THE FLOOD, ACT OF GOD & INPUT TAX CREDIT - H D...

Article by Mr. Hemant Desai – Advocate VAT – SURAT | www: hddesai.com 1 | P a g e

THE FLOOD, ‘ACT OF GOD’ & INPUT TAX CREDIT

Article by Mr. HEMANT DESAI Advocate – VAT – SURAT

E-mail: [email protected]

1. A massive flood extremely hit Surat City between the periods from

7th to 12th August 2006. Majority of the population remained in

floodwater with constant high of above men’s height. Government

authority conveyed the message through SMS on August 7, 2006 at

20.57 p.m. stating “current situation in Surat is much serious than 1998 –

citizens are requested to shelter in minimum height of 20 feet – sender District

Administration Surat”. Prior to the said message people witnessed that

flood water under heavy speed entered in City area at about 20.00

p.m. and within 3 hours time it crossed water level of 6 feet and

increased further. Difficult task has been experienced by common

men and business community. It became very difficult to take care of

business related books of accounts, its allied records and goods

rather than to take care of human personal life. Incidentally this is

the beginning year for the Gujarat Value Added Tax Act, 2003 (for

short as ‘Act, 2003’) in which by a new concept upon purchase of

goods by tax invoice the registered dealer becomes eligible for tax

credit, in statutory parlance it is regarded as INPUT TAX CREDIT (for

short as ‘ITC’). In some cases such goods lying in stock have either

been lost or damaged and hence destroyed.

2. With regard to Act, 2003 for destroy of goods two views are found.

One school of thought has expressed views that ITC is eligible, in

other words do not requires reversal, while as second school of

thought has expressed negative views, in other words ITC claimed

requires to be reversed. The former is the views expressed by legal

experts and latter is the views expressed by learned revenue

authorities. However to confirm the net amount of Value Added Tax

(for short as ‘VAT’) for tax period is to be determined by considering


the provisions of the Act, 2003. Refer to the scheme of the Act it

provides two methods for discharging the onus to make the payment

of VAT. First is composition scheme, it is optional, which is in lieu of

VAT. Under the said scheme dealer is neither permissible to collect

composition amount or VAT nor entitled to avail credit of tax amount

paid to vendor. Second is general scheme, in which dealer can collect

VAT amount or can keep the VAT amount inclusive and is entitled to

avail credit of tax which they have paid to vendor and discharge the

onus by net off. For ITC the accounting standard guide line states

those dealers who desire to avail it are obliged to open separate

ledger account. Hence for cases pertaining to second category needs

specific answer.

3. In pursuance of above facts and circumstances, the affected

registered dealers did not find above approach satisfactorily, feeling

aggrieved, for just and fair decision they approached the commercial

tax authority concerned and also made representation to the State

Government that the principles on which Act is formulated is

beneficial legislation of the State that needs to be interpreted

precisely in liberal manner and with an intention to see that purpose

for Act is fulfilled and the beneficiary is helped. The prayer has also

been made that the interpretation should not lead to see that it

would frustrate the object of Law and welfare State should not

become harsh and deny the benefits available to them when they

have acted in good faith. It has been specifically urged that any

contrary decision would lead them into unfair act, and that would

not befit a welfare State, which is expected to act in fair and equitable

manner. Despite the fact, after considerably long period it appears

that the representation made to State Government on the aforesaid

subject matter and decision in that behalf is still pending on even

date. Empathetically the enactment states that registered dealers are

statutorily required to file annual return, which is self assessment,


has also to get books of accounts audited and that has created doubt

that:

Whether dealer can legitimately claim the full amount of ITC when

such goods have been destroyed on account of flood?

When dealer has acted in good faith and situation becomes beyond

the control, for the destroyed goods amount of ITC be reversed?

What is the legal position of law, remedy and defence? Is there any

case law which supports the claim of ITC?

Circumstances of earthquake, cyclone, riots, fire, accident etc. are

similar to flood or they are different?

Whether the denial of ITC by Commercial Tax authority would be

legitimate within four corners of Act, 2003?

4. To answer the above queries it is necessary to refer the relevant

provisions under the Act, 2003 and Gujarat Value Added Rules, 2006

(for short as ‘Rules, 2006’). Under the Act, 2003 it is necessary to

refer Chapter II, relevant is section 11 and under the Rules, 2006

Chapter IV, relevant is Rule 15 it defines calculation of ITC. At

relevant time they reads as follows:

Sec. 11 Tax Credit.

(1) (a) A registered dealer who has purchased the taxable goods (hereinafter

referred to as the “purchasing dealer”) shall be entitled to claim tax credit equal

to the amount of,–

(i) tax collected from the purchasing dealer by a registered dealer from whom he

has purchased such goods or the tax payable by the purchasing dealer to a

registered dealer who has sold such goods to him during the tax period, or]

(ii) tax paid by him during the tax period under sub-section (1) or (2) of section

9, or

(iii) tax paid by the purchasing dealer under the Gujarat Tax on Entry of

Specified Goods into Local Areas Act, 2001.


(b) The tax credit to be so claimed under this sub-section shall be subject to the

provisions of sub-sections (2) to (12); and the tax credit shall be calculated in

such manner as may be prescribed.

