Karnataka H.C: cannot be denied only because ITC claim is not made in respect of Sale Invoices which are not pertaining to same Tax Period

High Court Of Karnataka

Kirloskar Electric Co. Ltd. Vs. State of Karnataka

Section 16

Dr. Vineet Kothari, J.

W.P. Nos. 58917-58928 Of 2016 And Others

January  10, 2018

JUDGMENT

1. The present batch of writ petitions is being disposed of by a common judgment as they involve common question of law.

2. The facts are illustratively taken from Writ Petition Nos.58917-928/2016 (Kirloskar Electric Co. Ltd. v. State of Karnataka) and a reference is made to the Statement of Objections filed by the Respondent State in Writ Petition Nos.26337-348/2017 (Micromatic Grinding Technologies Ltd. v. State of Karnataka).

3. Though the controversy in hand has been dealt with and the relevant provisions of Section 10(3) of the Karnataka Value Added Tax Act, (“KVAT Act, 2003” for short) had come up for interpretation before this Court in some of the judgments rendered by this Court including the Division Benches, the controversy does not appear to have died-down even with these judgments, as the Assessing Authorities of the Respondent Department have continued to disallow the Input Tax Credit (ITC) under Section 10(3) of the KVAT Act, 2003 on the ground that the claim of Input Tax Credit against the Output Tax Liability of the assessees did not pertain to the same ‘Tax period’ for which Output Tax Liability and Net Tax Liability was to be determined in accordance with Section 10(3) of the Act and assailing these assessment/re-assessment orders, this batch of several writ petitions came to be filed before this Court and after hearing both the sides, they are being disposed of by this common judgment.

4. The questions which arise are:

(i) Whether the claim of deduction or set off of Input Tax Credit against Output Tax Liability of the dealer can be restricted or denied on the ground of any time frame within which such Sales Invoices on the basis of which ITC is claimed should pertain or information or record of such ITC Invoices should be informed in the Returns to be filed, particularly if such time frame is restricted to the period of ‘Tax Period’ which can be as short as a month or a quarter, or the period of filing of Returns being 20 days from the end of month concerned or maximum six months from the end of ‘Tax period’ even for filing of Revised Returns disclosing errors and omissions?

(ii) What is the true meaning and purport of Section 10(3) of the KVAT Act, 2003 vis-à-vis Section 35 of the same Act, 2003? 

5. The KVAT Act, 2003, in supersession of the earlier Karnataka Sales Tax Act, 1957 was brought into force with effect from 01/04/2005 introducing the concept of Value Added Tax (VAT) to replace the erstwhile Single Point Sales Tax System by levy of Multiple Point Taxation on the sale of goods and to remove the cascading effect of the levy of sales tax at every point of sales, the concept of giving Input Tax Credit (ITC) was introduced in the VAT law enacted by various States including the State of Karnataka where under, against the Output Tax Liability in the hands of the assessee purchaser, the credit or deduction of input tax of the tax paid by his selling Dealer could be claimed as a deduction against his own Out put Tax Liability and only net of such tax liability was required to be paid by him and this is how ultimately removing the cascading effect of the tax of such Multiple Point Tax System under the VAT law, the ultimate consumer got the goods only with the net tax liability at the hands of the last seller in the chain of sales on the basis of value or sale price of such goods which he charges from the customers.

6. The controversy in the present impugned assessment/re-assessment orders arose because of a rather narrow and distorted interpretation of Section 10(3) put by the Authorities of the Respondent-Commercial Taxes Department. The provisions of Section 10(3) of the KVAT Act, 2003 which was amended in the year 2015 and again in the year 2016 as it stood prior and after these two amendments is quoted below for ready reference.

“SECTION 10(3) OF THE KVAT ACT PRIOR TO AMENDMENT IN 2015

10. Output tax, input tax and net tax.

(1) ………………..

(3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered Dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period, and shall be accounted for in accordance with the provisions of this Act.

