Due Process Essential in ITC Reversal: High Court Remands Case for Fresh Assessment

A company named M/s. Sri Ranganathar Valves Private Limited (petitioner), based in Coimbatore, has filed six writ petitions in the Madras High Court against the Commercial Tax Officer, Velandipalayam Assessment Circle (respondent), before the bench comprising Hon’ble Mr Justice S.M. Subramaniam. All these writ petitions are related to the same issue, i.e., reversal of Input Tax Credit (ITC) claimed by the company for different months during the financial years 2014-15 and 2015-16, hence have been listened to simultaneously in the court.

The company claimed that they had legitimately availed of ITC on their purchases, but the tax officer had reversed a portion of this credit and refused to refund it. The company has prayed the court to set aside these reversal orders and requested a refund of the denied amount.

The reversal of ITC by the tax officer was based on three main grounds. First, the officer claimed that some suppliers from whom the company had purchased goods had not paid tax to the government; therefore, ITC on those purchases had been denied. Second, the officer reversed ITC on the basis of assumed losses during manufacturing; he applied a fixed percentage (like 5% or 1%) as wastage and reversed ITC on that portion, considering it to be not used in the final product. The third reason the officer gave was that some goods on which ITC was claimed were not eligible because they were not directly exported, hence making the ITC claim invalid.

When the High Court thoroughly analysed the case on these three grounds, it ruled that ITC cannot be denied to the purchaser if the seller fails to pay the tax, as long as the purchaser can prove that the tax was collected and proper invoices were issued. These points were also highlighted in an earlier judgment in the case of Infiniti Wholesale Limited, where the court said the buyer should not be punished for the seller’s failure if the buyer followed the law.

On the point of reversal due to wastage, the Court criticised the assessing officer for adopting fixed percentages for visible and invisible losses. Citing an earlier judgment, the court said that using an unfair or standard percentage is not acceptable. Instead, the officers must analyse the actual manufacturing process, visit the location of the company if required, and calculate the actual wastage on the basis of evidence. Further, a detailed assessment is compulsory before making any such decision, rather than simply applying a blanket percentage. On the action of the officer, where ITC was denied on the goods that were not directly exported, the court said that before taking any legal action, the company must be given a fair opportunity to be heard.

In the final order, the High Court set aside the orders passed by the tax officer on 29.06.2016. The case has been remanded to the assessing officer for fresh consideration. The officer has been instructed to conduct a proper inquiry, and this time the company should be given a proper opportunity to be heard and avoid using any standard percentages without proper justification. The Court also instructed the officer to issue fresh notices regarding the wastage and ineligible goods issues and to complete the reassessment process within twelve weeks from the date of receiving the court’s order.