(2) The registered dealer who intends to claim the tax credit shall maintain the

register and the books of accounts in such manner as may be prescribed.

(3) (a) Subject to the provisions of this section, tax credit to be claimed under sub-

section (1) shall be allowed to a purchasing dealer on his purchase of taxable

goods made in the State, which are intended for the purpose of –

(i) sale or re-sale by him in the State;

(ii) sale in the course of inter-State trade and commerce;

(iii) branch transfer or consignment of taxable goods to other States (subject to

the provision of Sub-clause (b) below);

(iv) sales in the course of export out of the territory of India;

(v) sales to export oriented units of the units in Special Economic Zones for

sale in the in the course of export out of the territory of India;

(vi) Use as raw material in the manufacture of taxable goods intended for (i) to

(v) above or in the packing of the goods so manufactured.

(vii) use as capital goods meant for use in manufacturer of taxable goods

intended for (i) to (vi) above subject to the condition that such capital goods

are purchased after the appointed day:

Provided that if purchases are used partially for the purposes specified in this

sub-section, the tax credit shall be allowed proportionate to the extent they are

used for the purposes specified in this sub-section”.

(b) Notwithstanding anything contained in this section, the amount of tax credit in

respect of a dealer shall be reduced by the amount of tax calculated at the rate

of four per cent. on the turnover of purchases –

(i) of taxable goods consigned or dispatched for branch transfer or to his agent

outside the State, or

(ii) of goods taxable which are used as raw materials in the manufacture, or in

the packing of goods which are dispatched outside the State in the course of

branch transfer or consignment or to his agent outside the State.

(iii) of fuels used for the manufacture of goods.

(4) The tax credit shall not be claimed by the purchasing dealer until the tax period

in which he receives from a registered dealer from whom he has purchased


taxable goods, a tax invoice (in original) Containing Particulars as may be

prescribed under Sub-section (1) of Section 60 evidencing the amount of tax.

(5) Notwithstanding anything contained in this Act, tax credit shall not be

allowed for purchases –

(a) to (e) not relevant hence not reproduced.

(f) of the goods (not being taxable goods dispatched outside the State in the

course of branch transfer or consignment) which are disposed of otherwise

than in sale, resale or manufacture;

(g) to (p) are not relevant hence not reproduce.

Notwithstanding anything contained in clause (a) or (b) in this sub-section and

subject to conditions as may be prescribed, a registered dealer shall be allowed to

claim tax credit in respect of purchase tax paid by him under sub-section (1) or (2)

of section 9.

(6) and (7) not relevant hence not reproduced.

(8) (a) If the goods purchased were intended for the purposes specified under sub-

section (3) and are subsequently used fully or partly for purposes other than

those specified under the said sub-section or are used fully or partly in the

circumstances described in sub-section (5), the tax credit, if availed of, shall be

reduced on account of such use, from the tax credit being claimed for the tax

period during which such use has taken place; and such reduction shall be

done in the manner as may be prescribed.

(b) Where the capital goods referred to in sub-clause (vii) of clause (a) of sub-section

(3) are not used continuously for a full period of five years in the State, the

amount of tax credit shall be reduced proportionately having regard to the

period falling short of the period of five years.

(9) The registered dealer may claim the amount of net tax credit, which shall be

determined in the manner as may be prescribed.

(10) not relevant hence not reproduced.


(11) A registered dealer shall apply fair and reasonable method to determine, for the

purpose of this section, the extent to which the goods are sold, used, consumed

or supplied, or intended to be sold, used, consumed or supplied. The

Commissioner may, after giving the dealer an opportunity of being heard and

for the reasons to be recorded in writing, reject the method adopted by the

dealer and calculate the amount of tax credit as he deems fit.

(12) not relevant hence not reproduced.

Explanation: For the purposes of this section, amount of tax credit on any

purchase of goods shall be the same as the amount of tax paid or

payable under this Act or the amount of tax calculated on the fare

market price of their purchase, whichever is lower.

R. 15 - Calculation of Tax Credit under section 11.

(1) A registered dealer shall maintain the registers of purchases of goods and

mention therein the name and place of the selling dealer, his registration

number, serial number and date of tax invoice, description of goods along with

HSN, quantity of goods, value of goods and the tax charged.

(2) A registered dealer shall claim tax credit under section 11 in a tax period in

which he records, in his books of accounts, the tax invoice in respect of his

purchases of taxable goods.

(3) A registered dealer shall calculate tax credit as per Form-201 and such

calculation shall be made separately for each tax period.

(4) The amount involved in purchases specified in sub-section (5) of section 11

shall be excluded from the calculation of tax credit.

(5) The amount of tax paid under sub-section (1) or (2) of section 9 of the Act and

the amount of tax paid under the Gujarat Tax on Entry of Specified Goods into

Local Areas Act, 2001 shall be claimed in the tax period in which such amount

has been paid.

Explanation: For the purpose of calculating the tax credit, the amount of tax under sub-

section (1) of section 9 of the Act or the amount of tax under the Gujarat

Entry Tax on Specified Goods into Local Areas Act, 2001 is shown payable


by dealer in his return for tax period, then such amount shall be

considered to have been paid in such tax period.