SECTION 10(3) OF THE KVAT ACT AFTER ITS SUBSTITUTION IN 2015 w.e.f. 1-4-2015

10. Output tax, input tax and net tax

(1) …………………

(3) Subject to input tax restrictions specified in Section 11, 12, 14, 17,18 and 19, the net tax payable by a registered Dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and relatable to goods purchased during the period immediately preceding five tax periods of such tax period, if input tax of such goods is not claimed in any of such five preceding tax periods and shall be accounted for in accordance with the provisions of this Act.

SECTION 10(3) OF THE KVAT ACT AFTER ITS AMENDMENT IN 2016 w.e.f. 1-4-2016

10. Output tax, input tax and net tax. (1) …………………

(3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered Dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and [….] shall be accounted for in accordance with the provisions of this Act.

[Provided that, a registered Dealer while calculating the net tax payable on or after first day of April, 2015, may claim input tax relatable to goods purchased during the period immediately preceding five tax periods of such tax period, if input tax of such goods is not claimed in any of such five preceding tax periods.”

7. It may be noted that the provisions of Section 10 of the KVAT Act, 2003, which prescribe how the Output Tax (OPT), Input Tax (IPT) and Net Tax (NT) payable by the Dealer will be calculated is part of Chapter II dealing with the Incidence and Levy of tax comprising of Sections 3 to 21 of KVAT, Act, 2003. Chapter III comprises of Sections 22 to 28 – Registration of Dealers, Chapter IV comprising of Sections 29 to 34 deal with the Accounts of Documents and Chapter V comprising of Sections 35 to 57 deal with the Administration and Collection of Tax.

8. The provisions of Section 35 of the KVAT Act, 2003 deal with the filing of the ‘Returns’ by the Dealer and since the said provisions were mainly relied upon by the learned counsels for the Respondent – State for supporting the impugned assessment/re-assessment orders, the said provisions are also quoted below for ready reference. Section 35 and its proviso read thus:—

“35. Returns:

(1) Subject to sub-sections (2) to (4), every registered dealer, and the Central Government, a State Government, a statutory body and a local authority liable to pay tax collected under sub-section (2) of Section 9, shall furnish a return in such form and manner, including electronic methods, and shall pay the tax due on such return within twenty days [or fifteen days] after the end of the preceding month or any other tax period as may be prescribed:

  [Provided that the specified class of dealers as may be notified by the Commissioner shall furnish particulars for preparation of the return in the prescribed form [and] submit the return in the prescribed form, electronically through internet in the manner specified in the said notification:
 
Provided further that the specified class of dealers as may be notified by the Commissioner shall pay tax payable on the basis of the return, by electronic remittance through internet in the manner specified in the said notification.]

(2) The tax on any sale or purchase of goods declared in a return furnished shall become payable at the expiry of the period specified in sub-section (1) without requiring issue of a notice for payment of such tax.

(3) Subject to such terms and conditions as may be specified, the prescribed authority may require any registered dealer. —
 
(a) to furnish a return for such periods, or
 
(b) to furnish separate branch returns where the registered dealer has more than one place of business.

[(4) If any dealer having furnished a return under this Act, other than a return furnished under sub-section (3) of Section 38, discovers any omission or incorrect statement therein, other than as a result of an inspection or receipt of any other information or evidence by the prescribed authority,
 
(a) he shall furnish a revised return within the time prescribed for filing the return for the succeeding tax period; and
 
(b) he shall furnish a revised return any time thereafter but within six months from the end of the relevant tax period, if so permitted by the prescribed authority.]”

“Rule 37. Tax period. – The tax period for the purposes of Section 35 shall be as follows, namely. —

(1)   In the case of registered dealers, other than those dealers opting for payment of tax by way of composition under Section 15, whose [total turnover in a year does not exceed twenty-five lakh rupees], shall be a quarter,

(2)   In the case of other registered dealers, it shall be one calendar month.

Explanation. – For the purposes of clause (1), a quarter shall mean any period ending on the final day of the months of March, June, September and December of calendar year.]”

