Kiran Raj

The Karnataka High Court, Division Bench of Justice Krishna S. Dixit and Justice G. Basavaraja, dismissed revision petitions filed by the State of Karnataka challenging the orders of the Karnataka Appellate Tribunal that had allowed additional claims for Input Tax Credit (ITC) by the assessee, Tractor and Farm Equipment Limited. The High Court confirmed the Tribunal’s decision that the assessee could rectify underclaims of ITC due to bona fide errors in tax returns filed under the Karnataka Value Added Tax Act, 2003 (KVAT Act), provided that the rectification was made prior to the conclusion of reassessment proceedings. The Court stated, “we answer the first question as to the nature of Input Tax Credit to the effect that although it is a concession, the claim for it cannot be denied when all conditions stipulated by law are complied with.”

The Court further held that “Input Tax Credit is not a gratis, it is a kind of concession in a limited sense and that it would avail if all the conditions prescribed for that are strictly complied with.” The High Court refused to interfere with the Tribunal’s decision and affirmed the assessee’s entitlement to the ITC deductions under Section 14 of the KVAT Act and related notifications.

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The petition arose from proceedings involving Tractor and Farm Equipment Limited, a registered dealer under the KVAT Act, which filed its returns for the tax periods April 2008 to March 2009 and April 2009 to March 2010. The assessee initially claimed ITC on purchases taxed at 12.5% used in the manufacture of goods stock-transferred outside Karnataka. However, under a mistaken belief, the assessee did not claim ITC at 1% and 2% (for inputs taxed at 4%) as was permissible under Section 14 of the KVAT Act and Notification No. FD 507 CSL 2007 (IX) dated 01.04.2008.

During reassessment proceedings under Section 39(1) of the Act, the assessee sought to rectify the omission by claiming additional ITC amounts corresponding to the correct rebate percentages. For the tax year 2008-09, the Deputy Commissioner of Commercial Taxes initially rejected the claim but later allowed it pursuant to a rectification application filed under Section 69 of the Act. For the subsequent year, the ITC was allowed in the initial reassessment itself.

However, the Joint Commissioner of Commercial Taxes initiated suo moto revision proceedings under Section 63-A of the Act and disallowed the additional ITC claims, reasoning that the assessee did not file revised returns, and therefore, claims beyond what was originally filed could not be entertained. The Tribunal reversed the revision order, holding that the ITC claims were justifiable.

The State of Karnataka, represented by the Additional Government Advocate, challenged the Tribunal’s decision on several questions of law, including whether ITC claims could be entertained without a revised return and whether rectification was permissible under Section 39(1) when detrimental to State revenue.

The State argued that compliance with the prescribed return format under Section 35 and Rule 38 of the KVAT Rules was mandatory and that the assessee’s failure to claim full ITC in its original returns barred any subsequent rectification. The Additional Government Advocate submitted, “a default in this regard cannot be rewarded; compliance with the conditions is a must.”

In response, the assessee, represented by senior counsel, submitted that the statutory framework of the KVAT Act allows for rectification of bona fide errors during reassessment proceedings and that Input Tax Credit partakes the nature of a substantive statutory right. The counsel stated, “Input Tax Credit is not something like gratis, but partakes the character of State liability; therefore, Input Tax Credit is a concession, is misconceived.”

The High Court examined the nature of ITC under the KVAT Act and the applicable legal principles. It distinguished between ITC as a concession and as a statutory entitlement, noting, “An Assessee cannot claim Input Tax Credit unless the conditions prescribed by the statute are strictly complied with.” The Court observed that while ITC is granted subject to statutory conditions, it is not a mere discretionary benefit and may be enforced judicially when unlawfully denied.

The Court recorded, “If tax cannot be levied and collected except with the authority of law, then as a corollary of this, any excess exaction also cannot be retained by the State subject to exceptions.” Further, the Bench emphasized the statutory mandate under Section 10(5) of the KVAT Act, which directs refund or adjustment of excess ITC with interest when ITC exceeds output tax.

The High Court also examined Rule 38 and Form VAT 100 requirements regarding returns. The Court accepted that ordinarily, ITC must be claimed in returns or revised returns. However, it clarified, “when underclaim is made in the Return/Revised Return due to bona fide mistake of adopting inapplicable rates of tax only, it is permissible to seek rectification by making a representation provided that the foundational fact matrix is already available in the Return/Revised Return.”

Addressing the State’s argument that re-assessment rectifications cannot reduce State revenue, the Court rejected a revenue-centric reading of Section 39(2)(e) of the KVAT Act, holding, “Such a duty becomes more onerous when a representation is given by the dealer.”

The Court examined prior authorities relied on by the State, including the Karnataka High Court’s judgments in Centum Industries and Nandi Constructions. The Court noted that these cases did not address the specific provision of Rule 130A of the KVAT Rules, which the present Bench found significant. It observed, “From a holistic reading of all these cases, we gather an impression that meaning of the word ‘concession’ is not static, and it oscillates between gratis on the one extreme and right in the other.”

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The High Court ultimately found that denial of ITC in these circumstances would result in unjust enrichment of the State and double taxation, contrary to constitutional and statutory principles. The Court stated, “denying Input Tax Credit amounts to double taxation not authorized by law.”

The High Court dismissed both revision petitions, upholding the Tribunal’s orders in favor of the assessee. The Bench held, “in the above circumstances, these petitions being devoid of merits, are liable to be dismissed and accordingly, they are.”

Advocates Representing the Parties

For the Petitioners: Aditya Vikram Bhat, Additional Government Advocate

For the Respondent: T. Surya Narayana, Senior Counsel, assisted by Tanmayee Rajkumar

Case Title: The State of Karnataka & Ors. v. Tractor and Farm Equipment Limited
Neutral Citation: 2025:KHC:1905
Case Number: STRP No. 26/2023 C/W STRP No. 4/2024
Bench: Justice Krishna S. Dixit, Justice G. Basavaraja

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