Input tax credit cannot be denied to a purchasing dealer by invoking section 9(2)(g) of the Delhi Value Added Tax (DVAT) Act where the dealer has entered into a transaction in good faith, a two-judge bench of the Delhi High Court said last week.
Justices S Muralidhar and Chander Sekhar ‘read down’ the above provision while considering a bunch of petitions filed by various dealers wherein the provision was challenged for being violative of Article 14 of the Constitution.
The Court said that the provision cannot be used to deny input tax credit to a purchasing dealer for the default committed by the selling dealer.
In the instant case, the department initiated assessment proceedings against the petitioner-assessees solely on the basis that the ITC availed by SCT on the purchases did not match with the sale details filed by the selling dealers.
As per section 9(2)(g) of the Act, input tax cannot be allowed to the dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.
The main argument of the petitioners was that the condition laid down under the impugned provision is not within the control of the purchasing dealer. They urged that the provision is violative of Article 14. Therefore, the input tax credit cannot be denied for the said reason.
After hearing both sides, the bench observed that the purchasing dealer is expected to bear the consequences of denying input tax because of the default done by the selling dealer.
Citing a plethora of decisions, the bench observed 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 bench, therefore, held 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.”
Resultantly, the Court precluded the department from invoking section 9(2)(g) of the DVAT Act 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,” the bench said.
Read the full text of the Judgment below.
