HC : Input credit disallowance to bona-fide purchaser for seller's tax deposit default, unconstitutional

Delhi HC holds Section 9(2)(g) of Delhi Value Added Tax, 2004 (“DVAT Act‟) to the extent it disallows Input Tax Credit (ITC) to purchaser due to default of selling dealer in depositing tax, as violative of Articles 14 and 19 (1) (g) of the Constitution of India; Accepts assessee’s plea that expression “dealer or class of dealers” occurring in Section 9(2)(g) should be read down as not including a purchasing dealer who has entered into bona fide purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 where there is no mismatch of transactions in Annexures 2A and 2B; States, a purchasing dealer cannot be expected to keep track of whether selling dealer has in fact deposited tax or adjusted it lawfully against output tax liability, and unless Commissioner has placed information in the public domain, it is impossible for purchasing dealer to ascertain selling dealer’s failure to make a correct disclosure of the sales made in his return; Moreover, Department is not helpless if the selling dealer commits a default as in view of Section 40A inserted w.e.f. November 16, 2005, a purchasing dealer acting in connivance with a selling dealer can be proceeded against; States, Cabinet note outlining purpose behind introducing Section 9(2)(g) in DVAT Act w.e.f. April 2009 strangely did not mention Section 40A and also did not took note of practical difficulty that would be faced by the purchasing dealer, which is a major omission of important factors having a bearing on ITC claimed by a dealer; Remarks, Section 9(2)(g) gives a free hand to the Department in deciding to proceed either against the purchasing dealer or selling dealer, however, in the situation envisaged by said section, clearly the defaulting party is the selling dealer for which the purchasing dealer is expected to bear the consequence; Notes assessee’s submission that, there is a distinction between those categories specified in Section 9(2)(a) to (f) of DVAT Act which disentitle grant of ITC and one u/s 9(2)(g), whereas conditions specified in clause (a) to (f) are within the control of and can be vouched for by the purchasing dealer, the condition under Section 9 (2) (g) is not within its control; Accordingly holds that, failure by Legislature to distinguish between bona fide and non-bona fide purchasing dealers, results in Section 9(2)(g) applying equally to both the classes of purchasing dealers, which would certainly be hit by Article 14 of Constitution; Relying on host of SC cases, concludes that there was need to restrict denial of ITC only to the selling dealers who had failed to deposit tax collected by them and not punish bona fide purchasing dealers who cannot be expected to do the impossible; Observes,“It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution”; Distinguishes, Bombay HC and Tamil Nadu HC decisions in Mahalaxmi Cotton Ginning Pressing & Oil Industries and Jayam & Co, respectively : Delhi HC