M/s. C M Envirosystems Private Limited vs The State of Karnataka & anr.

Learned counsel for both parties submit that controversy in the present case is covered by a decision of this Court rendered on 10.1.2018 in the

case of Kirloskar Electric Co. Ltd. Vs. State of Karnataka in WP.Nos.58917-58928/2016 & connected matters, in which this Court dealing with

the controversy of input tax under Section 10(3) of the KVAT Act, 2003, held that the claim of ITC cannot be restricted for the tax period in

which output tax is computed and assessed by the respondents.

The relevant portion of the judgment is quoted below for ready reference:

The substantive provision of Section 10(3) of the KVAT Act, 2003, did not lay down any such restrictive time frame for

allowing the deduction of ITC against the OPT in a particular tax period to determine the net tax payable for that tax period and

therefore there is no justification whatsoever to accept such an interpretation put forth by the learned counsels for the Respondent

State. Such contentions had not only been negatived and with great respects, rightly so by the learned Single Judge in the case of

Sonal Apparel Private Limited case, but this Court is of the considered opinion that the Respondent Department is taking an

unnecessarily distorted view of the observations made by the Division Bench of this Court in the case of Centum Industries Private

Limited, where the Division Bench while disallowed the said claim of ITC made at a belatedly stage and observed simply as an obiter

that the claim of ITC should relate to the tax period in question. The Division Bench never said that the ITC Invoice or Sale Invoice

should also be pertaining to the same tax period, in which the credit of such ITC is claimed by the Dealer.

The learned counsels for the Respondent State were at complete loss of words to the question put by the Court as to, under what

authority of law the State can retain the tax paid by the selling Dealer to the State as collected under the Sale Invoice which is passed

on to the purchasing Dealer who are the assessees - petitioners before this Court, if ITC in respect of such sale invoice was to be

disallowed, contrary to the very concept of VAT law and the unrestricted language of Section 10(3) of the KVAT Act, 2003 and in

apparent violation of Article 265 of the Constitution of India, there was simply no answer on behalf of the Respondent State to this

query of the Court, except relying on the aforesaid obiter from the judgment of the Division Bench of this Court in Centum Industries

Private Limited case, which as explained above, does not support the case of the Revenue at all.

In the peculiar facts of the Centum Industries Private Limited case, the claim of ITC credit was disallowed on the basis of the

belated claim made by it and not while interpreting the substantive provisions of Section 10(3) of the Act in a narrower way, as is

sought to be canvassed by the Respondent State before this Court even now.

The learned counsels for the Respondent State were again without any answer to the question of the Court as to how the

machinery provisions of filing of the returns under Section 35 of the KVAT Act, 2003 for assessing the tax liability including the OPT,

ITC and Net Tax liability under Section 10 of the KVAT Act, 2003, can be allowed to override the substantive provisions of Section

10 of the KVAT Act, 2003, contained in chapter II of the said KVAT Act, 2003.

In the absence of any valid answer and submission on behalf of the Respondent State, this Court can safely conclude that the

machinery provisions cannot be allowed to override and defeat the substantive claim of the Input Tax Credits under Section 10(3) of

the KVAT Act, 2003, which without any restriction of the time frame, allowed such deduction or credit of the ITC against the OPT

liability of the Dealer in question.

When the Assessing Authority could pass the impugned re-assessment order, Annexure C dated 29/04/2016 for the whole year

in one go, disallowing the ITC claim illegally by restricting it on the basis of monthly Tax Periods, what can be the justification for

disallowing the same, without it being found to be an unverified claim, not supported by valid Sales Invoices ? None - is the simple

answer !

The Input Tax Credit under VAT law is parimateria with the concept of CENVAT or MODVAT under Excise Law and dealing

with a similar problem, the Hon''ble Supreme Court in the case of Collector of Central Excise, Pune Vs. Dai Ichi Karkaria Ltd. 1999

( 112 ) E.L.T.353 ( SC ) held in paragraph 17 as under:-

It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw

material to be used by him in the production of an excisable product immediately it makes the requisite declaration and

obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of

excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the

excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilized,

has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the

manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw

material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no corelation

of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is

manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise

duty on a final product manufactured on the very day that is becomes available.

