1. Basic Provision:- For the removal of doubt it is hereby declared that, in no case the amount of set-off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury except to the extent where purchase tax is payable by the claimant dealer on the purchase of the said goods effected by him :
    Provided that, where tax levied or leviable under this Act or any earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have been received in the Government Treasury for the purposes of this sub-section.
  2. Steps of illegal implementation: - The State of Maharashtra raided the accused dealers and took their affidavits about non-filing of returns and non-payment of collected taxes. Then they displayed the list of such accused dealers a number of times. Good step. However there after the department had scrutinized the returns of those dealers who had made purchases from those accused dealers and the department forced those innocent dealers who may or may not be aware of the fact that those dealers from whom they made purchases are bogus and irrespective of the fact that those bogus dealers were holding valid RC while making the sales to those innocent dealers. The department forced the innocent dealers, who had already paid the VAT to such bogus dealers, again to make payment of those VAT which are not paid by the accused dealer to the treasury and not filed the returns.

    Also asked the innocent dealers to prove the genuineness of all such purchases which could not be called in normal course of business under the principle of calling for source of source. Also the department forced the innocent dealers to pay the VAT with interest and penalty u/s. 29 and accept the liabilities twice by filing the e-returns. Even prosecution steps were also taken against those innocent dealers.

    No cross examination of accused dealer was made available to the innocent dealers in the principle of natural justice.

  3. Legal interpretation by court: - Many aggrieved dealers filed writ petition to Bombay High Court. The Bombay High Court decided in the case of Mahalaxmi Cotton Jinning Mills v/s. State of Maharashtra & others: Writ petition no. 33/2012 decided on 11/05/2012 and some other cases that the dealers who claimed input credit of VAT had to prove the genuineness of those purchases.

    But the department was directed to use its own machinery to recover those dues of bogus dealers from themselves only in place of harming the innocent dealers. And to return the payment of VAT made by the dealers against the disallowance of input credit from the purchases made from bogus dealers proportionately from the recovery of the vat from accused dealers.

  4. The department’s reaction on the courts view: - The State Government of Maharashtra is wise as usual. It did not react on the decision of the court. It is not made known to the dealers in Maharashtra about what recovery measures have been taken to recover the vat from accused dealers. How much amount had been recovered from those accused dealers? How much amount of those recovered from accused dealer have been apportioned and paid back to the innocent dealer. No information of any kind about this had been displayed on the mahavat site. On the contrary the department issue the circular no. 8T of 2012 dated 21/06/2012 about the implementation of the denial provision about the input vat credit to the dealers.

    In spite of internal circulars and instructions even today also the department of sales tax had not displayed any of the recoveries made from the Hawala Dealers. Neither the department has shown any interest to give credit of such amount recovered from the Hawala dealers, to the innocent beneficiaries’ dealers.

    Instead, the department officers are forcing the beneficial dealer to pay the disallowed input tax credit with interest and penalty till date or otherwise a threaten about the assessment and levy of 100% penalty is also been given.

    On the other hand, the department had issued internal circular no. 9A of 2012 dated 31/08/2012 giving effect of the action plan as a result of Bombay High Court judgment in the case of M/s. Mahalaxmi Cotton Ginning Pressing and Oil industries dated 11/05/12 writ petition no. 33/2012.

  5. Merits and Demerits with interpretation of the decision of Mahalaxmi: - In the famous Bombay High Court decision the department is under firm belief that the said decision is in favor of the department. The decision is very exhaustive and contains 71 pages. All pros and cons of the issue had been thoroughly discussed. Therefore, the facts are different and two fold. Because if we look in to the concluding remark of the said decision we find as follows-
    1. The constitutional validity of section 48(5) of MVAT Act 2002 is valid. It means that section can be enforced.
    2. The dealer will be disallowed the input vat credit made from the Hawala dealer and accordingly he will have to pay the taxes.
    3. However, the State Government and the Sales Tax authorities shall abide by the assurance and statement recorded in the judgment about the recovery measures to be taken against the Hawala dealers and proportionate credit to be given as mentioned at point no. 51 of the said judgment.
  6. However, again as mentioned earlier and here under the department is also again going for the so called illegal measures to recover the taxes not paid by the Hawala dealers and to recover from the innocent beneficial dealers. Such as-
    1. To declare and display the list of Hawala dealers on the MVAT site as per the choice of the department.
    2. To cancel the R.C.No. Of such Hawala dealer since, they have taken up the R.C. Numbers. Here the department authority overlooks the fact that such dealer had been issued R.C. Numbers with thorough checking and pre-visit of the dealers.
    3. The innocent dealer is forced to pay the tax with interest and penalty for the purchases made from such Hawala dealers, irrespective of the facts that such Hawala dealer was holding valid R.C. at the time of making sales to beneficial dealers. Also the beneficial dealer had valid proofs for the purchases made from such Hawala dealers according the provision of sale of goods Act, such as, proper agreement (even verbal), two parties to the transaction, Actual delivery of goods and proper consideration and payment of the same.

    In spite, of all this the beneficial dealers have to pay double vat, one to the Hawala dealers and other to the State Government of Maharashtra. Only because the Hawala dealer had not paid the said tax in to the treasury of State Government of Maharashtra.

