Merely because seller did not deposit VAT with Govt., the buyer cannot be denied benefit of ITC - Delhi HC in Suvasini Charitable Trust - represented by ALA Legal

Summary of SUVASINI CHARITABLE TRUST V. GOVERNMENT OF NCT OF DELHI & ANR. [W.P.(C) 4086/2013]

The petitioner was represented by a team of ALA Legal, lead by Mr. Puneet Agrawal, Partner, ALA Legal. He may be reached at puneet@alalegal.in

Download full text here: Suvasini Charitable Trust – Delhi HC

The Hon’ble High Court of Delhi on 26th October 2017 was pleased to decide the batch of writ petitions in Suvasini Charitable Trust [W.P. (C) 4086 of 2013], wherein constitutional validity of Section 9(2)(g) of the Delhi VAT Act, 2003 (DVAT Act) was challenged on the ground of being violative of Article 14 of the Constitution of India.

The batch writ petitions challenged Section 9(2)(g) of the DVAT Act as the said provision devoids bona fide assesses from the benefit of Input Tax Credit in certain circumstances. The said provision denies credit to the dealers or class of 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 said provision denies credit on purchases made by a dealer in case the seller has not deposited the collected tax and reflected the same in his return. This effectively causes the dealer to pay tax twice, once at the time of purchasing and secondly at the time of sales as ITC was denied. Further, even if at the time of purchase the dealer took all possible measures to ensure that the seller is registered, and the dealer submitted due returns with the VAT authorities, at a later date, due to non-compliance on part of seller such as non-payment of tax, the purchasing dealer shall be denied benefit of ITC. The dealer thus suffers due to non‑compliance on part of the seller which is beyond his control. Moreover, the returns submitted by the seller are not shared with the buyer. To take due care and precaution against the possibility of such non-compliance is next to impossible for the dealer. Such issues were brought to the fore before the Hon’ble Bench.

Such a provision where irrespective of whether the purchasing dealer is innocent, on account of subsequent conduct of the selling dealer, who has collected the VAT from the purchasing dealer and has failed to deposit it with the government or has failed to lawfully adjust it against his output tax liability, the purchasing dealer is made to suffer. Such was contended to be violative of Article 14 of the Constitution in as much as the provision treats both the innocent purchasers and the guilty purchasers alike. It was submitted that by treating unequals equally the legislative measure was violative of Article 14 of the Constitution. Reliance was placed on the decision in K.T. Moopil Nair v. State of Kerala AIR 1961 SC 552; State of Kerala v. Haji and Haji AIR 1969 SC 378; decisions in Commissioner of Customs, Amritsar v. Parker Industries 2007 (207) ELT 658 (P&H) and Shanti Kiran India Pvt. Ltd. v. Commissioner, Trade and Tax Deptt. (2013) 57 VST 405 (Delhi).

The Hon’ble bench while discussing the issue stated that as long as the purchasing dealer has taken all possible steps as mentioned above, he cannot be expected to keep track of whether the selling dealer has in fact deposited the tax collected with the Government or has lawfully adjusted it against his output tax liability. The purchasing dealer can, of course, ascertain if there is any mismatch of Annexures 2A and 2B but, assuming it is on account of the seller’s default, there is little the buyer can do about it. Non accessibility to the returns of the seller was also considered.

The Hon’ble Bench also emphasised upon Section 40A of the DVAT to be a provision where the state was empowered to catch hold of and impose liability on defaulters in cases where the buying and the selling dealers have connived with each other and causing injury to the state exchequer.

The Hon’ble Bench discussing upon the issue of classification between the defaulting seller and buyer and the bona fide buyer relied upon the judgment of Budhan Chaudhary v. State of Bihar [1955] 1 SCR 1045, where the Hon’ble Supreme Court explained that while Article 14 forbids class legislation, “it does not forbid reasonable classification for the purposes of legislation.” What, however, had to be fulfilled were the two tests: (i) “that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group” and; (ii) “that differentia must have a rational relation to the object sought to be achieved by the statute in question.”

Applying the discussion above the Hon’ble Bench in para 39 of the judgment concluded that in the present case there is a singular failure by the legislature to make a distinction between purchasing dealers who have transacted bona fide 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 latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.

Further, the Hon’ble Bench also concurred with the judgment of the Hon’ble High Court of Punjab & Haryana in the case of Gheru Lal Bal Chand v. State of Haryana where the constitutional validity of a similar provision was challenged.

The Hon’ble Court further observed that, “All this points to a failure to make a correct classification on a rational basis so that the denial of ITC is not visited upon a bonafide purchasing dealer. This failure to make a reasonable classification, does attract invalidation under Article 14 of the Constitution…..”

The Hon’ble Court also appreciated that the claim of the purchasing dealer in the present case is not that it should be granted ITC de hors the conditions spelt out in Sections 9 (1) and (2) of the DVAT Act. Positive case of the appellants is that each of them, as a purchasing dealer, has complied the conditions as stipulated in Section 9 and therefore, cannot be denied ITC because only selling dealer had failed to fulfil the conditions thereunder. Further, it was observed that Section 40A of the DVAT Act takes care of a situation where the selling dealer and the purchasing dealer act in collusion with a view to defrauding the revenue.

In view of the above discussion the Hon’ble Bench decided to read down the challenged provision over striking the same down being violative of Article 14 of the Constitution, in the following terms:

“53. In light of the above legal position, the Court hereby holds 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.

The Hon’ble Bench was also pleased to set aside the defaulting Assessment Orders issued to the petitioners.

Comments

A. The said judgment shall certainly effect pending VAT litigations in various states where in view of similarly placed provisions ITC has been denied/ demands have been raised for want of confirmation of payment of tax by selling dealer.

B. This judgment shall also impact similarly placed provisions under GST laws.