(6) Where the tax credit (other than tax credit on capital goods) admissible in the

year remains unadjusted against the output tax as per section 11, such amount

shall be refunded not later than expiry of two years from the end of the year in

which such tax credit had become admissible:

Provided that the dealer claiming such refund shall have to prove to the

satisfaction of the assessing authority that the purchases of the goods on which

such tax credit had been calculated have been disposed off in the manner

referred to in sub-section (3) of section 11 within the period by which refund

under this sub-rule becomes admissible.

(7) In case of sales made in the course of export outside the territory of India and the

amount of carried forward tax credit admissible under items (iv) and (v) of clause

(a) of sub-section (3) of section 11 remains unadjusted, such amount of tax credit

shall be refunded within the period of three months next following the end of the

month in which such purchases were made.

(7A) not relevant hence not reproduced.

(8) The refund under this rule or the refund under section 37 or 40 shall not be

admissible unless the dealer furnishes the copies of tax invoices of the purchases

for which tax credit and refund thereof is claimed:

Provided that the assessing authority granting the refund is satisfied that the

selling dealer has shown such transactions in his return and accounted for in his

books of accounts as taxable sales for which tax credit and refund under this rule

is claimed.

(9) A registered dealer may claim such net tax credit in the returns to be furnished

under sub-rule (1) of rule 19.

5. Above provisions are to be interpreted, for which the well settled

principle is that the scheme and spirit of the Act need to be

understood first, taxing statue has a fiscal philosophy without a feel

of which a correct perspective to gather the intent and effect of


various clauses cannot be gained. This view is fortified by the apex

court decision in Controller of Estate Duty v. Kantilal Trikamlal

(1974) 4 SCC 643 at 649 - 650. It is further well settled that in order

to ascertain the true meaning of the terms and phrases employed, it

will be legitimate to call in aid other well-recognised rules of

construction. Such as legislative history, the basic scheme and

framework of the statute as a whole, each portion throwing light on

the rest, the purpose of the legislation, the object sought to be

achieved, and the consequences that may flow from the adoption of

one in preference to the other possible interpretation. It is settled

principle of law that wherever the inference arises for the purpose of

interpretation of a statute the entire statute is to be read in its

entirety. The purport and object of the Act must be given its full effect

and in case of this nature, principles of purposive construction must

come into play. The fundamental principle in the construction of

statutes is that the whole and every part of the statute must be

considered in the determination of the meaning of any of its parts. In

construing a statute as a whole two principle results to clear up

obscurities and ambiguities in the law and to make the whole of the

law and every part of it harmonious and effective. It is presumed that

the Legislature intended that the whole of the statute should be

significant and effective. Different sections, amendments and

provisions relating to the same subject must be construed together

and read in the light of each other. Every statute must be construed

ex vigoenibus actus, that is, within the four corners of the Act. When

the taxing authority is called upon to construe the term of any

provision found as a statute, they should not confine its attention

only to the particular provision, which falls for consideration. But the

authority should also consider other parts of the statute, which

throw light on the intention of the Legislature and serve to show that

the particular provision ought not to be construed as if it stood alone

and apart from the rest of the statute. Every clause of a statute

should be construed with reference to the context and other clauses


of the statute so as, as far as possible, to make a consistent

enactment of the whole statute. This is the settled position of law in

CIT v. Amin (1972) ITJ 300, 307 SC (Bhagwati, C.J.); also in

Vaddeboyina Tulasamma v. Vaddeboyina Sesha Reddi, AIR 1977 SC

1977 at p. 1948: (1977) 3 SCC 99. Warren, C.J. observed in Richards

v United States, 7L Ed 2d 492, 499: 359 US 1.

"We believe it is fundamental that a section of a statute should not be read in

isolation from the context of the whole Act, and that in fulfilling our responsibility

in interpreting legislation we must not be guided by a single sentence or a number

of sentence, but should look to the provisions of the whole law and do its object

and policy".

6. At the outset of the above, the reason for VAT law, it has been

introduced in order to bring uniformity throughout the country with

regards to taxation on sales, and also introduced in the State of

Gujarat from 01.04.2006. Salient feature is, ITC of tax paid on

purchase is to be given against the tax liability incurred on the sale.

Briefly the effective tax shall be leviable on value addition at every

stage of sale transactions. Thus, the ITC is available at the point of

purchase of goods itself, if the purchased goods are intended for the

specified purposes stated in section 11(3)(a) of the Act, 2003. Thus it

shall transpire that the ITC available in relation to purchases of

taxable goods purchased for the intended purposes is neither

dependant nor related either to sale of very goods purchased or to the

sale of manufactured from the goods purchased. On bare perusal of

section 11(3)(a) of the Act, 2003 one will find that the ITC is available

only to registered dealer on his sales of any taxable goods. Therefore

precisely, there is no pyramiding effect of tax in trade and commerce.

However in order to give full meaning and to determine a correct

legislative intent of ITC, section 11 needs analysis.

