ITC under DVAT can not be denied to a bonafide purchaser -High Court

ITC under DVAT can not be denied to a bona fide purchaser who enters into a purchase with a registered selling dealer who issued a tax invoice reflecting TIN number-High Court

 ITC under DVAT can not be denied to a bona fide purchaser

ABCAUS Case Law Citation:
ABCAUS 2107 (2017) (10) HC

The Challenge/Grievance:
A bunch of writ petitions had been filed before the Hon’ble High Court challenging constitutional validity of Section 9 (2) (g) of the Delhi Value Added Tax, 2004 (‘DVAT Act’) as being violative of Articles 14 and 19 (1) (g) of the Constitution of India.

Important Case Laws Cited/relied upon by the parties:
Shri Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar [1959] 1 SCR 279,
K.T. Moopil Nair v. State of Kerala AIR 1961 SC 552
State of Kerala v. Haji and Haji AIR 1969 SC 378.
Gheru Lal Bal Chand v. State of Haryana (2011) 45 VST 195 (P&H)

Brief Facts of the Case:
Under Section 26 of the DVAT Act read with Rule 28 of the Delhi Value Added Tax Rules, 2005 (DVAT Rules), a registered dealer is required to submit a return for each tax period. Along with the return, the dealer has to submit information regarding the summary of purchases and sales made and the VAT paid thereon in Annexures 2A and 2B respectively. In case the selling dealer does not reflect the sales made to a particular purchasing dealer, a mismatch report gets generated on the website of the Department of Trade and Taxes (‘Department’). Conversely, where the selling dealer correctly reflects the sales made, no mismatch will show up on the login ID of the purchasing dealer on the website.

The petitioners had made purchases from dealers registered under the DVAT Act on the strength of tax invoices which proved the collection of tax by the vendor (selling dealer)from the purchasing dealer and which was a valid document for availing Input Tax Credit (ITC) on the VAT paid on its sales. 

Payments against the purchases were not in dispute and made only through banking channels and are duly accounted for. However for some reason the purchasing dealer failed to deposit the VAT collected from its buyers (petitioners).

Later, in one case, the Value Added Tax Officer (‘VATO’) issued a default assessment order invoking Section 9 (2) (g) of the DVAT Act. Apart from raising a tax demand, he imposed imposing a penalty under Section 86 (10) of the DVAT Act solely on the basis that the ITC availed by the purchasers did not match with the sale details filed by the vendors.

In another case, though there was no mismatch reflected on the website of the Department, the ITC was disallowed by the VATO invoking Section 9 (2) (g) of the DVAT Act in respect of some of the purchases made on the ground that the selling dealer was ’suspicious’.

Observations made by the High Court:

The Hon’ble High Court observed that Section 9 (2) of the DVAT Act sets out the conditions under which such tax credit or ITC would not be allowed. Sub-Clauses (a) to (f) specify certain kinds of purchases which would not be eligible for the claim of such ITC. There is a distinction between those categories specified in Section 9 (2) (a) to (f) of the DVAT Act which disentitle to the grant of ITC and the one under Section 9(2)(g). Whereas the conditions specified in Section 9(2)(a) to (f) are those which are within the control of and can be vouched for by the purchasing dealer, the condition under Section 9 (2) (g) is not. It requires the purchasing dealer to ensure, for the purposes of claiming ITC, that the selling dealer has deposited VAT with the Government or has lawfully adjusted it against such selling dealer‟s output tax liability. This is not within the control of the purchasing dealer.

The Hon’ble High Court further observed that purchasing dealer faces difficulty as he do not enjoy access to the return filed by the selling dealer particularly since under Section 98 (1) of the DVAT Act those particulars are meant to be confidential. Under Section 98 (3) (j) of the DVAT Act, it is possible for the Commissioner, where he considers it desirable in the public interest, to publish such information. That hinges on the Commissioner placing those details in public domain. If the Commissioner has not placed such information in the public domain, then it is next to impossible for the purchasing dealer to ascertain the failure of the selling dealer to make a correct disclosure of the sales made in his return.

It was noted that the Department is not helpless if the selling dealer commits a default in either depositing or lawfully adjusting the VAT collected from the purchasing dealer. There are provisions in the DVAT Act, referred to hereinbefore, which empower the Department to proceed to recover the tax in arrears from the selling dealer. There is also Section 40A, in terms of which, a purchasing dealer acting in connivance with a selling dealer can be proceeded against.

The Hon’ble High Court observed that in the situation envisaged by Section 9 (2) (g) itself, clearly the defaulting party is the selling dealer. He has collected the VAT from the purchasing dealer and failed to deposit it with the Government or failed to lawfully adjust it against his output tax liability and has failed to correctly reflect that in his return. For all these defaults committed by the selling dealer, the purchasing dealer is expected to bear the consequence of being denied the ITC.

The Hon’ble High Court observed that Section 9 (2) (g) of the DVAT Act fails to distinguish between bona fide purchasing dealers and those that are not. The Court opined that while denial of ITC could be justified where the purchasing dealer has acted without due diligence, i.e. by proceeding with the transaction without first ascertaining if the selling dealer is a registered dealer having a valid registration, denial of ITC to a purchasing dealer who has taken all the necessary precautions fails to distinguish such a diligent purchasing dealer from the one that has not acted bonafide. This failure to distinguish bona fide purchasing dealers from those that are not results in Section 9 (2) (g) applying equally to both the classes of purchasing dealers. This would certainly be hit by Article 14 of the Constitution.

Placing reliance on the law explained by the Supreme Court, the Hon’ble High Court concluded that in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.

Concurring with the Hon’ble Punjab & Haryana High Court, the Hon’ble High Court held that in the present case, the purchasing dealer was being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealer and therefore avoid transacting with such selling dealers. Alternatively, what Section 9 (2) (g) of the DVAT Act requires the purchasing dealer to do is that after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC. Indeed Section 9 (2) (g) of the DVAT Act places an onerous burden on a bonafide purchasing dealer.

Decision/Held:

The Hon’ble High Court held that holds that the expression “dealer or class of dealers‟ occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression ‘dealer or class of dealers’ in Section 9 (2) (g) is „read down‟ in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.

The Hon’ble High Court clarified that in view of the above, the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act.

Resultantly, the default assessment orders of tax, interest and penalty issued under Sections 32 and 33 of the DVAT Act, and the orders of the OHA and Appellate Tribunal insofar as they create and affirm demands created against the Petitioner purchasing dealers by invoking Section 9 (2) (g) of the DVAT Act for the default of the selling dealer were set aside.

ITC under DVAT can not be denied to a bonafide purchaser

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