Input tax credit can be claimed by purchasing dealers under the Kerala Value Added Tax Act, even if selling dealers fail to remit tax, provided purchasing dealers meet statutory requirements.

ORDER :

Mohammed Nias C.P., J.

The substantial question of law referred to the Full Bench is whether a purchasing dealer, who has otherwise complied with all statutory requirements, can legitimately be denied the benefit of input tax credit solely on the ground that the selling dealer failed to remit the tax collected.

2. W.P(C) No.6733/2019 was filed against the assessment order of the Sales Tax Officer denying ITC to the petitioner on the ground that the seller had not remitted the requisite tax as under the Kerala Value Added Tax Act, 2003 (hereinafter referred to as “KVAT”). A learned Single judge, after considering the view of the Division Bench of this Court in C.P. Rasheed v. State of Kerala [OT Rev. No. 104/2015, decided on 10.08.2018], found that the same runs contrary to the view of the Division Bench of the Delhi High Court in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (W.P.(C) 6093/2017) , and directed that the matter be placed before a Division Bench to consider whether the matter needs to be placed before a Full bench.

3. The registered dealers under the provisions of the KVAT Act, had approached this court by way of writ petitions challenging the denial of input tax credit on certain purchases made from registered selling dealers who, though having issued proper tax invoices and collected the tax component from the petitioner, subsequently failed to deposit the said tax amounts with the government treasury.

4. The Division Bench before whom the matters were placed noted that the bench in C.P. Rasheed (Supra) did not consider “tax paid or payable” in the definition of Input Tax Credit under S.2(xxiii). Moreover, the recovery methods available to the state under S. 31 and S.35 of the KVAT Act were also overlooked by the Bench in C.P. Rasheed (Supra). Accordingly, the Division Bench referred the matter to the Full Bench with the following question:

"Whether the credit of input tax can be availed by the purchasing dealer if the selling dealer had failed to remit the tax due at the earlier instance under the provisions of the Kerala Value Added Tax Act, 2003."

5. The learned Senior Counsel Sri. A Kumar, R. Jaikrishna, and Sri. Joju Kynady, appearing for the petitioners, advanced arguments in support of the petitioners' claim for input tax credit. It is argued that the definition of "input tax" under Section 2 (xxiii) of the KVAT Act as tax "paid or payable” by a registered dealer indicates two distinct and independent bases for credit entitlement. The deliberate use of the disjunctive "or" in this statutory definition, according to the petitioner, clearly indicates the legislative intent to recognise that credit arises either from actual payment of tax or from the legal obligation to pay tax created by a valid commercial transaction, without making such credit contingent upon the selling dealer's subsequent remittance of the tax to the government exchequer. This interpretation, the petitioner argues, finds strong support in the comprehensive scheme for input tax credit laid out in Section 11 of the Act, which meticulously outlines the conditions for availing of credit without making any reference whatsoever to the selling dealer's tax payment status.

6. The petitioner further emphasizes that the limited and specific grounds for denial of input tax credit enumerated in Section 11 (5)(m) relate exclusively to issues of documentary compliance - particularly the absence of valid tax invoices or evidence of fraudulent issuance of such invo