VAT Dealers Duty Bound to Reverse/Debit ITC u/s 13(6) After Business Discontinuation by Law: Allahabad HC [Read Order]

In a recent ruling, the Allahabad High Court has ruled that the dealers registered under Value Added Tax Act ( VAT Act), 2008 are duty bound to reverse or debit the input tax credit as prescribed under Section 13(6) of the VAT after the discontinuation of business by the operation of law.

“Once the opposite party – registered dealers, by operation of law, discontinued its business, it was the duty cast upon the opposite party dealer to debit their ITC as contemplated under section 13(6) of the VAT Act. The Tribunal has failed in its duty while allowing the appeal of the opposite party by overlooking the provision of section 13(6) of the VAT Act” observed Justice Piyush Agarwal.

The revision was filed by the department addressing two substantial questions of law. Firstly, whether the Commercial Tax Tribunal was justified in allowing the dealer to claim ITC under the VAT Act and its corresponding provisions in Section 16 of the Act and Section 140(1) of the Goods and Services Tax Act, 2017 , read with Rule 21(1)(y) of the VAT Rules. Secondly, whether such ITC could be allowed when the business of the dealer stood discontinued on 30.06.2017.

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The Additional Chief Standing Counsel (ACSC), representing the State, submitted that the opposite party, engaged in the trade of food-grains, pulses, oilseeds, and related commodities, had declared its closing stock as of 30.06.2017 and claimed Input Tax Credit (ITC) of ₹4,65,822 for the Assessment Year 2017–18.

The Assessing Authority, via order dated 11.02.2021, disallowed the ITC on the ground that the dealer had ceased business under the VAT Act from the said date, which was later upheld by the first appellate authority on 12.09.2022. However, the Commercial Tax Tribunal, on second appeal, set aside the orders of both lower authorities and allowed the dealer's claim, prompting the State to challenge the Tribunal’s decision by filing the present revision petition.

The ACSC contended that with the implementation of the GST regime on 01.07.2017, the VAT Act lost all its force, and as a result, all VAT Act registrations stood terminated. Hence, under Section 13(6) of the VAT Act, the dealer was duty-bound to debit any unused ITC standing to its credit on stoppage of business.

In addition the counsel pointed out that under Section 13(1)(a) of the VAT Act, ITC could only be claimed if the goods purchased were resold within the state or exported, a condition not fulfilled by the dealer.

Furthermore, Rule 21(1)(y) of the VAT Rules also mandated that unutilized ITC be reversed upon discontinuation of business. He contended that the Tribunal erred in overlooking these statutory requirements and wrongly allowed ITC despite the absence of any resale or continuation of business.

Opposing the revision, counsel of the opposite party, Rishi Raj Kapoor argued that even if it is assumed, without conceding, that the business was discontinued, the respondent was still entitled to refund of admissible ITC in accordance with Section 15(5) of the VAT Act. He relied on the judgment in M/s Sooraj Kirana Company v. Commissioner Commercial Tax to support the proposition that ITC could not be disallowed merely due to the transition to the new tax regime.

Further, counsel Suyash Agarwal argued that the dealer was a registered and active business entity and had not discontinued operations. He contended that the GST Act, under Section 140, provided for transitional arrangements for ITC, allowing for transfer of legitimate credit from the VAT regime into the GST regime through the filing of TRAN-1 form. However, they could not file the form due to technical glitches which were pleaded before the court with case laws.

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He further argued that the Assessing Authority lacked the jurisdiction to reverse the ITC since the dealer had not availed the credit through any fraudulent means. Judicial precedents including Tractor & Farm Equipment Ltd. v. CCE, Madurai, and Shree Navneet Cotton Co. v. State of Gujarat were cited to emphasize the legitimacy of transitional credit under GST.

In rebuttal, the ACSC submitted that the Tribunal's direction ignored the findings categorically given by the first appellate authority which mentioned that the ITC had not been rightfully applied. According to the counsel, such findings became final in case there was no particular reversal through the Tribunal.

“Section 13(6) of the VAT Act and rule 21(1)(y) of the UP VAT Rules contemplate that in the event ITC is unutilized and the registered dealer discontinued its business and the closing stock is there, then the dealer has to debit the unutilized ITC. The registered dealer cannot be permitted to utilize earned ITC for the said period”, observed the court.

Further, the bench held that once the business under the VAT Act was discontinued on 30.06.2017 by operation of law, it became the statutory obligation of the dealer to reverse or debit the ITC  in accordance with Section 13(6) of the VAT Act.

It was clearly confirmed by the court that the Tribunal in the impugned order, in its wisdom, has allowed the appeals of the opposite party by referring to the judgement cited by the revisionist, i.e., M/s Farooq Agencies Vs. Commissioner of Commercial Tax, is not applicable to the fact of the case.

According to the Bench, a specific provision under the VAT Act, undisputedly applicable in the present case was not complied with by the opposite party, a registered dealer. Moreover, the Tribunal, being the final fact-finding authority, failed to address or even mention this statutory requirement while allowing the appeal in favour of the dealer.

The high court noted that the Tribunal, in allowing the dealer’s appeal without examining compliance with these provisions or addressing specific findings of the Assessing Authority and appellate authority, appears to have overstepped. Thus, the bench set aside the Commercial Tax Tribunal’s order.

To Read the full text of the Order CLICK HERE

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