CAPITAL TRADERS vs. STATE OF GUJARAT

C/SCA/18963/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 18963 of 2018

FOR APPROVAL AND SIGNATURE:

HONOURABLE MS.JUSTICE HARSHA DEVANI

and HONOURABLE DR.JUSTICE A. P. THAKER

========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? No 2 To be referred to the Reporter or not ? No 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? No ========================================================== CAPITAL TRADERS Versus STATE OF GUJARAT ========================================================== Appearance: UCHIT N SHETH(7336) for the PETITIONER(s) No. 1,2 MR UTKARSH SHARMA, ASSISTANT GOVERNMENT PLEADER for the RESPONDENT(s) No. 1,2 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE DR.JUSTICE A. P. THAKER

Date : 11/02/2019

ORAL JUDGMENT (PER : HONOURABLE MS.JUSTICE HARSHA DEVANI) Page 1 of 12

C/SCA/18963/2018 JUDGMENT 1. By this petition under Article 226 of the Constitution of India, the petitioners have challenged the order dated 6.9.2018 made by the Gujarat Value Added Tax Tribunal (hereinafter referred to as the “the Tribunal”) in Second Appeal No.1003 of 2018 as well as the order dated 10.10.2018 passed by the Tribunal whereby the appeal has been dismissed for want of compliance of the order dated 6.9.2018. 2. The first petitioner Capital Traders, a firm registered under the Gujarat Value Added Tax Act, 2003 (hereinafter referred to as “the GVAT Act”) is engaged in the business of trading in chemicals. It is the case of the petitioners that the returns were duly filed and tax as applicable was paid under the GVAT Act. The petitioners purchased goods from registered dealers under the GVAT Act. Input tax credit was claimed by the petitioners on the tax paid on such purchases in accordance with the provisions of the GVAT Act. 3. Input tax credit for assessment year 2013-14 came to be disallowed in the case of the petitioner on the basis of alleged negative cross check reports. It was alleged that the vendors of the petitioners had purchased goods from some vendors whose registration certificates had been retrospectively cancelled and that there were dues in the case of the vendors. Accordingly, the Assessing Officer, vide order dated 31.3.2018, by placing reliance upon section 11(7A) of the GVAT Act disallowed input tax credit in the case of the petitioners for the year 2013-14. It is the case of the petitioners that the negative cross check reports or assessment orders passed in the case of Page 2 of 12

C/SCA/18963/2018 JUDGMENT the petitioners were never provided to the petitioners. The petitioners challenged the assessment order by way of a first appeal which came to be summarily dismissed on the ground of nonpayment of pre-deposit. The petitioners preferred a second appeal before the Tribunal. The Tribunal, by order dated 6.9.2018, admitted the appeal and stayed recovery on condition that the petitioners deposit Rs.2 crore within a period of one month. Since the petitioners could not comply with the said order, by the impugned order dated 10.10.2018, the appeal came to be dismissed and the interim relief granted earlier came to be vacated. Being aggrieved, the petitioners have filed the present petition. 4. Mr. Uchit Sheth, learned advocate for the petitioners submitted that in this case the input tax credit has been disallowed on the basis that the registrations of the persons from whom the petitioners had made purchases had been cancelled. It was urged that the disallowance of input tax credit being based upon extraneous material, such material ought to have been furnished to the petitioners. It was contended that after the order of the Tribunal dismissing the appeal on the ground of non-payment of pre-deposit, the petitioners contacted their vendors and tried to find out the reason for the alleged demand in their cases, whereupon replies were received that tax in respect of the sales to the petitioners had been duly deposited. It was submitted that out of the three vendors in respect of whom input tax credit came to be disallowed, two of them, namely, M/s.Ardor Global Private Limited and M/s. Infinium De-Chem Private Limited have responded that in fact they do not have any outstanding dues Page 3 of 12

C/SCA/18963/2018 JUDGMENT as per the assessment orders passed for the year 2013-14. It was pointed out that insofar as Ardor International Limited is concerned, while the amount of dues is much less than the amount mentioned in the assessment orders of the petitioners, the said vendor has informed the petitioner that majority of such dues are on account of disallowance or exemption from certain high seas sales transactions and that the remaining are dues relating to certain disputed claims of input tax credit unconnected with the sales made to the petitioners. The attention of the court was also drawn to the assessment orders passed in the case of those dealers. 4.1 It was contended that to invoke section 11(7A) of the GVAT Act, the respondents have to establish that qua these sales, the tax has not been paid and such exercise should have been carried out at the stage of the assessment proceedings; however, the assessment order has been passed without proper inquiry leading to a high pitched assessment. It was submitted that the petitioners have a strong prima-facie case in their favour and, therefore, the demand of huge pre-deposit for admission of the first and second appeal by the first appellate authority and the Tribunal respectively, is unjustified. 4.2 In support of his submissions, the learned advocate placed reliance upon the decision of this court in the case of Shree Bhairav Metal Corporation v. State of Gujarat, [2015] 82 VST 324 (Guj), wherein the court had remanded the matter to the adjudicating authority to consider the claim of the petitioner for input tax credit on the alleged purchase made by it from M/s. Lucky Enterprises, now that the copy of Page 4 of 12