9. A brief about the facts of the case of Kirloskar Electric Co. Limited in which re- reassessment order under Section 39(1) of the KVAT Act, 2003 for the consolidated period from April 2009 to March 2010 though ‘Tax Period’ is dependent upon each Calendar month, which was passed by the Respondent – Deputy Commissioner of Commercial Taxes on 29/04/2016 is challenged, are narrated below for ready reference.

10. The petitioner, Kirloskar Electric Company Limited engaged in the manufacture and sale of Electrical Motors, Generators, Transformers, etc. purchased materials such as Steel, Copper, Bearings and Consumables and other goods required from the local Registered Dealers as well as the Dealers from out side the State of Karnataka and in respect of the tax paid by them on such purchases at the rate of 4% and 12.5%, they claimed this Input Tax Credit (ITC) against the output tax liability in respect of the sales made by it, in the said tax period and the term ‘Tax Period’ is defined under Section 2(33) of the KVAT Act, 2003 as defined under Rule 37 of the Karnataka Value Added Tax Rules, 2005, which in the case of present petitioners meant each calendar month as a separate tax period.

11. The Respondent Assessing Authority denied the Input Tax Credit (ITC) on the ground that the ITC is deductible only in that ‘Tax Period’ during which the invoices of the selling Dealer is raised and the accumulated VAT ITC available in the various months preceding the ‘Tax Period’ in question, could not be used/given by way of Input Tax Credit against the Output Tax (OPT) for the ‘Tax period’ of a particular month.

12. The words “in that period” as employed in Section 10(3) of the KVAT Act, 2003, quoted above has been thus interpreted by the Assessing Authority to mean that the concerned ITC invoices should be of that very month or the ‘Tax period’. The Respondent Assessing Authority has wholly relied upon the observations of the Division Bench of this Court in the judgment rendered in the case of State of Karnataka v. Centum Industries (P.) Ltd.[2015] 54 taxmann.com 350/50 GST 82 (Kar) for the said interpretation of Section 10(3) of the KVAT Act, 2003.

13. The other judgments relied upon by the assessees petitioners to support their claim of ITC are:-

(i)   State of Karnataka v. K. Bond Polymers (P.) Ltd.[2014] 44 taxmann.com 41/44 GST 736 (Kar.);

(ii)   State of Karnataka v. Manyata Promoters (P.) Ltd.[2015] 64 taxmann.com 105 (Kar.); and

(iii)   Sonal Apparel (P.) Ltd. v. State of Karnataka [2017] 97 VST 488 (Kar) (SB) decided on 29/03/2016 by the learned Single Judge of this Court.

14. Aggrieved by these assessment/re- assessment orders and consequential demand of Tax, Interest and Penalty raised against the petitioners, the petitioners assessees directly filed these writ petitions before this Court by-passing the remedy by way of a Regular Appeal under the provisions of Section 62 of the KVAT Act, 2003 against such orders.

15. These writ petitions were entertained and notices were issued to the Respondent State and Commercial Taxes Department upon which they have filed their Statement of Objections in (Micromatic Grinding Technologies Ltd. (supra)) which the learned Additional Advocate General submitted that the same may be taken as the stand of the Respondent State in all these cases.

16. Before coming to the arguments raised on behalf of the learned counsels for the Respondent State, the contentions raised by the learned Senior Counsel, Mr.K.P. Kumar, on behalf of the petitioners – assessees leading the arguments on behalf of the learned counsels for the petitioners assessees may be noted as hereunder:—

17. Mr. K.P. Kumar, learned Senior Counsel urged that the claim of the Input Tax Credit cannot be restricted and denied to the petitioners assessees merely on the ground that the Sale Invoice on the basis of which ITC was claimed pertained to a month or a period prior to ‘Tax Period’ in question, since Section 10(3) of the KVAT Act, 2003 prior to its amendment with effect from 01/04/2015 did not provide any time limit within which the claim of deduction of such ITC has to be made against the OPT of the particular ‘Tax Period’ in which such goods are sold and the Tax Periods and assessment period involved in all the present Writ Petitions are admittedly prior to 01/04/2015.

