The Madras High Court has reaffirmed that while Duty Entitlement Passbook (DEPB) licences qualify as “goods” under the Tamil Nadu Value Added Tax (TNVAT) Act, dealers cannot claim Input Tax Credit (ITC) on the tax paid for purchasing such licences unless they satisfy the statutory conditions prescribed under Section 19 of the Act.
The Bench of Dr Justice G. Jayachandran and Justice N. Mala upholding reassessment orders denying ITC and the consequential tax and penalty demands.
The dispute arose from reassessment proceedings for the assessment years 2012-13 and 2013-14. The assessee had purchased DEPB licences and used them to import plastic granules. While some of the imported granules were utilized in manufacturing plastic products, the remaining quantity was sold as plastic granules within the State.
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The assessee claimed Input Tax Credit under Section 19 of the TNVAT Act on the tax paid while purchasing the DEPB licences. According to the assessee, acquisition of DEPB licences was an integral part of its import business and therefore constituted an “input” purchased in the course of business. It further argued that there was no requirement for a one-to-one correlation between the purchase of the DEPB licence and the sale of imported plastic granules.
The Commercial Tax Officer rejected the claim, holding that ITC under Section 19(2) is available only where the purchased goods satisfy the statutory purposes specified in the Act. According to the Department, tax paid on DEPB licences could not be adjusted against the sale of imported plastic granules because the licences themselves did not qualify for ITC under the statutory framework. Separate reassessment orders raised tax demands of ₹3.94 lakh and ₹3.70 lakh for the two assessment years, along with penalties equal to 50% of the tax due.
The assessee challenged the reassessment orders before the High Court. Although the Single Judge expressed reservations about an earlier Division Bench ruling in Sha Kantilal Jayantilal v. State of Tamil Nadu, observing that the judgment might require reconsideration, the writ petitions were nevertheless dismissed on the ground that the earlier Division Bench decision remained binding precedent.
Aggrieved by this outcome, the assessee preferred intra-court appeals before the Division Bench.
Before the Division Bench, the appellant contended that the Single Judge had accepted several legal propositions in its favour but still dismissed the writ petitions solely because of the earlier Division Bench judgment.
The assessee argued that DEPB licences are “goods” under the TNVAT Act in light of the Supreme Court’s decision in Yasha Overseas v. Commissioner of Sales Tax. The purchase of DEPB licences was undertaken in the course of business and therefore qualified as “inputs.” The TNVAT scheme does not mandate one-to-one correlation between the goods purchased and the output goods sold for availing ITC. The earlier Division Bench ruling in Sha Kantilal Jayantilal had failed to appreciate the legislative objective of avoiding cascading taxation and therefore deserved reconsideration.
The State contended that the earlier Division Bench judgment had comprehensively interpreted Section 19 of the TNVAT Act and correctly concluded that ITC on DEPB licences was unavailable.
The Revenue argued that although DEPB licences are recognised as goods, they do not satisfy the statutory conditions governing ITC because there must be a sufficient nexus between the purchased goods and the taxable goods contemplated under Section 19. Simply being “goods” does not automatically entitle a dealer to claim input tax credit.
The Division Bench undertook an extensive examination of Section 19 of the TNVAT Act and revisited the reasoning adopted in Sha Kantilal Jayantilal. The Court reproduced significant portions of the earlier judgment, observing that Section 19 is a comprehensive code governing every aspect of ITC, including entitlement, restrictions, reversals and carry-forward of credit.
The Court acknowledged that the Supreme Court in Yasha Overseas had categorically held that DEPB licences constitute “goods.” However, it emphasized that this conclusion alone does not determine eligibility for Input Tax Credit.
According to the Bench, Section 19(1) specifically grants ITC only in respect of taxable goods specified in the First Schedule to the TNVAT Act. DEPB licences, although falling within the general definition of “goods,” are not included in the First Schedule. Consequently, they do not satisfy the statutory requirement for claiming ITC.
The Court further observed that DEPB licences merely confer a right to import goods at concessional rates and are legally distinct from the goods imported using those licences. While the imported goods may qualify for ITC if statutory conditions are met, the licence itself cannot be treated as an eligible input for claiming credit.
Rejecting the appellant’s contention that Sha Kantilal Jayantilal was rendered per incuriam, the Court held that the earlier judgment had carefully analysed the TNVAT Act, Supreme Court precedents and the legislative intent behind the ITC provisions.
The Division Bench observed that the impression created by the Single Judge that the earlier decision required reconsideration was incorrect. After independently examining the statutory framework, the Bench found no legal infirmity in the earlier ruling and concluded that it continued to represent the correct interpretation of Section 19 of the TNVAT Act.
The Madras High Court dismissed both writ appeals, upholding the reassessment orders and denial of Input Tax Credit on the purchase of DEPB licences.
The Court held that although DEPB licences are recognised as “goods,” they do not satisfy the statutory requirements for availing ITC under Section 19 of the TNVAT Act merely because they are used in the course of business. There was no order as to costs, and the connected miscellaneous petitions were also closed.
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