UPVAT | Computation Of Correct ITC Be Examined By Assessing Authority Not Later Than Stage Of Making Regular Assessment Order: Allahabad High Court

The Allahabad High Court has held that computation of correct input tax credit can only be done till the passing of the regular assessment order by the Assessing Authority and not at a later stage. The Court held that reverse input tax credit is neither a 'rate of tax' nor a 'turnover' which can be subjected to reassessment under Section 29 of the Uttar Pradesh Value Added Tax Act, 2008.

Section 29 of the UPVAT Act empowers the Assessing Authority to initiate reassessment proceedings against an assesee if there is “reason to believe” that whole or part of the turnover has escaped assessment or has been assessed to tax at a lower rate than prescribed or if deductions and exemptions have been wrongly allowed.

The bench comprising of Justice Saumitra Dayal Singh and Justice Donadi Ramesh held that

“ITC did not arise as a "rate" applied to "turnover". It was an "allowance" created/arising upon fulfillment of statutory conditions. If those conditions were not fulfilled, RITC could be done, under Section 14 of the Act and also in the course of regular assessment - for reason of that power specifically vested by the legislature. No such power/jurisdiction has been vested under Section 29(1) of the Act to assume jurisdiction to initiate reassessment proceedings to redetermine ITC or to RITC.”

Factual Background

Petitioner is a manufacturer of 'Mentha Oil' and made purchases of various raw materials to manufacture 'Mentha Oil'. Petitioner had claimed input tax credit on the purchases made which were examined by the Assessing Authority. Vide the assessment order, the Assessing Officer disallowed ITC claim to the extent of Rs. 3,24,456/- on grounds of purchases being made from unregistered dealers. ITC claim of Rs. 6,64,75,453/- was allowed.

After the assessment order had finality, petitioner was issued a notice under Section 29(7) of the UPVAT Act proposing to grant permission to reassess the petitioner for assessment year 2014-15 by extending the period of limitation. Rejecting the objections filed by the petitioner, permission was granted on 18.3.2023. Notice for reassessment was issued on 22.3.2023 and thereafter, assessment order was passed on 28.3.2023.

Counsel for petitioner argued that since ITC was claimed under Section 13 of the UPVAT Act, any measure to reverse ITC claimed ought to have been taken under Section 14 of the Act. It was argued the jurisdiction to reverse the claim of Rs. 6,64,75,453/- was only during the relevant tax period which ended on 31.03.2015 and no proceedings could be initiated 8 years after expiry of limitation.

Further, it was argued that reassessment under Section 29 of the UPVAT Act only relates to escapement of turnover and ITC does not pertain to determination of turnover on sale or purchase. Since the petitioner was not liable to tax on 'turnover of purchase', it was argued that the proceedings were without jurisdiction.

It was also argued that the proceedings were concluded in great haste by the Assessing Officer without giving any real opportunity to the petitioner.

Counsel for revenue argued that ITC was a tax and thus proceedings for reassessment were valid for wrongfully availing ITC.

High Court Verdict

The Court observed that the proceedings were being conducted in great haste with only 2 days' time being given to the petitioner for replying to the reassessment proceedings which was inadequate. The Court observed that while the Assessing Authority took three days' time to form the issues in the notice for reassessment, however, only 2 days' time was given to the petitioner to reply and the reassessment proceedings were closed on the first day of hearing itself with the assessment order being passed the following day.

“Such a procedure adopted by the assessing authority dilutes the trust that a tax-payer/citizen may place in the rule of law being observed by the statutory authorities. Even if it were a case of a tax evader, the rule of law would, by its very stature and basic requirement, commend to all quasi-judicial authorities including the assessing authority, to conduct their proceedings in a manner that may be fair and therefore inspire confidence in the noticee, irrespective of a his status - whether an honest tax-payer or a tax evader.”

The Court held that ITC is not part of determination of turnover or tax liability but an allowance that arises to certain dealers in the prescribed manner, upon fulfillment of specified circumstances under the Act. The Court observed that ITC is different from tax as ITC claimed can be corrected at the instance of the assessee as well as the assessing officer and once the amount is crystallized, any allowance which has been created can be adjusted against the gross tax liabilities of the assesee.

The Court held that legislative intent was not to include ITC as 'turnover of sale' or 'turnover of purchase' of goods as the computation of ITC crystalizes during the regular assessment proceedings.

The Court observed that Sections 25, 26, 27 and 28 include computation of ITC as a part of regular assessment proceedings.

The Court elaborated the conditions under which jurisdiction to reassess under Section 29 of the UPVAT Act can be assumed. Firstly, the Court held that Assessing Officer must form “reason to believe” that turnover which could be turnover of purchase or turnover has been under assessed. Secondly, when lower rate of “tax” have been applied to such turnover of purchase or turnover of sale.

The Court observed that under Section 2(ag) of the Act “tax” has been defined to include amount of reverse input tax credit. Thus, it cannot be an “exemption” or “deduction” wrongly claimed under the UPVAT Act. The Court held that RITC being tax cannot be the turnover that has escaped assessment for initiation of proceedings under Section 29 of the Act.

“RITC that may have been wrongly claimed may never described as a "rate" of tax on the "turnover". By using the words "rate" in conjunction with "assessed"/"under assessed lower than that at which it is assessable", the legislature has unexceptionally confined the scope of reassessment proceeding to that part of assessment procedure as may involve determination of chargeable tax liability that would arise either on sale or purchase of goods i.e. the amount of tax that would be chargeable on "rate" basis on those activities.”

The Court held that the only eventuality that may arise is assesee claiming extra ITC which he is not entitled to. In such cases, the Assessing Authority only has the power to recompute the ITC claimed in regular assessment proceedings. However, there is no jurisdiction vested in any Assessing Authority to initiate reassessment proceedings with respect to wrongful claim of ITC.

The Court held that “the scheme of the Act is - the computation of correct ITC may be examined by the Assessing Authority, not later than the stage of making the regular assessment order i.e. at the stage of Section 28 of the Act. That order may remain amenable to jurisdiction of suo moto revision.”

The Court held that only if Mentha Oil was generally exempted under UPVAT Act or Central Sales Tax Act, petitioner would have been exempted from claiming ITC on purchase of raw materials used to manufacture Mentha Oil. However, merely because the product was being exported will not make it exempt from levy of domestic tax, held the Court.

Holding that the Assessing Authority had no jurisdiction to proceed under Section 29 and that there was violation of principles of natural justice, the Court allowed the writ petition.

Case Title: Mentha And Allied Products Ltd vs. State Of U.P. And 3 Others 2024 LiveLaw (AB) 300 [WRIT TAX No. - 683 of 2023]

Citation: 2024 LiveLaw (AB) 300

Counsel for Petitioner: Nikhil Agrawal, Krishna Mohan Tripathi

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