Kiran Raj

The Supreme Court has ruled on a critical issue concerning the retrospective applicability of amendments to input tax credit (ITC) under the Punjab Value Added Tax Act, 2005 (Punjab VAT Act). The court held that an amendment made to Rule 21(8) of the Punjab VAT Rules, 2005, seeking to reduce ITC retrospectively, was without statutory backing at the time of its introduction. The judgment stated that taxpayers who had already accrued ITC at a higher rate could not have their entitlement reduced for stock held before the statutory amendment took effect. The ruling clarifies the limitations of delegated legislation and upholds the principle that any reduction in tax benefits requires clear legislative

The dispute arose from a notification issued by the Government of Punjab on January 25, 2014, amending Rule 21 of the Punjab VAT Rules. The amendment inserted sub-rule (8), which provided that if the tax rate on goods was reduced, the ITC on such goods lying in stock would also be reduced accordingly from the effective date. This affected business holding stock purchased at a higher tax rate, as they would receive ITC at the lower rate applicable from February 1, 2014, rather than the rate at which the tax was originally paid.

The respondent, Trishala Alloys Pvt. Ltd., along with other petitioners, challenged the amendment before the Punjab and Haryana High Court. They contended that the rule had been introduced before an enabling statutory amendment was made to Section 13(1) of the Punjab VAT Act, which came into effect only on April 1, 2014. The petitioners argued that the rule, by retrospectively altering ITC on stock purchased at a higher rate, violated vested rights and lacked statutory authority.

The State of Punjab, as the appellant, defended the rule, asserting that it was within the government’s power under Section 70 of the Punjab VAT Act to make rules with retrospective effect if deemed necessary in the public interest. The State argued that the High Court had misinterpreted Rule 21(8), and that the rule merely adjusted ITC in line with the new tax rate, without imposing retrospective liability.

The Punjab and Haryana High Court, in its judgment dated May 20, 2015, held that at the time of its introduction, Rule 21(8) lacked statutory authority, as the enabling amendment to Section 13(1) had not yet come into force. The High Court ruled that ITC accrued before April 1, 2014, could not be affected by a rule introduced earlier without legislative backing. The State of Punjab then appealed the decision to the Supreme Court.

The Supreme Court examined the statutory framework and amendments, observing that the right to ITC is a substantive right conferred by the statute. The judgment recorded, "A taxable person who had stock in trade as on January 25, 2014, or as on February 1, 2014, had already paid the tax while making the purchase of such goods. The taxable person who is otherwise entitled to avail input tax credit on the goods already purchased and lying in stock would suffer serious prejudice and loss if his entitlement to input tax credit is reduced by virtue of lowering of the rate of tax on such goods on a subsequent date."

The court further stated, "We have no hesitation in holding that on the date of introduction of sub-rule (8) of Rule 21 of the Rules, the State did not possess any power emanating from the Act to confine the availing of input tax credit to the reduced rate of tax on the stock in trade i.e. transactions that had concluded with the dealer already earning input tax credit."

The judgment also examined the legislative process and noted that the enabling amendment to Section 13(1) came into force only on April 1, 2014. It stated, "The amendment in the first proviso to Section 13 of the Act introducing the words 'are sold' etc. came into effect on April 1, 2014. The State of Punjab was, therefore, empowered in the exercise of its power of delegated legislation to notify a rule linking the availing of input tax credit already earned to their sale on April 1, 2014."

The Supreme Court relied on precedents affirming that vested rights cannot be altered retrospectively without explicit statutory sanction. It referred to Eicher Motors Ltd. v. Union of India (1999) and Jayam & Co. v. Assistant Commissioner (2016), which established that accrued ITC cannot be reduced retroactively.

The Supreme Court dismissed the appeals filed by the State of Punjab, holding that Rule 21(8) could not apply retrospectively before April 1, 2014. The judgment stated, "We, therefore, allow the writ petitions and hold that in the absence of any provision in the statute enabling the State of Punjab to notify Rule 21(8) of the Rules w.e.f. January 25, 2014, the said provision would come into effect from April 1, 2014."

The judgement held that businesses holding stock purchased before February 1, 2014, would retain their ITC at the original rate applicable at the time of purchase, unaffected by the subsequent reduction in tax rates.

Case Title: State of Punjab & Ors. Vs. Trishala Alloys Pvt. Ltd.
Case Number: Civil Appeal No. 2212 of 2024
Bench: Justice Abhay S. Oka, Justice Ujjal Bhuyan

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