7. Section 11 specifies the circumstances, the conditions and extent to

which the ITC shall be available. On perusal of it, the foremost


condition as per sub clause (1)(a) is that, claimant of ITC for taxable

goods requires registration under the Act, 2003. Only such dealer

shall become eligible for ITC, it can be claimed for ‘tax actually’

collected by vendor, ‘purchase tax’ shown payable for purchases

effected from un-registered dealer, and ‘Entry Tax’ shown payable for

specified goods covered under the Gujarat Tax on Entry of specified

goods into local area Act, 2001. Sub clause (2) refers that registered

dealers who intend to claim ITC shall maintain the register as

provided in rule 15 of the Rules, 2006. Sub clause (3)(a) refers the

purpose for which ITC is available. Therein expression used by

Legislature ‘intended for the purpose of’ is significant and of much

importance. It envisages that for availing ITC primarily dealer should

have intention to sale or resale or manufacture the goods. Various

purposes are defined in this sub clause. The proviso there to refer

‘proportionate credit’ means if purchases are used partially for the

purpose stated in sub clause (3)(a), the ITC shall be allowed

proportionally to the extent purpose of purchases meets. Proviso

thereto refers to reduction in ITC. It means if the goods purchased for

intended purposes, for which ITC has been claimed, are used fully or

partially for purpose other than so specified than ITC has to be

reversed to the extent on account of such use. Sub clause (3)(b)

specify that reduction has to be made if the goods purchased are

consigned out of State, purchased taxable goods used as raw

materials or packing materials and manufactured goods consigned

out State, purchases of fuel used in the manufacture of taxable goods

then 4% amount of the turnover of purchases are required to be

reduced. Sub clause (4) refers that to avail the ITC the original tax

invoice is mandatory to be received in the tax period in which claim is

made. Sub clause (5) refers to negative list it specifies certain

purchases that shall not be allowed for ITC. In which relevant sub

clause is 11(5)(f), therein expressions are used ‘disposed of otherwise’

the meaning thereof signifies with section 11(3)(a) requires that the

goods must be sold to some person otherwise than by way of


compliments or gift. ‘Disposal’ means transfer of title in the goods to

any other person. The expression ‘disposed’ means to transfers or

alienate. Expression ‘disposed’ in the provision takes colour from and

must be read in the light of the words that are neighbours, namely,

‘sale’, ‘resale’, or ‘manufacture’. So reading makes it clear that the

word ‘disposal’ therein refers to transfers only by way of sale or resale

or manufacture but not by complimentary or gift or like manners.

Sub clause (8)(a) refers that once the ITC is claimed by intending to

meet the object of sub section (3) are subsequently used partially or

fully for other purposes as described in sub section (5), the ITC if

availed shall require to be reduced on account of such use, during

tax period when such use has taken place. Sub clause (b) refers to

capital goods that if the asset is not used continuously for period of

five years in the State, than the ITC is required to be reduced

proportionately falling period short.

8. For availing ITC the documents or formalities to be complied are

provided in rule 15 of the Rules, 2006, it speaks that claimant shall

maintain register with column, name – place – TIN - Inv. no. – date –

description – HSN – quantity – value - TAX. Sub rule (2) of it speaks

that ITC shall be claimed only in Tax Period in which Tax invoice is

recorded. Sub rule (3) refers that dealer shall calculate ITC as per

Form 201 for each Tax Period. Sub rule (4) abundantly states that for

the instances enumerated in sub section (5) of section 11, ITC shall

be excluded from total claim. Sub rule (5) refer to URD purchases,

ITC can be claimed of purchase tax provided dealer shows such tax

as payable in his return of tax period in that respect. Similarly ITC

for Entry Tax also can be claimed. Sub rule (6) is formulated for ITC

found if excess other than ITC on capital goods, shall be refunded on

expiry of 2 years. Sub rule (7) refers to Export, ITC claim shall be

refunded in 3 months from month of Purchases. Sub rule (8) states

that refund shall be admissible subject to furnishes of copies of Tax

Invoices subject to if CTO is satisfied, that such transactions are


incorporated in return and accounted in books. Sub rule (9) states

that net ITC claim shall be claimed in return.

9. From above it transpires that there is no cascading effect of tax

element. There is complete opportunity for claiming credit for the

amount of VAT paid by the previous business in the supply chain.

