The Supreme Court has held that the dealers cannot claim Input Tax Credit (ITC) for purchases linked to exempt sales under Uttar Pradesh Value Added Tax Act (UPVAT Act).
The bench of Justice Pankaj Mithal and Justice S.V.N Bhatti has observed that the prohibition from allowing input tax credit is a statutory mandate, and the view taken by the orders is available and correct. In the teeth of clear expression in section 13(7) of the Act, it difficult is to give effect to the intent or policy made known through notifications to grant input tax credit. The dealer availing section 7(c) of the Act knows the extent to which the input tax credit could be claimed.
The appellant is a registered dealer under the Uttar Pradesh Value Added Tax Act, 2008. The subject matter of the appeal relates to the turnover returns filed by the dealer for the assessment year 2010-11. The dealer recorded sales against the issuance of Form-E to the manufacturer-exporter. The dealer claimed an input tax credit. The assessing officer, at the first instance, allowed input tax to the extent of Rs. 6,42,260. Subsequently, the assessing officer disallowed the claim of an input tax credit of Rs. 6,42,260.
The assessing officer in the assessment order, passed under section 28, put the dealer on notice to hold that the dealer is not entitled to input tax credit for the purchase tax paid by him on the sales turnover made in favour of the manufacturer-exporter.
The dealer explained that the case of input tax claimed by the dealer falls within the scope of section 13(1) of the Act. Even though the subject turnover falls within the ambit of section 7(c) of the Act, the proviso or exception covered by section 13(7) of the Act is not attracted. The assessing officer noted that the subject sales or the subject turnover made against Form-E was accepted by the department.
The exemption from payment of tax shall not be levied and paid on the turnover of sales or purchase of such goods by such class of dealers as may be specified in the notification issued on this behalf. The notifications dated 24.02.2010 and 25.03.2010 covered the procedure for dealing with the turnover falling within section 7(c) of the Act.
Therefore, the input tax benefit is provided in accordance with the scheme outlined in section 13 of the Act. Section 13(7) is a proviso, and the said proviso stipulates that a transaction covered by section 7(c) of the Act is not entitled to input tax credit. Extending input tax credit in terms of section 13(1) of the Act would be contrary to sections 7(c) and 13(1) on the one hand and 13(7) of the Act on the other.
The dealer filed an appeal before the additional commissioner, and the first appellate authority dismissed the appeal. The gist of the first appellate authority’s findings is that the notification corresponds to section 7(c) of the Act. The notification exempts the direct sale of raw materials and spare parts to manufacturer-exporters from tax upon filing Form-E. The notification does not provide input tax credit facility to sellers having tax-exempted sales made in favour of manufacturer-exporters.
The court held that Section 13(7) also sets out that no facility for input tax credit shall be allowed to a dealer with respect to the purchase of any goods where the sale of such goods by the dealer is exempt from tax under Section 7(c). The prohibition from allowing input tax credit is a statutory mandate, and the view taken by the orders is available and correct.
Case Details
Case Title: Neha Enterprises Versus Commissioner, Commercial Tax, Lucknow, Uttar Pradesh
Case No.: CIVIL APPEAL NO. 6553 OF 2016
Date: April 9, 2025