C/SCA/18963/2018 JUDGMENT the order passed in the case of Lucky Enterprises was available with the petitioner therein. It was, accordingly urged that the petition requires to be allowed by granting the reliefs prayed for in the petition. 5. Opposing the petition, Mr. Utkarsh Sharma, learned Assistant Government Pleader, submitted that insofar as the case of the vendor Ardor International Limited is concerned, on verifying the books and documents for the year 2013-14, it is found that the total tax liability was Rs.122,40,61,930/- out of which a meagre amount of Rs.7,09,79,684/- has been deposited by way of challan, resulting into differential dues of Rs.115,30,82,246/-. It was submitted that the total sale transactions resulted into dues of Rs.2570.53 crore under the GVAT Act, out of which Rs.208.98 crore are in respect of the transactions with Capital Traders, viz., the petitioner herein. It was submitted that the tax dues of Ardor International Limited come to Rs.9,37,45,486/- and that Ardor International Limited's Value Added Tax TIN (Tax Identification Number) has been cancelled on 1.1.2017. 5.1 Insofar as the tax dues for the year 2013-14 of Ardor Global Private Limited and Infinium Det-chem Private Limited are concerned, the learned Assistant Government Pleader drew the attention of the court to the averments made in paragraph 9 of the affidavit-in-reply filed on behalf of the second respondent wherein it has been stated thus: “9. I say and submit that as per the contentions raised by the petitioner as far as the tax dues for the year 2013-14 of Ardor Global Private Limited and Infinium Det-chem Page 5 of 12

C/SCA/18963/2018 JUDGMENT Private Limited are concerned, the tax liability dues in the said assessment year is shown as nil. As far as the said contention is concerned, looking to the details it appears to be true at this stage, that these two vendors do not have any dues for the said assessment year 2013-14, however, when the transaction details with reference to Rs.175.20 crore was called upon from the present petitioner, i.e. Capital Traders, such details were not furnished by the present petitioner and therefore the assessing officer has not release/allowed ITC in transactions of these two vendors and the department has taken utmost care to go into the transaction so that no additional liability is imposed on the present petitioner. The liability in view of the tax dues imposed on the petitioner is to the tune of Rs.7,81,77,269/- in case of Ardor Global Limited and amount of Rs.30,9,727/- in case of Infinium Det-chem Private Limited.” Mr. Sharma submitted that it was for the petitioners to clarify that the transactions with these three parties were legal and proper and that there were no irregularities or infirmities in these transactions by furnishing the details during the course of assessment. It was submitted that the petitioners were given ample opportunities by the Assessing Officer but the petitioners having failed to furnish the required details, no blame be laid at the door of the assessing authority. It was, accordingly, urged that the petition being devoid of merits deserves to be dismissed. 6. The sole question that arises for consideration in the Page 6 of 12

C/SCA/18963/2018 JUDGMENT present case is as to whether the first appellate authority and the Tribunal were justified in directing the petitioners to make pre-deposit in terms of the orders passed by them. 7. A perusal of the record of the case reveals that in the assessment order, the Assessing Officer has, after examining the transaction tree, observed that in case of certain dealers the sales appear to be of Cancelled Tin/Ab-initio Cancelled Tin. He has observed that in case of certain dealers who have sold goods to this dealer, there is absence of Tin movement of goods and as they are involved in only billing activities, their registrations have been cancelled ab-initio. Input tax credit cannot be taken in respect of purchases made from such dealers. Keeping in view the provisions of section 11(7A) of the GVAT Act, the Assessing Officer has held that as tax had not been paid earlier, the dealer is not entitled to input tax credit on such purchases. The Assessing Officer has worked out the percentage of purchases made by the petitioners from the three parties and has proportionately disallowed the input tax credit on such purchases. 8. It is an admitted position that at the time of making the assessment order, the details of the assessments made in the case of the three vendors from whom purchase has been made by the petitioners had not been furnished to the petitioners. Subsequent to the passing of the impugned orders by the first appellate authority and the Tribunal, the petitioners made inquiries from the vendors and were furnished copies of the assessment orders made in their (the vendors’) cases. By a communication dated 27th November, 2018 M/s. Infinium Det- Page 7 of 12

C/SCA/18963/2018 JUDGMENT Chem Private Limited informed the petitioners that there are no outstanding dues for the year 2013-14 under the Value Added Tax Act, 2003. A copy of the assessment order has also been annexed to the petition. Similarly by a letter dated 27th November, 2018 of Shri Bharat Shah with reference to sales made by M/s.Ardor Global Private Limited during the year 2013-2014, the petitioner has been informed that for the assessment for assessment year 2013-2014 under the GVAT Act has been completed and as per the assessment order, the company has been held liable to pay Rs.5189/- which has also been deposited by the company in the Government treasury in the month of June, 2016. A copy of the assessment order has also been annexed along with the letter. It is, accordingly, stated that for the year 2013-14, no amount is outstanding as payable by the company under the GVAT Act. 9. By a letter dated 27th November 2018 of Shri Fenil Bharatbhai Shah, Ex-Director of Ardor International Private Limited., the petitioners have been informed that during the year 2013-14 M/s. Ardor International Pvt. Ltd. had sold goods to the petitioners amounting to Rs.219,43,23,453/-. These sales were recorded in the books of account of the company and duly reported in the returns regularly submitted by the company under the GVAT Act. The tax payable under the GVAT Act as per the returns of the company was also duly paid by the company. It is further stated that the company has been assessed for the year 2013-14 under the GVAT Act and as per the assessment order, the total dues against the company were Rs.68,36,74,990/-. A copy of the assessment order is also annexed along with the letter. It is further stated in the letter Page 8 of 12