Hence the primary objective of VAT is to enhance competitiveness

and removes the cascading effect of taxes and levies. Where there is

no sale, in other words intended for the purpose otherwise than

specified in sub clause (3)(a) of section11, the ITC shall be allowed

proportionally. Sub clause (5) of the Act, 2003 categorically state

that, ITC shall required be reversed if the goods purchased for

intended purposes under sub section (3) of section 11, are

subsequently used completely or partially for the purposes other

than the specified in said sub section, then it shall be reversed on

account of such use. Section 11(8)(a) is the relevant one for reversal

of ITC. Sub clause (5) of section 11 of the Act, 2003 provides negative

list. It states tax credit shall not be allowed for the purchases of

goods not being taxable goods dispatched outside the State in the

course of branch transfer or consignment, which are disposed of

otherwise than in sale, resale or manufacture. As discussed above in

para 7, in sub clause 11(5)(f), the expressions are used ‘disposed of

otherwise’ the meaning of it signifies with sub clause (3)(a) of the Act,

2003. Section 11(3)(a), which provides tax credit is absolute, with

exception, namely that it can be immediately availed upon purchase,

they are for sale, branch transfer or consignment in out of State,

export including EOU and SEZ, used as raw material in manufacture

of taxable goods. The essence is after the purchase it needs to be sold

to some one. In other words price must realize, means the act should

be otherwise than of compliments or donation or gift. The expression

‘disposal’ means transfer of title in the goods to another person has

significance with the next immediate words in the sentence are ‘sale’,

‘resale’, or ‘manufacture’. These words are to be read with word


‘disposal’ which means the transfers only by way of sale or resale or

manufacture is permitted to avail ITC, however if it is otherwise

means complimentary or donation or gift or like manners than ITC

obviously to be reversed. The incidents of flood in which goods

purchased by tax invoice have been compelled to destroy do not fall

into said provision. The reason is when goods were purchased the

intention was to sale or resale or use in manufacture, which normally

any prudent businessmen do. But due to destruction of flood the

purchased goods got damaged, that pathetic situation prevented

them to play the bonafide role of sale or resale or use in manufacture

cannot be regarded that they acted unfairly. There is not even

allegation on them, or name either of vendor or vendee appears in

unscrupulous taxpayers list. It is not even disputed that the flood is

not act of god, a vis major. The intention of legislature in framing sub

clause (5) is very transparent that, every one hold the registration

shall become eligible for tax credit that will hamper the progress of

the welfare of State. To keep the revenue safe and to use it in welfare

of the State the enactment of clause was necessary which stipulate

the condition. Act, 2003 is framed on concept to bring uniformity

through out the country with regard to sale. In which tax becomes

payable only on value addition, this is beneficial legislation it needs

to be interpreted liberally. Contrary interpretation shall lead them to

see that it would frustrate the object of Law and welfare of State.

State expects that dealers should act in fair and equitable manner,

than duty is to help such dealers in mitigating the sufferings instead

of pushing them into more pitiable condition.

10. Like the situation of flood, just years ago cyclone disturbed the tax

holiday policy. The issue went before the Hon’ble Gujarat High Court,

in the matter of ROLCON ENGINEERING CO LTD. v. STATE OF

GUJARAT – S.C.A. No. 2033 of 2004 decided on 02.03.2006. In

succinct facts, under the perennial shortage of electricity, the State


Government framed scheme named The Sales Tax Incentive Scheme

for Wind Power Generation, 1993 (for short as 'the scheme'). Under

the said scheme upon the investment for erection of windmill and to

generate electricity, the sales tax incentives were offered. In the

scheme one of the condition was that entrepreneur had to run the

wind farm satisfactorily at least for six years from the date of

commissioning, and if do not run than the tax benefits availed would

become recoverable. In pursuance of it, the petitioner had set up a

wind farm for generation of electricity and started operation, thereby

the Government granted benefit in respect of payment of sales tax.

11. After setting up the wind farm, they regularly supplied electricity to

Gujarat Energy Development Agency (GEDA) and availed the benefit

in respect of payment of sales tax. As per scheme after the period

become over they had to make payment to the government in six

equal annual installments. Before the period become over, a

devastating cyclone hit the coastal areas of Saurashtra in June 1998,

which destroyed the wind farm set up by petitioner. In the said

circumstances, they informed GEDA about the destruction. The

authority got the damage assessed, submitted report to concerned

authority and then issued a notice calling upon the petitioner to

show-cause as to why the Eligibility Certificate issued to them should

not be cancelled as they had committed breach of clause of the

scheme by not keeping the wind farm, windmills in operation for a

continuous period of six years after commissioning the same.

12. Petitioner responded that in pursuance of the scheme they had paid

four installments out of six which had become due. They submitted

that the benefit given under the scheme should not be withdrawn as

the windmills erected by them had been completely destroyed on

account of cyclone, which was a natural calamity, for which they

were in no way responsible. They submitted that looking to the extent

of damage caused on account of natural calamity, the government


should have offered some sort of help, relief to them, rather than

calling upon it to show cause as to why the benefit given should not

be withdrawn because, normally, the Union and State governments

give relief to those who are adversely affected due to natural

calamities, but, instead of giving any help, if they are asked to pay

then they will put to more difficulties by impugned action. Thereafter,

sales tax authority called upon them to pay tax, interest and penalty

a sum of Rs. 1,05,82,588/-, as a result of withdrawal of the benefit

which already had been granted to them. According to authority as

the wind farm did not run satisfactorily till January 2001, the

petitioner had committed breach of the condition and, therefore, they

were not entitled to any benefit.

13. For the alleged reason the petitioner filed special civil application,

submitted that till the windmills had been destroyed due to the

cyclone, electricity generated was regularly supplied to GEDA and no

default was committed by them in respect of supply of electricity

generated. Such default occurred because of the windmills had been

completely destroyed due to the cyclone. There was no intention on

the part of them to discontinue generation of electricity but only on

account of a natural calamity ‘vis majore’ the generation and supply

of electricity had been discontinued. Petitioner urged that its an Act

of God, hence action be withdrawn.

