The Supreme Court has dismissed a civil appeal filed by Neha Enterprises, upholding the decision of the Uttar Pradesh Commercial Tax authorities to reverse input tax credit (ITC) claimed by the appellant on tax-exempt sales made under Section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008.
Case Background
Neha Enterprises, a registered dealer under the UP VAT Act, filed turnover returns for the assessment year 2010–11, recording sales worth ₹1,89,35,100 against Form-E to manufacturer-exporters. The dealer claimed input tax credit amounting to ₹6,42,260 on the purchase tax paid.
Initially, the assessing officer allowed the ITC. However, by order dated February 22, 2013, under Section 28 of the Act, the officer reversed the ITC, stating that the sales in question fell under Section 7(c) of the Act and were thus exempt from tax, making the dealer ineligible for input credit.
Proceedings Before Lower Authorities
The appellate authority dismissed the dealer’s appeal on July 22, 2013, noting that the notification dated February 24, 2010, issued under Section 7(c), exempted direct sales to manufacturer-exporters but did not grant input tax credit to the sellers.
A second appeal before the Commercial Tax Tribunal, Meerut, was also dismissed on September 10, 2013. The Tribunal held that Section 13(7) of the Act expressly prohibits input tax credit in cases where the sales are exempt under Section 7(c).
The Allahabad High Court upheld the decisions of the lower authorities and dismissed the revision on November 24, 2014. The High Court ruled:
“Bare reading of the provisions of Section 13(7) clearly reveals that the applicant was not entitled for the input tax credit with respect to the sale of goods exempted under Section 7(c) of the Act.”
Arguments Before the Supreme Court
Counsel for the appellant argued that the exemption under Section 7(c) was a policy measure to promote manufacturer-exporters and that denying ITC would defeat the policy objective. It was contended that Section 13(1) should be read harmoniously with Section 7(c) to allow credit.
In response, the State contended that Section 13(7) explicitly prohibits ITC where sales are exempt under Section 7(c). The counsel emphasised that taxing statutes must be interpreted based on their language, not policy considerations.
Court’s Analysis and Judgment
The Bench comprising Justice Pankaj Mithal and Justice S.V.N. Bhatti examined the statutory framework and held that the denial of ITC was in line with Section 13(7) of the Act. The Court noted:
“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) of the Act.”
Rejecting the appellant’s reliance on policy intention, the Court observed that the statutory prohibition is binding:
“In the teeth of clear expression in Section 13(7) of the Act, we find it difficult to give effect to the intent or policy made known through notifications to grant input tax credit.”
The Court concluded that the dealer, having availed the exemption under Section 7(c), was aware that ITC would not be permissible.
The civil appeal was dismissed with no order as to costs. The Court upheld the reversal of input tax credit as legally justified.
