Another situation which in many of the cases under the Punjab VAT,
which dealers are facing is the disallowance of input tax credit on the ground
that the registration of seller of the goods has been cancelled or normally it
is stated in the assessment orders that the person from whom goods have been
purchased is a cancelled dealer.
No disallowance in the absence of proper mechanism: In such situation the
most important thing which must be noted is, whether the registration was
cancelled after the date of purchase in question or before such date.
If a purchase is made from a person whose registration has already
been cancelled before such purchase, then tax credit of tax paid on such purchase
cannot be denied to the purchaser of goods, unless due procedure for
cancellation of registration is followed as provided in the law, for e.g.
publication of cancellation in newspapers or in offiicial gazette, as required
in rule 13(6) etc,.
The reason for it is that unless there is a mechanism whereby a
person can verify about the factum of cancellation of registration and unless
the due process as prescribed under the law for the cancellation is followed,
benefit of input tax credit cannot be disallowed..This view is supported by the
verdict of Delhi high Court in Shanti Kiran India Pvt. Ltd. vs Commissioner of
Trade and Taxe Deptt. st. Appll. 34-39 of 2012.
Disallowance of ITC in cases where cancellation is subsequent to
the date of purchase:In many of the cases, input tax credit is disallowed on the ground
that since, the registration certificate of seller has been cancelled and such
seller has not paid any tax on his sale of goods, despite the fact that at the
time when the purchase was made from seller, then the registration of the said
seller was active.
In such type of cases no disallowance of input tax credit can be
made where purchase was made during the period when seller's registration
certificate was active, it is immaterial that seller has paid tax or not. A
purchaser of goods cannot be expected to become tax auditor of his seller and
moreover for the irregularities committed by the seller, purchaser should not
be placed in a dis-advantageous position.
Moreover as explained in earlier article on the same issue, the
seller's liability continues untill the date of cancellation of his
registration. Therefore, Department preserves the right to collect tax from the
seller concerned for his sales tax liability,till the date of his cancellation
of registration. In such case department can recover the tax sooner or later
from the seller on the sales made by him. In such a scenario it will be unfair
to ask purchaser to pay tax i.e. by disallowing ITC, which is the primary
liability of seller concerned to pay.
Seller's liability to pay sales tax is primary liability: At this juncture it is
very important to understand that whenever a seller makes sale of goods, the
liability to pay tax on his sales is his primary liability to pay the tax
irrespective of the fact whether he has or has not collected the tax on his
sales from buyer.
The above view is supported by the Supreme Court’s verdict in
Tata Iron & Steel Co., Ltd. v. State of Bihar [1958] 9 STC 267 (SC);
AIR 1958 SC 452, wherein, a Constitution Bench of the Supreme Court, while
considering the provisions of the Bihar Sales Tax Act, 1947, observed that the
primary liability to pay sales tax, so far as the State is concerned, is on the
seller ”
It was observed by SC in above case as follows:
"From the point of view of the economist and as an economic
theory, sales tax may be an indirect tax on the consumer, but legally it need
not be so. Under the 1947 Act the primary liability to pay the sales tax, so
far as the State is concerned, is on the seller. The circumstance that the 1947
Act, after the amendment, permitted the seller who was a registered dealer to
collect the sales tax as a tax from the purchaser does not do away with
the primary liability of the seller to pay the sales tax."
Why purchaser should be asked to pay primary of liability of
seller in the absence of fraud or connivance: Thus once it is clear
that primary liability to pay sales tax is of the seller concerned, therefore
if he makes a default in payment of taxes, then the purchaser should not be
asked to pay the primary liability of the seller, unless some fraudulent or
connivance is proved between seller and purchaser.
A registered dealer’s liability to pay tax under the Punjab VAT
Act, 2005 continues until his registration certificate is cancelled. If,
however, such dealer’s liability continues till that date, so also would the
advantages continue, which accrue to him by reason of his registration, as also
those would continue, which would accrue to others by reason of their dealing
with him.
The above observation was made by Bombay High Court in Suresh Trading
Co. vs State of Maharashtra [1981] 48 STC 207 (Bom.), which was subsequently
upheld by the Supreme Court.
Moreover Supreme Court in the above noted case also made following
observation:
"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 pur-chase 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 dealers' 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.
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".
Effects of amendment in section 13(12): Section 13(12) of Punjab
VAT Act, 2005 has been amended w.e.f. 15.11.2013 prospectively so as to provide
that input tax credit shall not exceed the tax actually payable in the
Government Treasury. Would that mean, if seller does not deposit tax in the
Government treasury, the corresponding input tax credit will not be available
to the purchaser?
In my view unless and untill a mechanism is provided by the
Government to enable the buyer of goods to know whether tax has been paid by
the seller in he Government Treasury, no input tax credit can be disallowed on
the basis of section 13(12), because in the absence of such a mechanism, it
will be inequitous to place an onerous burden on the purchaser to keep vigil
over the seller whether he has deposited any tax in the treasury or not.
Without providing any mechanism to the purchaser, he is indirectly asked to
become a tax auditor of the seller, which is clearly unfair and inequitable.
The above view is also supported by Delhi High Court's verdict in
Shanti Kiran case (supra) in the following terms:
"In the present case, section 9(1) grants input-tax credit to
purchasing dealers. Section 9(2), on the other hand, lists out specific
situations where the benefit is denied. The negative list, as it were, is
restrictive and is in the nature of a proviso. As a result, this court is of
the opinion that the interpretation placed by the Tribunal that there is
statutory authority for granting input-tax credit, only to the extent tax is
deposited by the selling dealer, is unsound and contrary to the statute.
It is also iniquitous because an onerous burden is placed on the purchasing
dealer-in the absence of clear words to that effect in the statute-to keep a
vigil over the amounts deposited by the selling dealer. The court does not see
any provision or methodology by which the purchasing dealer can monitor
the selling dealer's behaviour, vis-a-vis the latter's VAT returns. Indeed,
section 28 stipulates confidentiality in such matters."
In nut shell, the need of the hour is to develop a system or
mechanism to enable buyers to get to know about the taxes deposited by sellers
and the cancellaton of dealers. Such mechanism can be provided with the help of
e-governance. A form like 26AS, provided by the Income Tax Department, to get
to know the credit of one's TDS, must be provided to bring down litigation and
proper implementation of the amended law.
For Part-I of the article click at below link:
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