Disallowance of input claimed by VAT officer held incorrect, HC

Facts in Brief:

1. Appellant trades in electrical goods and is a registered dealer under the VAT Act. It purchases goods from dealers registered under the said Act on the basis of tax invoices issued by them and on the payment of VAT at applicable rates.

2. The appellant received notices for assessment of tax and interest under Section 32 of the VAT Act and for penalty assessment under Section 33. These were for various periods between 2007 and 2008 and apparently premised on the audit of its accounts by the VAT Department for the period 01.04.2007 to 31.03.2008.

3. The VAT Officer (VATO) by assessment orders disallowed the input claimed on account of purchases from two dealers - M/s. Balaji Enterprises and M/s. R.S. International.

4. The VATO was of the opinion that the selling dealers operated for short periods and their turn-over was high in comparison to the tax deposited by them. Consequently by the orders, the VATO demanded tax, interest and penalty for the periods in question. Arguing that the VATO's orders were not justified in law, the appellant moved the Objection Hearing Authority (OHA) under Section 74. These appeals/objections were dismissed by order dated 29.01.2010.

5. The OHA confirmed the VATO's.

On appeal HC held as under,

6. This Court is of the opinion that in the absence of any mechanism enabling a purchasing dealer to verify if the selling dealer deposited tax, for the period in question, and in the absence of notification in a manner that can be ascertained by men in business that a dealer's registration is cancelled (as has happened in this case) the benefit of input credit, under Section 9(1) cannot be denied.

7. Furthermore, this Court notices that the cancellation of both selling dealers' registration occurred after the transactions with the appellant. The VAT authorities observed that the scanty amounts deposited by the selling dealers was incommensurate with the transactions recorded, and straightaway proceeded to hold that they colluded with the appellant. Such a priori conclusions are based on no material, or without inquiry, and accordingly unworthy of acceptance.

8. In view of the above discussion and findings, this Court answers the substantial question framed in favour of the assessee, and against the revenue. It is held that the appellant is entitled to the credit claimed, which shall be worked out and given, after due verification, in accordance with law, within two months from today. The appeals are allowed in the above terms, with no order as to costs. 

Case Reference - Shanti Kiran India Pvt. Ltd. vs Commissioner Trade & Tax Deptt.