17.1 He submitted that the petitioner – Dealer records the purchases in question in his Books of Accounts maintained in regular course of business as is mandated by Section 31 of the KVAT Act, 2003 itself on the date when the goods are delivered to the purchaser and upon verification are found to be in order, in accordance with the Purchaser Order and are not liable to be returned to the Selling Dealer and once the purchase is so recorded in the Accounts to be maintained in the ordinary course of business, the ITC can be claimed as deduction against the Output Tax of any next ‘Tax period’ for which such Output Tax and the same cannot be denied by the Assessing Authority.

17.2 Mr. Kumar also urged before the Court that the decision of the Division Bench in the case of Centum Industries (P.) Ltd. (supra) has not restricted the claim of ITC by saying that if the ITC invoices did not pertain to that very ‘Tax period’, but on the facts of that case, where the Sale Invoice pertained to the month of June 2006, but no ITC was claimed in the next month of July 2006, but was claimed only in the month of next February 2007, much after the lapse of the period of six months, which is the outer limit for filing of even the Revised Returns under Section 35 of the KVAT Act, 2003, the disallowance of such ITC made by the Department was upheld by the Division Bench of this Court on the ground of delay in making such claim of ITC. But, he submitted that no such facts exist in the present cases.

17.3 He urged that in the absence of any specific statutory time limit in Section 10 (3) of the KVAT Act,2003, no such restriction for claiming the ITC in the next month itself could have been placed by the Respondent Department. He submitted that as soon as the purchases were duly recorded in the Books of Accounts maintained by the petitioners Dealers as per the provisions of the KVAT Act, 2003, the information of ITC was duly given and claimed in the Returns filed under Section 35 of the KVAT Act, 2003.

17.4 Mr. Kumar further submitted that ITC is nothing but CENVAT Credit under Excise law or ITC on the basis of a valid Sale Invoice which goes to the pool of credit of tax, which can be claimed as “deduction or set off against the Output Tax Liability of the Dealer upon the sales made by it during a particular tax period irrespective of any time limit and there is no requirement of goods-to-goods matching of ITC claim against OPT liability on sales of particular goods and that tax already having been deposited by the Selling Dealers with the State, in discharge of their obligations under the law, the same cannot be forfeited by the State in violation of Article 265 of the Constitution of India, by disallowing such credit of the ITC in the hands of the present Purchasing Dealers against their OPT liability. In other words, he submitted that such disallowance of ITC would run absolutely contrary to the very concept of removing the cascading effect of tax on the multiple points of Sales under VAT law and neither any such statutory limitation could have been put nor it has been put in Section 10 (3) of the KVAT Act, 2003 and therefore such a restrictive interpretation cannot be put by the Respondent Assessing Authorities and the impugned orders are in contravention of the said clear provisions of the KVAT Act, 2003 and therefore deserve to be quashed and set aside by this Court.

17.5 Mr. Kumar relied upon the following decisions of this Court, a brief mention of which can be made hereunder immediately:—

(a)   In K. Bond Polymers (P.) Ltd. (supra), the Division Bench of this Court headed by Hon’ble Justice N. Kumar (as his lordships then was) held that where the assessee purchased the goods during June 2005, July 2005, December 2005 and February 2006 paying tax at 4% under the KVAT Act 2003 as claimed by the supplier, but subsequently, the supplier charged a higher rate of tax at 12.5% and raising a Debit Note on 31/07/2006 which the assessee paid as the differential tax amount to Selling Dealer and claimed the Tax Rebate of that amount of differential Tax in the VAT Returns filed for the month of December 2006, and the Division Bench of this Court allowed the said claim of the assessee and rejected the Revision Petition filed by the State, by holding that once tax was paid under the KVAT Act, 2003, the assessee was entitled to the benefit of Input Tax. The delay in putting forth the claims of such Rebate did not in any way affect his right to claim the said amount which was ultimately due to him under the KVAT Act, 2003, nor it amounts to a contravention resulting in liability to pay tax, interest and penalty, as was sought to be levied by the Assessing Authorities and the entire approach of the Assessing Authorities and the first Appellate Authority was contrary to law and run counter to the spirit of the KVAT Act, 2003.

