The system of VAT was introduced in the sales tax law to bring more transparency, efficiency, to remove tax cascading etc. The difficulties which may arise in any system comes to picture only when the system is practically implemented.
One of the major difficulties being faced by the dealers is the disallowance of input tax credit by the revenue on the ground that the dealer from whom the goods have been purchased is a bogus dealer or whose certificate has been cancelled, as a result of which, it is claimed by the revenue that since no tax has been paid by such cancelled or bogus dealer, therefore no corresponding tax credit is available to the purchaser.
Section 13(12) of the Punjab VAT Act, 2005 has been amended w.e.f. 15.11.2013 to the effect that Input tax credit in no case shall exceed the amount of tax on the purchase of goods, actually paid in the Government treasury. This amendment is prospective and its effect has not been made retrospective. So this amendment would not have any effect on the cases before 15.11.2013.
Now there are certain points in relation to the disallowance of input tax credit on the ground of purchaser being a cancelled and bogus dealers, which need some light so as to keep the principle of fairness alive in the assessment proceedings, while disallowing any input tax credit.
Disallowance in case of bogus dealers: I have seen many cases where assessing officers pass an assessment order stating that the dealer from whom the goods have been purchased are bogus dealers. Now the bogus dealer has not been defined in the Punjab VAT Act. In general terms one would undertsand that a bogus dealer would be a person who is dealing in the bogus/ fraudulent transaction of sale and purchase or who fraudulently has collected the tax on his sales, but not paid the same with the Government.
No mechanism to know whether a person is genuine dealer or not:Now while dealing with any person, how one can come to know whether the person from whom he is purchasing the goods, is a genuine dealer or a not, is a question which remains unanswered, as there is no mechanism provided by the Department so as to get to know that the person from whom he is purchasing the goods has deposited the tax collected from him in the Government treasury.
The Department also has not provided/published any list of such bogus dealers, from where an assessee may come. The assessee comes to know only at the time of assessment proceedings that the person from whom he has purchased the goods is a bogus dealer declared by the Department.
In the absence of such a mechanism, every person has a right to believe that a person to whom the registration has been granted by the Department itself, is a genuine dealer, as the registration is granted after due verification by the Department officials.
Priniciple of fairness must be adopted: Now, in such a scenario, during the assessment proceedings, before disallowing input tax credit to the purchaser on the ground that the person from whom he has purchased the goods is a bogus dealer, the principle of fairness and justice demands that such person must be confronted with the evidence that how such person is a bogus dealer.
When an officer records a finding in his assessment order that a seller of goods is a bogus dealer, this is purely a finding of fact. Now, it must be remembered that findiag of fact has to be a legal finding of fact, and what is a legal finding of fact has been very well explained by Punjab & Haryana high Court in the judgement Pehr Chand & Sons vs State of Punjab 30 STC 211 as follows:
“A finding of fact in order to be binding has to be a legal finding of fact. For instance, a finding of fact which is based on no evidence is no finding of fact. Similarly, a finding of fact based on irrelevant evidence and a finding of fact based on evidence partly relevant and partly irrelevant, would be no answer to the contention of the assessee that such a finding is vitiated and is no finding in the eyes of law”(para 32 of the judgement).
Thus the officer conerned must produce an evidence to establish a fact that a dealer concerned is a bogus dealer. However, having said that, it should also be noted that the onus is on the assessee in first place to prove that he has made genuine purchases and therefore he must also produce the evidences to prove the genuineness of his purchases from the so called bogus dealers, i.e. he must produce VAT invoices, proof of payment, and proof of movement of goods or other circumstancial evidences which may prove his purchase as genuine.
However it should be noted that once the evidences as to genuineness of purchases are produced, the onus must shift on the officer concerned to rebut the same.What happens most of the time is the AOs without rebutting the evidences produced by the assessee, makes disallownace of input tax credit, as if they are bent upon doing so, ignoring the fact that they are also acting as quasi judicial authorities and have to abide by the principles of judiciousness.
At this juncture, the Judgement of our jurisdictional Punjab & Haryana High Court in the well known case Gheru Lal Bal Chand vs State of Haryana clearly which has laid down the principle that seller is an agent of Government and input tax credit cannot be disallowed to the genuine purchaser on the ground that seller has not deposited the tax with the Government treasury, unless some fraudulent, collusion or connivance is proved between the seller or its predecessors and the purchaser, will come to rescue the assessee from any unfair disallowance of input tax credit.
However, all in all in my view if only the principle of fairness and justice is adopted by the quasi judicial authorities during the assessment proceedings, most of the problems and litigations would disappear and it would also increase the tax collection of revenue.
To be continued.......
In the next continued blog disallowance of input tax credit in case of cancelled dealers would be discussed.
Amit Bajaj Advocate
Bajaj & Bajaj Advocates
128, Sangam Complex,
Milap Chowk, Jalandhar(Punjab)