C/SCA/18963/2018 JUDGMENT that almost the entire inter-State sales and total branch transfer transactions were of goods imported from outside the country. It is further stated in the letter that sales to Capital Traders are duly recorded in the books of account of M/s. Ardor International Limited and also assessed to tax in the assessment year 2013-14 passed under the GVAT Act. Though dues of Rs.68,36,74,990/- have been raised in the assessment order passed under the GVAT Act for the year 2013-14, they are not relating to the sales of Capital Traders. 10. Thus, after the impugned orders came to be passed by the Tribunal, the petitioners have come across material which establishes that insofar as two of the vendors are concerned, no dues were outstanding for the assessment year 2013-14. Insofar as the third vendor is concerned, that vendor has informed the assessee that none of the outstanding dues were in respect of the sales made in the case of the petitioners. 11. At this juncture, reference may be made to the decision of this court in the case of Shree Bhairav Metal Corporation v. State of Gujarat (supra), wherein it has been held thus:- “9.4 As observed earlier, the impugned order has been passed by the adjudicating authority denying the ITC claimed by the petitioner on the alleged purchases made by the petitioner from M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises – seller has been cancelled ab initio on the ground that the seller had involved into the billing activities only and all the transactions by M/s Lucky Enterprises are held to be bogus. The petitioner has been denied the ITC on the ground of the aforesaid activities/alleged transactions between the petitioner and Page 9 of 12

C/SCA/18963/2018 JUDGMENT M/s Lucky Enterprises. However, as observed herein above, the petitioner was not served with the copy of the order in the case of M/s Lucky Enterprises. Now, the copy of the order passed in the case of M/s Lucky Enterprises is available with the petitioner. Therefore, after giving an opportunity to the petitioner with respect to observations made in the case of M/s Lucky Enterprises insofar as the alleged transactions between the petitioner and M/s Lucky Enterprises and after giving an opportunity to the petitioner to prove the genuineness of the transaction between the petitioner and M/s Lucky Enterprises in light of the observations made herein above, therefore, the matter is required to be remanded to the adjudicating authority to consider the claim of the petitioner for ITC on the alleged purchases made by the petitioner from M/s Lucky Enterprises.” 12. In the opinion of this court, the above decision would be squarely applicable to the facts of the present case. Having regard to the fact that at the time when the assessment order was made, the petitioners did not have the copies of the assessment orders made in the case of the vendors, the petitioners did not have any opportunity to prove the genuineness of such transactions. 13. As can be seen from the assessment order, the Assessing Officer has placed reliance upon section 11(7A) of the GVAT Act for disallowing input tax credit to the petitioners. Section 11(7A) of the GVAT Act reads as under:- “Notwithstanding anything contained in this section, in no case the amount of tax credit on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury:” Page 10 of 12

C/SCA/18963/2018 JUDGMENT 14. Thus, the sub-section (7A) of section 11 of the GVAT Act envisages disallowance of tax credit in excess of the amount of tax paid in respect of the same goods. Therefore, to disallow tax credit on any purchase, it has to be established that it is in respect of the very goods purchased by a dealer that the tax has not been paid. Input tax credit cannot be disallowed by working out the percentage of purchases made from a dealer whose registration is cancelled, without first establishing that in respect of the goods purchased by the dealer, the vendor had not paid tax. 15. In the light of the above discussion, the court is of the view that the petitioners have made out a strong prima-facie case in their favour. Under the circumstances, the Tribunal and the first appellate authority were not justified in directing payment of huge amount of pre-deposit for the purpose of admitting the appeal and staying recovery. 16. The petition, therefore, succeeds and is, accordingly, allowed. The impugned orders dated 10.10.2018 as well as 6.9.2018 by the Tribunal in Second Appeal No.1003 of 2018 as well as the order dated 27.6.2018 passed by the Joint Commissioner of State Tax Division-II, Ahmedabad (the first appellate authority) directing payment of pre-deposit and dismissing the appeal for non-payment of pre-deposit, are hereby quashed and set aside and the matter is restored to the file of the first appellate authority who shall hear the appeal on merits, without insisting upon payment of any pre-deposit. The recovery of the demand raised under the assessment order shall remain stayed till the first appellate authority finally Page 11 of 12

C/SCA/18963/2018 JUDGMENT decides the appeal. Rule is made absolute accordingly with no order as to costs. (HARSHA DEVANI, J) (A. P. THAKER, J) Z.G. SHAIKH Page 12 of 12