Dealer held entitled to credit for input Tax for ascertaining liability, HC

Facts in Brief:

1. The appellant is a dealer registered with the HVAT Act as also under the Central Sales Tax Act, 1956 and is filing the returns and discharging tax obligations in accordance therewith.

2. It is Singh Gurbax engaged in the manufacturing and trading of plastic moulding parts etc.

3. After introduction of the HVAT Act, the units enjoying the benefit of exemption were given an option for deferment of tax under Section 61 of the said Act.

4. Assessment for the relevant assessment year in the case of the appellant was framed by the assessing authority vide order dated 15.2.2007, Annexure A.1. The case was taken suo motu by the revisional authority.

5. On receipt of notice, the appellant put in appearance and filed written submissions.

6. According to the appellant, the revisional authority without considering the clarification given by the Secretary in the case of M/s Haldiram Foods (P) Limited inflicted financial liability on it and order dated 29.2.2008, Annexure A.2 was passed against it.

7. Aggrieved by the order, the appellant filed appeal before the Tribunal on 11.5.2008 which was rejected vide order dated 7.10.2009, Annexure A.4.

8. Thereafter, the appellant filed review application before the Tribunal on 18.3.2010 and the same was also dismissed vide order dated 21.9.2011, Annexure A.6.

On appeal HC held as under,

9. In K.P.Verghese vs. Income Tax Officer, Ernakulam, (1981) 131 ITR 597, the Supreme Court held that circulars and instructions are binding on the authorities administering the tax department but they are also clearly in the nature of contemporanea exposito furnishing legitimate aid to the construction of the Act, in the following terms:-

"But the construction which is commending itself to us does not rest merely on the principle of contemporanea expositio. The two circulars of the Central Board of Direct Taxes to which we have just referred are legally binding on the Revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of subsection (2) and they depart or deviate from such construction.

10. It is now well-settled as a result of two decisions of this Court, one in Navnitlal C. Jhaveri v. RR. Sen(1) and the other in Ellerman Lines Ltd. v. Commissioner of Income-tax, West Bengal(2) that circulars issued by the Central Board of Direct Taxes under section 119 of the Act are binding ( n all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act.

11. The question which arose in Navnitlal C. Jhaveri's case (supra) was in regard to the constitutional validity of sections 2(6A) (e) and 12(1B) which were introduced in the Indian Income Tax Act 1922 by the Finance Act 1955 with effect from 1st April, 1955.

12. These two sections provided that any payment made by a closely held company to its shareholder by a way of advance or loan to the extent to which the company possesses accumulated profits shall be treated as dividend taxable under the Act and this would include any loan or advance made in any previous year relevant to any assessment year prior to the assessment year 1955-56, if such loan or advance remained outstanding on the first day of the previous year relevant to the assessment year 1955-56. The Singh Gurbax 2014.07.30 12:14 I attest to the accuracy and integrity of this document High Court Chandigarh constitutional validity of these two sections was assailed on the ground that they imposed unreasonable restrictions on the fundamental right of the assessee under Article 19(1) (f) and (g) of the Constitution by taxing outstanding loans or advances of past years as dividend.

13. The Revenue however relied on a circular issued by the Central Board of Revenue under section 5(8) of the Indian lncome-tax Act 1922 which corresponded to section 119 of the Present Act and this circular provided that if any such outstanding loans or advances of past years were repaid on or before 30th June 1922, they would not be taken into account in determining the tax liability of the shareholders to whom such loans or advances were given.

14. This circular was clearly contrary to the plain language of section 2(6A)(e) and section 121(B), but even so this Court held that it was binding on the Revenue and since "past transactions which would normally have attracted the stringent provisions of section 12(1B) as it was introduced in 1955, were substantially granted exemption from the operation of the said provisions by making it clear to all the companies and their shareholders that if the past loans were genuinely refunded to the companies they would not be taken into account under section 12(1B)" sections 2(6A)(e) and 12(1B) did not suffer from the vice of unconstitutionality.

