The Impact of Retrospective Cancellation on Input Tax Credit: Judgment from Madras High Court

The brief facts of the case are as follows:

Each of the petitioners in this case is a registered dealer engaged in the purchase and sale of tax-paid goods. In some instances, they are manufacturers who use the tax-paid goods purchased from other dealers. Each petitioner/dealer has availed of input tax credit on the amount of tax paid by the registered selling dealer on the purchase of taxable goods. The department proceeded to take action against the selling dealers, who sold goods to the petitioners, for various reasons and canceled their registration certificates. Based on the cancellation of the registration certificates issued to the selling dealers, the department issued notices in some cases, calling upon the petitioners to show cause as to why input tax credit should not be reversed; in some cases, the department passed revised assessment orders reversing the input tax credit availed.

The issue in the case : Whether the cancellation of the registration certificates of the selling dealers with retrospective effect will entitle the department to reverse the input tax credit already availed by the petitioners/assessees consequent to assessment orders passed by the competent authority based on records.

Action taken by petitioner: All the petitioners have challenged the notices, revised assessment orders, and provisional assessment order on the plea that the reversal of input tax credit is per se erroneous and the basis on which the input tax credit has been reversed or sought to be reversed is based on the cancellation of the registration certificates issued to the selling dealers, which were passed with retrospective effect and, therefore, cannot bind the petitioners.

Supportive judgment: The input tax credit was availed based on valid documents, and the benefit given cannot be reversed in this manner. In support of the plea, the petitioners relied upon a decision of the Supreme Court in State of Maharashtra v. Suresh Trading Company, (1998) 109 STC 439.

Point to consider:

• On the sale and purchase of goods by the registered dealers, the tax payable on such sale has been paid and is supported by statutory records like invoices, etc., and the same is not in dispute.

• At the time when the sale was effected by the selling dealers to the petitioners, the registration certificates were valid. On the basis of the sale documents, input tax credit was availed by all the petitioners/assessees based on assessment made by the competent authority.

• As far as the cancellation of the registration certificates of the selling dealers is concerned, it is for those selling dealers to canvass the plea as to when it will take effect either on the date of the order or with retrospective effect.

• As far as the petitioners are concerned, they have purchased the taxable goods from registered dealers who had valid registration certificates; paid the tax payable thereon; availed input tax credit; and the assessing officers have passed orders granting such benefit.

• Therefore, the assessment orders granting input tax credit were validly passed. There was no cancellation of the registration certificates of the selling dealers at that point in time. The petitioners/assessees have paid input tax based on the invoices issued by registered selling dealers and availed input tax credit.

• The retrospective cancellation of the registration certificates issued to the selling dealers cannot affect the right of the petitioners/assessees, who have paid the tax on the basis of the invoices and thereafter claimed the benefit.

• They have utilized the goods either for their own use or for further sale. At the time when the sale was made, the selling dealers had valid registration certificates, and the subsequent cancellation cannot nullify the benefit that the petitioners/assessees availed based on valid documents.

• A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current.

• The argument on behalf of the department that it was the duty of persons dealing with registered dealers to find out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to nullify the provisions of the statute which entitle persons.

Conclusion: In the present case, it is not in dispute that the registration certificates of the selling dealers have been cancelled with retrospective effect and, therefore, to reverse the input tax credit on the plea that registration certificates have been cancelled with retrospective effect cannot be countenanced. Whatever benefits that have accrued to the petitioners based on valid documents in the course of sale and purchase of goods, for which tax has been paid, cannot be declined. The transaction that took place when the registration certificates of the selling dealer were in force cannot be denied to the petitioners/assessees on the above plea. This is contrary to the law laid down by the Supreme Court in the stated case.

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