14. Strengthening the argument they submitted that the scheme had

been framed by the State Government with a laudable object of

encouraging generation of electricity and to help who ventures into

the generation of electricity; this helps the nation, which is in short

supply. These facts are required to be compared with beneficial

legislation. The State Government formulates policy to give some

benefit; it should be interpreted in a way so as to give some benefit to

the beneficiary of the scheme. If they are not allowed to avail the

benefit because of destroyed only on account of an ‘Act of God’ and


they could not continue to generate electricity continuously for a

period of six years after commissioning the windmills then the

circumstances, they should not be deprived of the benefit already

given.

15. The Lordship examined the fact that, its undisputed that the

petitioner had no intention to discontinue generation of electricity

and the disruption was caused due to the damage caused to the

windmills and transmission lines of GEDA as a result of a

devastating cyclone that hit the coastal area of Saurashtra. It cannot

be disputed that the said cyclone was an Act of God, a vis majore.

The intention behind incorporating particular clause in the scheme

was to see that the taxpayer industrial undertaking does not

discontinue generation of electricity after availing benefit under the

scheme. The Court stated the fact that very often unscrupulous

persons take undue advantage of a scheme or policy framed for a

noble cause. In the beginning they will fulfill the conditions and

thereafter they commit breach of the conditions and as a result of

which the laudable purpose with which the scheme is framed, is

frustrated. If such a dishonest taxpayer commits breach of any of the

conditions incorporated in the scheme, the State should not give any

tax benefit to such an unscrupulous taxpayer. Under the facts of

case after erection of windmills, an industrial undertaking availing

benefit does not stop generation of electricity; the particular clause

had been incorporated in the scheme and not otherwise.

16. The Court categorically held that the language employed in the

clause in question, observed that it is clear that so as to retain the

benefit already granted, an industrial undertaking should keep the

wind farm running satisfactorily at least for six years from the date of

commissioning the same. The language used in the clause cannot be

interpreted to read that even if due to factors beyond control of the

industrial undertaking, if the wind farm cannot be kept in a running


condition, there would be breach of the said condition. The condition

incorporated in the said clause deals with a voluntary action on the

part of the industrial undertaking. The said clause can be invoked for

withdrawal of the benefits if it is found that either deliberately or due

to gross negligence on the part of the industrial undertaking, the

wind farm was not kept in running condition. In opinion of the Court,

if the act of discontinuing generation of electricity is deliberate or

voluntary, then only the concerned industrial undertaking should be

deprived of the benefit availed under the scheme.

17. In the instant case the facts are quite similar, the goods purchased

prior to flood incident by tax invoices are obviously meant for sale or

resale or manufacture and not to be disposed of otherwise. Such

bona-fides can be proved that from beginning of the year, goods

whenever purchased they were sold by respective dealers and by

calculating tax liability paid the tax and filed returns. No deliberate

intention have been observed, the only on account of situation

beyond controlled the flood effected dealers could not sale or resale or

manufacture. They cannot be deprived of benefit availed under the

Act, whatever happened it is not the purposeful creation, it was

natural calamity, is an Act of God, that has kept the honest prudent

businessmen away from their activity. The commercial tax authority

has never observed or made report or found that it is deliberately or

due to gross negligence on the part of the dealer, the goods have been

destroyed. There is not even report by any authority of carelessness

on part of dealers. This is undisputed facts that situation is vis

majore. Hence the principle laid down in case supra equally applies

with due respect and therefore ITC is not required to be reversed.

18. In case supra the Lordship held that, the principles on which a

beneficial legislation or a benevolent policy of the State is to be

interpreted, it is undisputed that when the State is inclined to give

some benefit to a taxpayer, the terms or provisions of the policy


should be interpreted in a liberal manner and with an intention to

see that the purpose for which the policy is framed is fulfilled and the

beneficiary is helped. The interpretation must not be such which

would frustrate the objective of the policy. Reaching to it Lordship

humbly relied on very well established principle and has been also

accepted by our Apex Court.

“a person cannot be constrained to do something which is impossible. There is a

well known legal maxim Lex non cogit ad impossibilia, which means that law cannot

compel a man to do what he cannot possibly do. If there is impossibility on the part

of a person to perform an obligation, law would not expect the person to do that

impossible thing. The said maxim, which has been accepted by our judicial

system, has been very well explained in 'Broom's Legal Maxims' (10th Edition) as

under:

“...It is then, a general rule which admits of ample practical illustration, that

impotentia excusat legem; where the law creates a duty or charge, and the party is

disabled to perform it, without any default in him, and has no remedy over, there

the law will in general excuse him (t): and though impossibility of performance is in

general no excuse for not performing an obligation which a party has expressly

undertaken by contract, yet when the obligation is one implied by law, impossibility

of performance is a good excuse.........”

The aforesaid maxim has also been explained in 'Craies on Statute

Law' (7th Edition):

“Under certain circumstances compliance with the provisions of statutes which

prescribe how something is to be done will be excused. Thus, in accordance with

the maxim of law, Lex non cogit ad impossiblia, if it appears that the performance

of the formalities prescribed by a statute has been rendered impossible by

circumstances over which the persons interested had no control, like the act of God

or the King's enemies, these circumstances will be taken as a valid excuse”

The Hon'ble Supreme Court has approved the aforestated meaning of

maxim lex non cogit ad impossibilia in the case of I.F.C.I. Ltd Vs.