  7. The Hon. State Government authorities and the department of sales tax had not properly spelled the definition of Hawala dealer, Hawala entails making bogus invoices to allow a trader to claim tax credits. In this racket, the Hawala operator, posing as the seller, exits only on paper and gets a cut in return. If we analyze the term Hawala, it shows that there is only paper transaction without movement of goods. Whereas, the department of sales tax is not at all taking the cognizance of the fact between the transaction of Hawala dealer and the beneficiary dealers. Instead, in all cases the department is compelling even to a small dealer in his purchases any transaction of Hawala dealers had been reflected in many of those cases, it had happened, that the beneficial dealers had come to know about the purchase dealer being a Hawala dealer when it had been declared by the department. It is because when the beneficial dealer entered in to the transaction with such Hawala Dealer, he had primarily fulfilled all the four conditions of the sale of goods Act. In this situation is it not an injustice on such bonafide beneficiary dealers.
  8. Even presently, the sales tax department and authorities are comparing the J-1, J-2 of each dealer. The focus is made on the purchases of each dealer, in light of the Hawala dealer particularly. The dealer is whose record there is transaction with the Hawala dealer enlisted by the State Government from time to time. The department is straight away demanding the tax on the mismatch results are turning in to the recovery of taxes with interest and penalties. It is a total injustice on the dealer because if a dealer does not file his J-1, J-2 correctly the other purchasing dealer is punished for the same.
  9. Legal Approach & Court Views: - In the VAT Act of the different states of India many more decisions had come which are of prime importance to be looked into while dealing with the cases of section 48(5) under MVAT Act. Some of the important citations are as follows-
    1. Mahalaxmi Cotton Jinning Mills v/s. State of Maharashtra & others: Writ petition no. 33/2012 decided on 11/05/2012
    2. Shanti Kiran India Pvt. Ltd. v/s. Commissioner Trade and Tax Department: ST Appeal No. 34 to 39 of 2012 pronounced on 04/01/2013 (Delhi High Court)
    3. Gerulal Balchand v/s. State of Haryana & Others decided on 23/09/2011: Total 26 Writ Petitions.
    4. Microqual Techno Pvt. Ltd. (Bangalore) v/s. Additional Commissioner of Commercial Taxes (Bangalore) Sales Tax Appeal No. 1/2010 decided on 06/08/2010: 46 MTJ 451.
    5. Suresh Trading Co. v/s. State of Maharashtra: (SC) (1997) 11 SCC 378.
    6. Hindustan Steel Ltd. V/s. State of Orissa: (1970) 25 STC 211 (SC).
  10. The counter effect of the transaction of Hawala dealers had also a severe impact on the income tax issue of the dealer. The income tax department had issued notices to such dealers and asked them to show cause why such transactions of Hawala dealers should not be disallowed. However income tax department cannot go for any unilateral decisions against the assessee for such transactions. Because it will have to deal with the provision of section 28 to 42 about the claim of expenditure from business depending upon the case of particular assessee. Some useful decisions are listed below to consider in the case of above situation.-
    1. Girdharilal Nanelal v/s. The Sales Tax Commissioner (M.P.):39 STC 30. (SC)
    2. Spanco Limited v/s. DCIT 10(2) (Mumbai ITAT) ITA Nos. 4036 to 4038/MUM/2011 & 4466 to 4467/MUM/2011 vide order dated 11-07-2012.
    3. The Commissioner of Income Tax 1, Mumbai v/s. M/s. Nikunj Eximp Enterprises Pvt. Ltd. (ITXA 5604 of 2010) MUM vide order dated 17-12-2012.
    4. M/s. Balaji Textiles Industries (P) Ltd. v/s. Third ITO: 49 ITD 177 (Mumbai).
    5. ACIT Circle 16(2) v/s. Fortune Steels Industries ITA Nos. 2894 & 2895/MUM/2007.
    6. Income Tax Officer v/s. Parmanand ITAT Jodhpur Bench-(2007) 107 TTJ (JD) 395.
    7. Jagdamba Trading Company v/s. Income Tax Officer ITAT, Jodhpur ‘SMC’ Bench-(2007) 107 TTJ (Jd) 398.
    8. Commissioner of Income Tax v/s. Leaders Valves (P) Ltd- High Court of Punjab & Haryana: (2006) 285 ITR 435 (P&H)
    9. J.R. Solvent Industries (P) Ltd. v/s. Assistant Commissioner of Income Tax – ITAT, Chandigarh Third Member Bench- (1999) 63 TTJ (Chd.) (TM) 165.
  11. Precautions: The matter and battle of section 48(5) had long way to go. Our senior pleaders and association members from Bombay are fighting the issue at the Supreme Court with special leave petition (SLP). In these situations the dealers and practitioners are required to take following precautions depending upon facts of the cases.
    1. Keep the matter pending at the appellate level until some concrete decisions comes.
    2. Pay the taxes under dispute.
    3. Agitate about interest and penalty as per as possible.
    4. Submit all the valid proofs for the transactions with Hawala dealers as per Sale of Goods Act before the authorities and take acknowledgement of it.
    5. Take advice and guidance of senior experts in case of need. Fight with the issue with department with patience and with positive approach.
    6. As per the internal circular no. 1A of 2013 dated 11/01/2013 says that the department officer are bound to give input tax credit claimed by the dealer in case top 10 suppliers or suppliers covering at least 50% ITC whichever is more matches than it will be assumed that the rest of the ITC claimed by dealer is matched we should take advantage of this.
    7. In case any query or notice is received from income tax department asking about the details of Hawala transactions, the bonafide dealer/assessee should not be afraid and submit all the relevant details which had been submitted before the sales tax authorities. The advice of the expert may please be obtained and support of decisions mentioned here in above may also be referred.
    8. In the case of J-1. J-2 mismatch the relevant details may be called from the respective officer. Thereupon, the cross matching may please be done and if we are correct with the transaction under any mismatch and with all supporting evidences and documents, even in those cases we should firm and agitate with positive approach.
  12. Disclaimer: The views expressed in this article are the personal views of the author and the opinion expressed in this article should not construed to legal or expert advice, the author would not be responsible for any decisions taken by the readers on the basis of these views.