(b)   A similar view was expressed subsequently by another Division Bench of this Court later, in the case of Manyata Promotors (P.) Ltd. (supra) and it was held by the Division Bench of this Court that under Section 10 (4) of the KVAT Act, 2003, the Input Tax Credit can be claimed only when the Input Invoice is with the Registered Dealer and nowhere in the KVAT Act, 2003, it has been specified that the Input Tax Credit (ITC) should be claimed in the month in which the date of invoice by the Supplier or Vendor falls or that the Purchasing Dealer has to claim the Input Tax Credit in the same period in which the Bills have been raised by the Selling Dealer.

The said ratio of the Division Bench judgment in fact clinches the issue in favour of the assessee petitioners in the present cases as well.

The relevant portion from paragraph 11 of the said judgment in Manyata’s case (supra) is quoted below for ready reference.

“……Under section 10(4) of the Act, the input- tax credit can be claimed only when the input invoice is with the registered dealer. Nowhere in the Act has it been stated that the input-tax credit should be claimed in the month in which the date of the invoice of the supplier/vendor falls or the purchasing dealer has to claim input-tax credit in the same period in which the bills have been raised by the selling dealers. A reading of section 35 makes it very clear that there is no requirement for the purchasing dealers to claim input-tax credit in the same month in which the date of the invoice of the supplier or vendor falls. Section 35(1) makes it clear that every registered dealer shall furnish the return in such form and manner, and shall pay the tax due (clearly the Net Tax = OPT – ITC) on such return within 20 days or 15 days after the end of preceding month. Nowhere in the said section has it been contemplated that the purchasing dealer shall claim input tax in the same month. Section 35(4) contemplates that any dealer having furnished the return discovers any omission or incorrect statement therein, he may furnish the revised return at any time within a period of six months from the end of relevant tax period. The case on hand does not fall under section 35(4) of the KVAT Act.”

(c)   In yet another judgment rendered by the learned Single Judge of this Court in the case of Sonal Apparel Private Limited (supra) decided on 29/03/2016, in a very lucid manner and even explaining and distinguishing the Division Bench judgment in the case of Centum Industries Private Limited (supra), which is the sheet anchor of the argument of the State before this Court even now, the learned Single Judge noted the contention of the Revenue that, “if for any reason, Input Tax Credit could not be availed of in the month in which purchase invoice was raised, the Dealer could have filed a Revised Return within a period of six months under the provisions of Section 35 (4) with reference to the month in which the Seller’s invoice was raised” and this is precisely the contention raised before this Court even now, but negativing the said contention, the learned Single Judge held in paragraph 20 that,

“This contention is wholly impermissible, impracticable and opposed to all canons of business accounting and commercial practices. Virtually every Dealer is liable to a Tax Audit and revising a Return for the month in which the seller raises his invoice would be incompatible with the Dealer’s Accounts, as the purchases are accounted for in a later month. Any such action by the Dealers would result in the rejection of the Dealer’s Books of Accounts leading to best judgment assessments being passed besides severe penal action.”

Upholding the claim of the Input Tax Credit of the assessees and discussing the Scheme of the KVAT Act, 2003 and the provisions of Section 10(3) of the KVAT Act, 2003, while distinguishing the observations of the Division Bench in the case of Centum Industries Private Limited(supra), the learned Single Judge further held as under:—

“35. The Scheme of the KVAT Act being to provide for set off of all tax paid at the earliest points of purchase against the tax payable by him on his sales, by compelling a dealer to avail of credit of tax paid on purchases only in the month in which the selling dealer raises invoices, the Scheme would be defeated and it may result in double taxation.

36. Under the provisions of the erstwhile Karnataka Sales Tax Act, 1957, tax was leviable only at the stage of first sale of goods.

37. Under the KVAT Act, tax is leviable on every sale of goods, irrespective of whether it is the first, second or third sale. However, in order to ensure that the Act does not fall foul of the prohibition placed by the Constitution of India on double taxation, the provisions of the Act permit a dealer to deduct the amount of tax paid by him on his purchases while calculating his net tax liability. If the interpretation afforded by the Revenue to the meaning of section 10(3) were to be accepted, the petitioners would be deprived of the benefit of availing credit of tax paid on their purchases, it would result in tax being levied under the provisions of the same Act on the same commodity at multiple stages.

