Disallowance of ITC under TNVAT Act  due to Mismatch and Purchase suppression: Madras HC directs Denovo Adjudication [Read Order]

The Madras High Court directed denovo adjudication on the disallowance of Input Tax Credit (ITC ) claimed under Tamil Nadu Value Added Tax, 2006 ( “TNVAT Act”) due to mismatch, purchase  suppression and availment of Input Tax Credit on purchases from registration cancelled dealers. The assessment order disallowing the ITC was passed without considering the Circular issued by the Commissioner of Commercial Tax.

M/s.Farwood Industries Limited, the petitioner is a registered dealer under Tamil Nadu Value Added Tax, 2006 ( “TNVAT Act”) and engaged in the manufacturing and sales of cupboards, wardrobes, furniture, doors and windows. During the assessment years 2015-16 and 2016-17, the petitioner purchased raw materials by way of interstate and intrastate sales for use as raw material in the manufacture of the above items and claimed input tax credit on the purchases of the same. A VAT audit was conducted at the petitioner's place of business on 24.04.2017.

During the VAT Audit, several defects were noticed interalia including Purchase suppression on verification of sales details of other end dealer's Annexure II, Wrong availment of ITC for the purchase made from Registration cancelled dealers, Mismatch of ITC etc.

Based on inspection, a notice was issued on 23.10.2019 calling upon the petitioner to submit its objection. The details of invoice number, date of invoice, and value of invoice which has been treated as sales suppression (check-post movement) were sought and the same were not furnished by the respondent. The impugned order has been made merely recording the fact that the petitioner had filed their reply on the following dates viz., 30.12.2019, 13.01.2020 and 05.02.2020.  The assessment order does not reveal that the above request was even considered by the assessing officer.

It was observed that the majority of the defects relate to the input tax credit disallowed given the mismatch, purchase suppression and availment of Input Tax Credit on purchases from registration cancelled dealers.

In the case of JKM Graphics Solutions Limited vs. Commercial Tax Officer, Vepery Assessment Circle it was observed that the revenue must devise a mechanism to deal with the issue of mismatch and the other disputes involving input tax credit. The Commissioner of Commercial Tax issued Circular No.5 of 2021 wherein a detailed mechanism was devised to resolve disputes involving wrongful claims of input tax credit.

In light of the judgement, the Single-judge bench comprising Justice Mohammed Shaffiq set aside the impugned orders and the matters were remanded back to the respondent to redo the assessment. It is open to the respondent to complete the assessment de-novo within 12 weeks.

To Read the full text of the Order CLICK HERE

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