15. This decision was followed in Ellerman Lines case (supra) where referring to another circular issued by the Central Board of Revenue under section 5(8) of the Indian Income Tax Act 1922 on which reliance was placed on behalf of the assessee, this Court observed: "Now, coming to the question as to the effect of instructions issued under section 5(8) of the Act, this J Court observed in Navnit Lal C. Jhaveri v. R. K. Shah Appellate Assistant Commissioner, Bombay:

"It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their Singh Gurbax 2014.07.30 12:14 I attest to the accuracy and integrity of this document High Court Chandigarh shareholders as a result of genuine trans actions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision.

16. The directions given in that circular clearly deviated from the provisions of the Act, yet this Court held that circular was binding on the Income-tax officers."

17. The two circulars of the Central Board of Direct Taxes referred to above must therefore be held to be binding on the Revenue in the administration or implementation of sub- section (2) and this sub section must be read as applicable only to cases where there is under-statement of the consideration in respect of the transfer."

18. The Constitution Bench in C.B.Gautam v. Union of India, (1993) 1 SCC 78 had approved the decision in K.P.Varghese's case (supra) as under:-

"We may point out that although it was submitted by the learned Attorney General that the decision in the case of K.P.Varghese (1981) 131 ITR 597 (SC) requires reconsideration, he did not seriously challenge the correctness of that decision. No argument has been advanced by him which could lead us to the conclusion that the said case was not correctly decided nor has he pointed out any error in the judgment in that case."

19. From the above, it emerges that circulars, instructions and clarifications issued by the competent authority granting administrative relief in exercise of power conferred under statutory provision are binding on subordinate officers. It is not open to the subordinate officers to contend that the circulars, instructions and clarifications are erroneous and not binding on them as long as they remain in force.

20. However, they would not be binding on the courts and the assessees. In other words, it will be open for the assessees to plead that the circular, instructions and clarification issued by an authority which is not of beneficient nature to Singh Gurbax 2014.07.30 12:14 I attest to the accuracy and integrity of this document High Court Chandigarh them runs counter to the statutory provision and is ultra vires and bad in law and thus, ineffective qua their rights.

21. On plain interpretation of the provisions of the statute and the rules framed there under and also on the basis of clarification dated 12.7.2004 issued under Section 56(3) of the HVAT Act which is binding on the authorities for the administration of tax, the state cannot deny the benefit of input tax credit to the dealer for determining the tax payable by it.

22. Thus, viewed from any angle, the dealer is entitled to the benefit of input tax credit while calculating the 50% deferred tax upfront to be paid by it.

23. Once the dealer is held entitled to credit for input tax for ascertaining the liability to be discharged by it as noticed above, the question relating to charging of interest in the facts and circumstances is rendered academic.

24. In all fairness, reference is made to the judgments relied upon by learned State counsel. In Tata Iron & Steel Co. Limited's case (supra), the issue before the Apex Court was whether a dealer falls in exemption clause or not. It was noticed as under:-

"The principle that in the event of a provision of a fiscal statute is obscure such construction which favours the assessee may be adopted, but it would have no application to construction of an exemption notification, as in such a case it is for the assessee to show that he comes within the purview of exemption [see Novopan India Limited v. Collector of Central Excise and Customs, (1994) Supp 3 SCC 606]."

25. It was further observed that the eligibility criteria is to be construed strictly but a liberal approach may be adopted in construing other conditions. Similar was the position in Creative Handicrafts and M/s Mahabir Vegetable Oils Pvt. Limited's cases (supra). The conditions of Singh Gurbax 2014.07.30 12:14 I attest to the accuracy and integrity of this document High Court Chandigarh eligibility for claiming deferment not being under challenge in the present cases, no advantage can be derived by the State from these pronouncements.

26. The substantial questions of law as noticed above are answered accordingly and the amount of tax payable by the dealer shall be calculated by the Assessing Officer in accordance therewith. All the cases are disposed of in the aforesaid terms. 

Case Reference - M/S Sonex Auto Industries P ... vs State Of Haryana And Others.