38. In Centum Industries case [2015] 77 VST 117 (Karn); [2014] 80 KLJ 65, this Court has interpreted section 10(3) to mean that a dealer is required to avail of credit of input tax in the month in which the “input tax” is paid by the purchasing dealer. The said decision does not however, support the proposition that input tax must be availed of in the month in which the selling dealer raises his invoices. The Revenue is hence not justified in seeking to apply the said decision in support of its reasoning.”

Again repelling the contention of the Revenue based on the requirement of filing Revised Returns to claim the Input Tax Credit for the tax period to which ITC invoice or Sale Invoice pertains, the learned Single Judge negatived the said construction by holding that the same would amount to an absurd construction. To quote again, the learned Single Judge held as follows:

” 40. A contention on behalf of the Revenue that a dealer is permitted to avail of credit belatedly up to six months by revising the return under section 35(4) of the KVAT Act, apparently drawing inspiration from the decision in Centum Industries case [2015] 77 VST 117(Karn.); [2014] 80 KLJ 65, is not relevant. It would not be possible to hold that section 10(3) first restricts availment of credit to the same month as the month of purchase and then section 35(4) goes on to permit the same by way of revision of return would be an absurd construction. Such an interpretation would lead to the conclusion that the KVAT Act encourages availment of credit by the dealer without ensuring the eligibility for the same, as delay in availment would result in denial of credit altogether and thereafter rectifying any incorrect credit available by revising the return. Such a view could not have been the intention of the Legislature as that would lead to a situation where filing of a revised return under section 35(4) would become a rule, rather than an exception. In other words, every dealer may be necessarily required to file two returns for the same tax period, firstly an original return reflecting incorrect credit and then a revised return availing the eligible credit.

A case can be found in favour of the petitioners in the alternative as well. In that, it is not in dispute that from the inception of the KVAT Act, section 10(3) was consistently interpreted by the Revenue to mean that a dealer is permitted to deduct the input tax paid on his purchases irrespective of the month in which the purchases were affected. Based on the understanding that section 10(3) did not require dealers to avail credit only in the month in which the purchases were effected. They were held entitled to avail of such credit, as long as the claim of input-tax credit was supported by the prescribed documents. The ambiguity as to the purport of section 10(3) arose as a result of the Department’s clouded interpretation of the Centum Industries case [2015] 77 VST 117 (Karn.); [2014] 80 KLJ 65. The newly substituted provision clears the air and puts to rest the ambiguity, it may hence be said that the amendment to section 10(3) is clarificatory and therefore could be given retrospective effect.”

Against the said judgment of the learned Single Judge with which reasoning, this Court respectfully agrees and endorses the said view, the Revenue is said to have preferred an intra-Court Appeal namely, Writ Appeal No.3176/2016 which has been admitted by the Division Bench of this Court on 20/06/2017. However both the learned counsels fairly submitted that the prayer of the State for stay of the operation of the judgment of the learned Single Judge was not accepted by the Division Bench of this Court and no interim order was granted, even after lengthy arguments made at the Bar.

Thus, the learned Senior Counsel for the petitioners, Mr. Kumar submitted before the Court that the impugned assessment/re-assessment orders passed in this batch of writ petitions to the extent they take a restrictive interpretation of Section 10(3) of the KVAT Act, 2003 and deny the claim of the Input Tax Credit merely on the ground that the ITC invoice did not pertain to that very ‘Tax Period’ or the calendar month or that ITC was not claimed immediately in the Returns filed, even though in that ‘Tax Period’, the purchases concerned were not even recorded in their Books of Accounts, deserves to be quashed and set aside and for other points or issues in the said orders, the matter may be remanded back to the Assessing Authority for passing of the fresh assessment orders in accordance with law.

