Input Tax Credit cannot be granted If Registration of Selling Dealer was cancelled: Kerala HC [Read Judgment]

A two-judge bench of the Kerala High Court has held that the Input Tax Credit cannot be granted to a dealer when the registration of the selling dealer was cancelled by the department after the purchase.

The assessee, a dealer in chicken, had filed the returns for the year 2005-2006. The department conducted an audit visit in the premises of the assessee and found that the purchase disclosed in the returns were far lesser than the purchase seen from the Delivery Notes recovered. Accordingly, additions were made by the Revenue by estimating the turnover on the basis of the value shown in the Delivery Note. Also, the input tax credit was denied to the assessee.

Before the High Court, the assessee contended that the cancellation of registration with respect to the three dealers was after the purchase made by the petitioner and that too was in the subsequent year. It was also contended that the petitioner had made the purchases based on the registration granted by the Department.

The division bench comprising Justices Vinod Chandran and Ashok Menon rejected the contention since the claim made is of an input tax credit.

“As rightly found by the First Appellate Authority as also the Tribunal, input tax credit is a concession permitted to avoid the cascading effect in a value-added tax regime. What is paid as tax at an earlier instance has to be set off in the later instance, wherein the taxation is only on the value addition. While avoiding the cascading effect to the dealers, it is ensured that the State gets its dues on the rates fixed for each commodity,” the bench said.

“However, when the selling dealer at the first instance does not pay the amounts to the Government, there can be no input tax credit claimed. Obviously, the dealer at the first instance had, collected tax and not remitted the same to the Department. The State is deprived of the tax to that extent and hence there is no question of input tax credit. The assessee could definitely file a suit for recovery from the entity from whom they made the purchase. Having not received the tax at the first instance of sale, there is no obligation on the State to grant input tax credit,” the bench added.

A contradictory view was taken by the Madras High Court in the year 2016 while quashing the orders passed by the VAT Authorities reversing Input Tax on ground that selling dealer has not paid taxes/selling dealers registration certificates have been cancelled.