Cannanore Spinning and Weaving Mills Ltd, AIR 2002 SC 1841”.


19. So far as the case in hand is concerned, impossibility of performing

the condition was on account of vis-majore, an Act of God. The

condition laid in sub clause (5) of section 11 of the Act, 2003 is

impossible in situation like of flood, when the water level was

witnessed above men’s height. It rushed with heavy speed and

became beyond the control situation to take care or safeguard the

goods so purchased. It is not the case of the commercial tax

authorities that the condition incorporated in clause 11(8)(a) of the

scheme was violated by the flood effected dealer deliberately. It

cannot be disputed that the flood was an Act of God, which

completely destroyed the goods purchased by them, which made it

impossible for them to fulfill one of the conditions incorporated in the

scheme. As stated hereinabove, till the flood had hit the area of

business, the dealers had continuously operated business structure

by compliance of the law. Not a single default had been committed by

the dealers and only on account of natural calamity, vis-majore, it

became impossible for them to sale, resale or manufacture of the

goods. Facts remains that upon getting insurance claim by some

dealers the fact reveals that they had no dishonest intention to

commit breach of any of the conditions on which the benefit had

been availed by it under the provision and starred business early.

Therefore, it is to be held that the dealers cannot be deprived of the

benefit, which had been given to it under the Act only because it

could not fulfill the condition due to an Act of God or because of

impossibility on its part to perform the same.

20. Apt on the subject there is case of Supreme Court, Ganesh Prasad

Dixit v. CST (1969) 24 STC 343 (SC), wherein the Court dealing with

the provisions of the M.P.G.S.T. Act, 1959 examined the expression

used ‘either consumes such goods in the manufacture of the goods


for sale or otherwise’. The observation made by the Court at page 348

is as under:

"Mr. Chagla for the appellants urged that the expression 'or otherwise' is intended

to denote a conjunctive introducing a specific alternative to the words 'for sale'

immediately preceding. The clause in which it occurs means, says Mr. Chagla, that

by section 7 the price paid for buying goods consumed in the manufacture of other

goods, intended to be sold or otherwise disposed of, alone is taxable. We do not

think that that is a reasonable interpretation of the expression 'either consumes

such goods in the manufacture of other goods for sale or otherwise'. It is intended

by the legislature that consumption of goods renders the price paid for their

purchase taxable, if the goods are used in the manufacture of other goods for sale

or if the goods are consumed otherwise."

21. The above observation has relevance with the matter in hand. The

expression consumption otherwise must in the context mean

consumption of other goods for purpose other than sale. However in

DCST, Erankulam, v. THOMAS STEPHEN & CO. LTD. 69 STC 320 at

page 324, it is held that disposal means transfer of title in the goods

to any other person. The expression ‘dispose’ means to transfer.

Reaching to conclusion Court observed that it was formerly an

essential word in any conveyance of land. The Dictionary of English

Law and also Webster Comprehensive Dictionary (International Edn.)

- Vol. 1, page 368. Clause (b) of the section requires that the goods in

question should be transferred to some person otherwise than by way

of sale. In the matter of flood affected dealers, there was no evidence

of any transfer at all, therefore, there was no ‘disposal’ of the goods

as known to law. The conjunctive words are ‘sale, resale or

manufacture’. The clause in which it has been enacted precisely

denotes reference with ‘disposed of’ which do not suggest disposal of

goods otherwise than in destroy of goods on account of natural

calamity. The expression ‘otherwise’ cannot be read as ‘in any other

manner’. The clause, truly read, speaks of goods disposed of

otherwise than in sale, resale or manufacture. These employed words

are amicable, are within the four corners of law, meaning destroyed


does means not transferred. Therefore ITC claimed is not to be

reverse, it would be totally incorrect if it is to be reversed. Well-settled

rule of construction states that ‘no Legislature or rulemaking

authority uses any word, term or expression for nothing. Every

word, term or expression used in an enactment has a role to play

or meaning to render’ - refer 128 STC 189 page 201 para 13.. It is

duty of the Court that full effect to the legislative intent must be

given without scanning the wisdom or policy or without engrafting

and adding or implying anything which is not congenial or consistent

with such express intent of the law giver; more so if the statute is a

taxing statue. The statement of Rowlatt J. in cap Brandy Syndicate v.

Inland Revenue Commissioners (1921) 1 KB 64 at 71 is important it

holds the filed reads as under:

“In a taxing statute, one has to look merely at what is clearly state. There is no

reason for any intendment. There is no equity about a tax. There is no presumption

as to a tax. Nothing has to be read in, nothing has to be implied. One can only look

fairly at the language used”.

22. Keeping the settled principle in mind since there is no evidence of

transfer at all, there is no disposal of the goods observed and hence

section 11(5)(f) is not applicable. ‘Disposed of’ as contemplated in

said section envisage must involve transfer, not disposing of goods do

not fall for contravention of the provision, therefore ITC is not to be

reversed.