18. On the other hand, the learned Additional Advocate General, Mr. A.S. Ponnanna and the learned Additional Government Advocate, Mr. T.K. Veda Murthy, appearing for the Respondent State and Commercial Taxes Department were at pains to support the impugned assessment orders passed by the various Assessing Authorities solely relying upon the observations of the Division Bench of this Court in the case of Centum Industries Private Limited (supra) headed by Hon’ble Justice N. Kumar himself, in which taking a bit deviating route from the clear view earlier expressed by his lordships in the case of K. Bond Polymers Private Limited (supra), in the peculiar facts of the case of Centum Industries Private Limited (supra) before it, held that where the assessee paid the input tax for the month of June 2006 but in the Returns filed in July 2006, he did not put forth any ITC claim nor did he file any revised returns within six months putting forth the said ITC claim and the period of six months prescribed under Section 35(4) of the KVAT Act, 2003 had lapsed but such claim was made only in the next February 2007, after the expiry of the said period of six months, the Appellate Tribunal had wrongly allowed the said ITC claim and while allowing the Revision Petition filed by the State, against the order of the Tribunal in favour of the assessee and quoting the observations of the Appellate Tribunal in para.14 of the judgment, the Division Bench observed in Centum’s case as under:—

“14. In the instant case, the assessee paid input tax for the month of June 2006. In the returns filed in July 2006 he did not put forth any claim. He also did not file any revised return within 6 months putting forth the said claim. [Thus Dealer did not claim ITC though purchases recorded in the Books for six months against his OPT (Output Tax) Liability rendering his claim purportedly Stale or time barred] That is the period prescribed under law under Section 35(1) and 35(4) of the Act. It is only in the return filed in the month of February 2007, after the expiry of the aforesaid period, he put for the said claim. Therefore, the Assessing Authority as well as the First Appellate Authority rightly held that the claim for input tax rebate put forth for the first time in February 2007 for the period of June 2006 cannot be allowed. 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. [From the words “allowing input tax is a statutory promise…..dealer would forfeit his claim to claim input tax” are the observations of the Tribunal quoted by the Division Bench, though not put the inverted commas, but then just following words… “On coming to the said conclusion, the Tribunal has not applied its mind”…makes it clear and has been verified by this Court as well from the order of the Tribunal] In coming to the said conclusion, the Tribunal has not applied its mind to sub-section(3) of Section 10 which is the provision which determines the net tax payable by a registered dealer in respect of each tax period in arriving at tax liability the amount of output tax payable by the assessee in that period less the input tax deductible by him as may be prescribed in that period and accounted for in accordance with the provisions of the Act. If the assessee is not putting forth a claim for input tax deduction in the return filed in July 2006 nor as he put forth such a claim in a revised claim which he could have filed within 6 months there from his right to claim input deduction is lost. He cannot for the first time in the returns filed in February 2007 put forth a claim for input tax deduction as the said return was not related to the tax period during which the input tax was paid. [Thus, it is not the ratio decidendi, but an obiter by Division Bench while finding it to be a too belated a claim of ITC, not because of any restriction in Section 10 (3) but because the claim was made belatedly even after a reasonable period of six months, inferred as reasonable by maximum period for filing Revised Returns under Section 35 (4) of the KVAT Act, 2003.] In that view of the matter, the Tribunal has not applied its mind to the aforesaid provision and ignoring the mandate of law has allowed the said deduction erroneously. Therefore, the said finding recorded by the Tribunal cannot be sustained and accordingly it is hereby set aside. The question of law raised is answered in favour of the Revenue and against the assessee.”

The bracketed words of this Court’s understanding of the context of Centum’s case are given in between the aforesaid quote from the Division Bench decision in the case of Centum Industries Private Limited (supra).

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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 !

28. 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 v. Dai Ichi Karkaria Ltd. 1999 (112) E.L.T.353 held in paragraph 17 as under:—

“17. 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.”

29. 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.

30. 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.

31. 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.

32. This Court is, therefore of the considered opinion that the impugned assessment orders/reassessment 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.

33. 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.

34. 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.

35. 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.

[Citation : 2018-Taxcaselaw-4-Karnataka-H.C-GST]