The two-judge bench of the Supreme Court of India today categorically held that the post-sale discounts granted by the dealer/manufacturer by issuing credit notes are eligible for deduction under the provisions of the Karnataka Value Added Tax Act.
The bench comprising of Justice Deepak Misra and Justice Amitava Roy clarified that the deduction is allowable in respect of discount granted through the issue of credit notes, even if the same has not been reflected in the tax invoice.
The bench was hearing a number of petitions, in which the appellants, assesseess under the Karnataka VAT Act, issued credit notes to the customers granting discounts, after the completion of sale. The net amount received was shown in the books of accounts and the returns. Initially, the assessing authority allowed deduction in respect of the discount amount. Later, the order was rectified by the officer following the High Court decision in State of Karnataka vs. M/s Kitchen Appliances India Ltd., wherein it was held that only discounts mentioned in the tax invoices as eligible for deduction from the total turnover in terms of Rule 3(2)(c) of the Rules.Though the order was challenged before the High Court, the Court sustained the same.
In an another petition also, the High Court took a view that though the amounts allowed as discount did constitute permissible deduction to compute the eventual taxable turnover, such discount was to be necessarily reflected in the sale invoice to qualify for such deduction.It was therefore, observed that the claim of deduction of the discount extended through credit notes after the completion of the sale but not divulged in the tax invoice. The appellants therefore, approached the Apex Court for relief.
Before the Court, the appellants contended that combined reading of Section 30 and Rule 31 clearly states that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover.
Analyzing the provisions of Rule 3(2), the bench noted that all amounts allowed as discount would qualify for deduction from the total turnover to ascertain the taxable turnover and thus the extent of exigibility under this statute.
It was further noted that legislative intent, while amending Rule 3(2) was not to deny the benefit of deduction of trade discount by obdurately insisting on the reflection of such trade discount in the text invoice or the bill of sale at the point of the sale as the only device to guard against possible avoidance of tax under the cloak thereof.
“Axiomatically, therefor the interpretation to be extended to the proviso involved has to be essentially in accord with the legislative intention to sustain realistically the benefit of trade discount as envisaged. Any exposition to probabilise exaction of the levy in excess of the due, being impermissible cannot be thus a conceivable entailment of any law on imperative impost. To insist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be ill-logical, irrational and absurd. To reiterate, trade discount though an admitted phenomenon in commerce, the computation thereof may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory. This may herald as well the possible unauthorised taxation even in the face of cotaneous accounts kept in ordinary course of business, attesting the grant of such trade discount and adjustment thereof against the price. While, devious manipulations in trade discount to avoid tax in a given fact situation is not an impossibility, such avoidance can be effectively prevented by insisting on the proof of such discount, if granted. The interpretation to the contrary, as sought to be assigned by the Revenue to the first proviso to Rule 3 (2)(c) of the Rules, whentested on the measure of the judicial postulations adumbrated herein above, thus does not commend for acceptance”, the bench said.
Allowing the appeal, the bench added that “On an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid. The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated.”
Read the full text of the Judgment below.