23. There is another case of Hon’ble Gujarat High Court, in the case of

Harji Vithaldas v. State of Gujarat reported in 1973 GSTB 265,

wherein the appellant was holding licensed, they purchased goods

cotton from unregistered dealer. Section 12(1)(c) of the BST Act, 1959

provides purchase of such goods against declaration in Form 16,

which certify the intention to resell. The cotton so purchased was

destroyed as result authority levied purchase tax under section 14.

The Lordship analyzed the section in question 12(1)(c) and Form 16


and observed that words ‘intended for resell’ are common. Then

looked at the phraseology and stated that golden rule of the

interpretation is that the words in section must be given its natural

meaning. The Legislature used the word ‘resold’ in section 12(1)(a)

and (b) and the certificate issued there under. But different

connotation are observed in section 12(1)(c) as ‘intended for resell’.

And that is the same connotation in certificate in Form 16. The

Legislature used different phraseology purposefully. The Legislature

knows the meaning of the words it uses. When the words used by

Legislature are clear, they must be given their true meaning

irrespective of consequences. In obvious meaning words ‘intended for

resell’ cannot mean ‘resold’. The Court made it clear that section 14

provided two conditions are satisfied, namely, (1) that the dealer or

commission agent has purchased goods under certificate given under

section 11 or 12; and (2) the contrary to such certificate, the goods

are used for another purpose or are not resold in the manner and

within the period certified. As per the legislative intent as reflected by

the scheme of taxation and in particular by section 12 and 14, it is

clear that if a licensed dealer who issues certificate under section

12(1)(c) declaring his intention to resale the goods subsequently

changes the said intention, then he would be held liable for purchase

tax otherwise not. The fire which took place at dealer’s business

place has destroyed the goods. This act is beyond the control of any

one. It cannot be said dealer has changed the intention to resell the

goods so purchased. The Court categorically observed concern

section emphasis important undertaking of dealer. The dealer

committed breach of said undertaking cannot be said that their acts

contrary to the certificate and therefore, liable to pay purchase tax

under section 14. The dealer intended to sell but became unable to

fulfill the intention because of the destruction caused by the fire. So

held finally is not liable to purchase tax.


24. Lastly on the subject matter for similar incident which happened

some time ago in late July and early August 2005 in the Mumbai and

district of Maharashtra on account of disturbance caused by the

unprecedented flood and rain the Commissioner of Sales Tax,

Maharashtra State by way of administrative relief issued trade

circular vide reference no. VAT- 2005/Act/VD- 1 Trade cir –30T of

2005 dated 23.09.2005. In this circular the guide line for the problem

faced by the trade and industry in complying with administrative

requirement under the Maharashtra Value Added Act, 2002 it has

been clarified that credit (setoff) would be available on goods which

had been earlier purchased and were subsequently destroyed in

flood. The said authority only desired that claimant shall obtain

duplicate purchase invoices from suppliers. In the said circular it is

further clarified that those dealers who have filed their returns before

flood and books of accounts and supporting thereof if destroyed than

in that case such returns will be accepted. However upon information

from the sources suggest that such returns are incorrect, then an

independent inquiry be made. With regard to the incident of Surat to

avoid the further debate, controversy, litigation and expressing

sympathy on the effected dealers based upon the said trade circular,

the Commissioner of Commercial Tax, Gujarat State should also

issue public circular clarifying the position in similar way.

Conclusion: The flood affected dealers had every bonafide intention

to sell the goods but situation beyond the control had put them

behind hence such dealers are not required to reverse the ITC. The

language used in the section 11(5)(f) of the Act, 2003 cannot be

interpreted to read that even if due to factors beyond control of the

trade and industry, if the purchased goods could not be sold, resold,

manufactured, there would be breach of the said condition. The

condition incorporated in the said clause deals with a voluntary

action on the part of the trade and industry. Dealers engaged in trade

and industry cannot be constrained to do something which is


impossible. By following the well known legal maxim Lex non cogit ad

impossibilia, means that law cannot compel them to do what they

cannot possibly do. There was absolutely impossibility on the part of

them to perform an obligation during massive flood which affected

large number of common men, such law can not expect from them to

do that impossible thing. The dealers became disabled to perform

their faithful duty which the law has cast upon them. Under the

circumstances of natural calamity, compliance with one of the

provisions of statutes which prescribe how something is to be done

should be governed as good excused. For the default, the law should

treat them in general good excuse, the performance of the formalities

prescribed by a statute has been rendered impossible by

circumstances over which though they were interested but had no

control, like the act of God, the said circumstances is valid excuse.

All other incidents like cyclone, earthquake, riots and fire are akin.

Hence they would fall into the same path. Any contrary decision

would not be proper for a welfare State to become further harsh and

withdraw the benefits available to them to the dealers who had acted

in good faith for availing benefits under a particular Law of the State.

From the detailed discussions herein above the readers will certainly

agree with the views expressed by me, that in the situation of flood no ITC

is to be revered. However, finding it contrary, the subject is open for

comments and/or debate. It will be welcomed.

THE FLOOD, ACT OF GOD & INPUT TAX CREDIT - H D...

Documents

Transcript of THE FLOOD, ACT OF GOD & INPUT TAX CREDIT - H D...