Sellers’ fault of not depositing tax can’t deny tax credit to buyer: High Court order

A buyer cannot be penalised in case a seller does not deposit tax collected from her/him, a High Court has ruled.

This order could become precedent in a number of similar cases all over India as many of the businesses are denied input tax credit (ITC) under the indirect tax regime when the counter party does not file tax returns and tax has not been deposited.

This problem was prevalent during the Value Added Tax (VAT) regime and many cases on this issue are still pending in various courts. And now in the Goods and Services Tax regime, fake invoices are being generated to claim ITC.

In a matter filed with Jharkhand High Court, the petitioner was aggrieved by an order passed by the Assistant Commissioner of Commercial Taxes, Urban Circle, Jamshedpur, in a VAT-related case whereby the claim of ITC was rejected and interest was imposed upon him. The petitioner firm argued that taxes were paid and challenged the order given by tax authority.

The petitioner firm made certain purchases worth over ₹1.08 crore from another firm, both registered under Jharkhand VAT Act. The former firm also paid VAT amounting nearly ₹11.9-lakh and got tax invoices from the latter.

The petitioner filed the return and claimed ITC. However, during the scrutiny of the returns, it was found that the said amount did not reflect in the MIS (Management Information System) as regards the return filed by the seller firm.

Accordingly, a notice was issued to the buyer firm which in reply produced all the documents to prove that tax had been paid. He also replied that it was the selling dealer, who had not deposited the tax, for which the petitioner firm was not at fault.

Though the assessing officer noted that the buyer firm had paid the tax, but as the ITC claim was disallowed, interest was imposed upon the petitioner. The court noted that though the provision of law was ambiguously worded, it was clear in its intention that the ITC was to be claimed or allowed on any purchase of goods, only to the extent the amount of tax was actually paid with respect to the said goods in the Government Treasury.

Seller’s contention

The selling firm admitted that it could not file return, its registration was blocked due to which it could not even file a late return. This firm informed the court that it is willing to pay the tax provided portal is opened for that. Tax authority said that it has acted according to the law.

The court said that the petitioner firm had acted absolutely in a bonafide manner and had discharged its tax liability by paying the VAT amount to the selling dealer. It had also filed its return within time, claiming the applicable ITC, but it was solely due to the lapses on the part of the selling dealer, that the return had not been filed by the selling dealer, and the tax amount was not deposited.

“We are satisfied that the petitioner had discharged its liability under the VAT Act, and there being no mechanism under the JVAT Act, by which, the petitioner could compel the seller also to discharge their duty, it was not within the competency of the petitioner to compel the selling dealer to file the return within the stipulated time, and deposit the tax collected from the petitioner in the Government Treasury,” the court said while quashing order by the assessing officer and asking to return the money collected as interest.

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