Thus the claim of credit of input tax is indefeasible as was the case of CENVAT under Excise law and such credit of ITC under

VAT law which is equivalent to tax paid in the chain of sales of the same goods, cannot be denied on the anvil of machinery

provisions or even provisions relating to time frame which is law of limitation only bars the remedy rather than negativing the

substantive claims under the taxing statutes.

Both the questions framed above are therefore liable to be answered in favour of the petitioners assessees. The claim of ITC

cannot be restricted and denied on the stated grounds by Revenue. It cannot be denied only because ITC claim is not made in

respect of Sale Invoices which are not pertaining to same Tax Period, nor it can be denied on the ground that such claim is not made

immediately in the month or months following the month of purchase of goods in question. The machinery provisions of filing of

Returns under Section 35 of the KVAT Act cannot defeat the substantive claims under Section 10(3) of the Act. The Revenue is

entitled only to verify that the Sale Invoices are genuine and valid and such ITC claim is not duplicate, fictitious or bogus. Article 265

of the Constitution of India does not entitle the State to retain such tax paid by Selling Dealers and deny the claim of ITC credit or set

off in the hands of the Purchasing Dealers who claim such ITC against their Output Tax Liability when they sell goods further,

incurring such Output Tax liability.

One wonders whether the subsequent amendments effected by the Respondent State in the year 2015 and 2016 though not

applicable to the assessment period involved in this batch of writ petitions presently being decided by this Court, is a ''relaxation'' or a

''restriction'' and whether it is for the benefit of the assessees as contended by the Respondent State or seeks to restrict and defeat

the claim of ITC in the period of assessment following such amendment. Be that as it may. Since that amendment is neither applicable

to the facts of the present case nor any of the sides has called the same in question, this Court need not make any further analysis of

these amendments.

This Court is, therefore of the considered opinion that the impugned assessment orders/reassessment orders passed by the

Respondent - Assessing Authorities to this extent of denying the claim of ITC to the petitioners assessees are illegal and unsustainable

and deserve to be quashed and set aside by this Court.

The writ petitions are accordingly allowed and the impugned orders are quashed and set aside. The matters would stand restored

to the file of the Respondent Assessing Authorities to pass fresh orders in accordance with law as interpreted above as far as claim of

Input Tax Credit is concerned.

This Court is of the further opinion that despite more than one judgment interpreting the provisions of Section 10(3) of the KVAT

Act, 2003, in favour of the assessees, the tendency on the part of the Assessing Authorities of the Respondent Department to still

keep on passing the orders contrary to these judgments is in utter disregard of the judicial and hierarchical discipline which they are

bound to observe and it may also amount to a deliberate disobedience on their part and may invite contempt action and therefore to

prevent any such further unnecessary litigation on this issue, at the behest of the different Authorities of the Department taking a

contrary view, it is directed that the Head of the Respondent Department, namely, the Commissioner of Commercial Taxes shall issue

a Circular in terms of the various aforesaid judgments of this Court in favour of assessees, for being followed by the Authorities

through out the State to avoid any further multiplicity of litigation before this Court and Appellate Forums. Therefore, such a Circular

shall be issued by the Respondent Commissioner of Commercial Taxes and the Respondent - Departmental Authorities, including the

Appellate Authorities under the Act are cautioned that now onwards if any contrary view is found to be taken by such Authorities of

the Department on aforesaid issue, this Court would initiate suo motu contempt proceedings against the Commissioner of Commercial

Taxes as well as the concerned Authorities of the Respondent Department.

With these observations and directions, these writ petitions are allowed. All the impugned orders passed by the Assessing

Authorities are set aside and the matters are restored to file of the respective Assessing Authorities, for passing fresh orders in

accordance with law, as interpreted above. No costs.

In view of the same, the present writ petition is allowed and the impugned endorsement at Annexure-A, dated 14.6.2016 is set aside. The

matter is remanded back to the concerned authority for passing fresh orders in accordance with law as already directed by this Court in the

aforesaid cases. No order as to costs.