ITC claim is not made in respect of Sale Invoices which

are not pertaining to same Tax Period, nor it can be denied on the ground that such claim is not made immediately in the month or months following

the month of purchase of goods in question. The machinery provisions of filing of Returns under Section 35 of the KVAT Act cannot defeat the

substantive claims under Section 10(3) of the Act. The Revenue is entitled only to verify that the Sale Invoices are genuine and valid and such ITC

claim is not duplicate, fictitious or bogus. Article 265 of the Constitution of India does not entitle the State to retain such tax paid by Selling Dealers

and deny the claim of ITC credit or set off in the hands of the Purchasing Dealers who claim such ITC against their Output Tax Liability when they

sell goods further, incurring such Output Tax liability.

One wonders whether the subsequent amendments effected by the Respondent State in the year 2015 and 2016 though not applicable to the

assessment period involved in this batch of writ petitions presently being decided by this Court, is a ''relaxation'' or a ''restriction'' and whether it is

for the benefit of the assessees as contended by the Respondent State or seeks to restrict and defeat the claim of ITC in the period of assessment

following such amendment. Be that as it may. Since that amendment is neither applicable to the facts of the present case nor any of the sides has

called the same in question, this Court need not make any further analysis of these amendments.

This Court is, therefore of the considered opinion that the impugned assessment orders/re-assessment orders passed by the Respondent -

Assessing Authorities to this extent of denying the claim of ITC to the petitioners assessees are illegal and unsustainable and deserve to be quashed

and set aside by this Court.

The writ petitions are accordingly allowed and the impugned orders are quashed and set aside. The matters would stand restored to the file of

the Respondent Assessing Authorities to pass fresh orders in accordance with law as interpreted above as far as claim of Input Tax Credit is

concerned.

This Court is of the further opinion that despite more than one judgment interpreting the provisions of Section 10(3) of the KVAT Act, 2003,

in favour of the assessees, the tendency on the part of the Assessing Authorities of the Respondent Department to still keep on passing the orders

contrary to these judgments is in utter disregard of the judicial and hierarchical discipline which they are bound to observe and it may also amount

to a deliberate disobedience on their part and may invite contempt action and therefore to prevent any such further unnecessary litigation on this

issue, at the behest of the different Authorities of the Department taking a contrary view, it is directed that the Head of the Respondent

Department, namely, the Commissioner of Commercial Taxes shall issue a Circular in terms of the various aforesaid judgments of this Court in

favour of assessees, for being followed by the Authorities through out the State to avoid any further multiplicity of litigation before this Court and

Appellate Forums. Therefore, such a Circular shall be issued by the Respondent Commissioner of Commercial Taxes and the Respondent -

Departmental Authorities, including the Appellate Authorities under the Act are cautioned that now onwards if any contrary view is found to be

taken by such Authorities of the Department on aforesaid issue, this Court would initiate suo motu contempt proceedings against the Commissioner

of Commercial Taxes as well as the concerned Authorities of the Respondent Department.

With these observations and directions, these writ petitions are allowed. All the impugned orders passed by the Assessing Authorities are set

aside and the matters are restored to file of the respective Assessing Authorities, for passing fresh orders in accordance with law, as interpreted

above. No costs.

Accordingly, the present writ petitions are also disposed of in the same terms.

If any other issues arise in the matter other than the aforesaid covered issue, the petitioner assessee may file a regular Appeal under Section 62

of the KVAT Act, 2003, before the Joint Commissioner (Appeals) and if such an Appeal is filed within a period of four weeks from today, the

same shall be disposed of without raising any objections on the question of limitation.

With the aforesaid observations, the present writ petitions stand disposed of. No costs.