Dealers Cannot Claim Input Tax Credit For Purchases Linked To Exempt Sales Under UPVAT Act : Supreme Court

Emphasizing that tax statutes must be strictly construed with statutory language taking precedence over policy intent, the Supreme Court, in a case concerning the Uttar Pradesh Value Added Tax Act, 2008 (“VAT Act”), held that a dealer is not entitled to claim Input Tax Credit (“ITC”) on the purchase of goods where the subsequent sale of those goods is exempt from tax.

“Section 13(7) outlines the circumstances under which such a benefit cannot be allowed. 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.”, the Court observed.

The bench of Justices Pankaj Mithal and SVN Bhatti heard the case where the Appellant had sold raw materials worth ₹1.89 crore to a manufacturer-exporter during the 2010-11 assessment year. These sales were exempt from tax under Section 7(c) of the UPVAT Act, facilitated by notifications dated February 24 and March 25, 2010, which aimed to boost exports by exempting direct sales to exporters. However, the dealer sought to claim an ITC of ₹6.42 lakh for taxes paid on purchases linked to these exempt sales.

The tax authorities and High Court disallowed the Appellant's claim for the ITC, citing Section 13(7) of the VAT, which bars the ITC for exempted transactions under Section 7(c) prompting the Appellant to approach the Supreme Court.

Section 7(c) of the VAT Act allows the state to exempt specific sales/purchases via notifications. The appellant's sales to the manufacturer-exporter were exempt from VAT under notifications dated 24.02.2010 and 25.03.2010.

Section 13(7) of the VAT Act prohibits ITC if the sale is exempt under Section 7(c) or involves goods used in manufacturing/packing exempted goods.

The Appellant made an argument that when the sale made by it to the exporters/manufacturers is exempted from tax under the UPVAT Act then the purchases linked to the sale made by it to the export shall also be exempted for VAT to fulfill the true intent of the policy to boost exports.

Rejecting the Appellant's argument, the judgment authored by Justice Bhatti held that Section 13(7) of the VAT Act warrants a strict interpretation, as it expressly and unambiguously prohibits the claim of Input Tax Credit (ITC) when the sale made by the Appellant to the exporter is exempted through notification as per Section 7(c) of the VAT Act.

The Court noted that an exemption from Tax wouldn't warrant the dealer to claim ITC as both the concepts i.e., Tax exemptions and ITC entitlements operate independently where availing an exemption under Section 7(c) precludes simultaneous claims for input credits.

Holding thus, the Court held that the sale made to the exporter was exempted from the VAT to boost exports/manufacturing as part of the policy, and the statutory mandate to prohibit ITC on purchases linked to sales made to the exporters under Section 7(c) would override the policy intent because of the strict interpretation of the tax statutes.

“It is axiomatic, particularly in tax jurisprudence, that distinct concepts, such as taxable persons, taxable goods and taxable events, are established for levying and collecting the tax. Similarly, the scheme of availing input tax credit is determined by section 13 of the Act. Section 13(1) provides for allowing credit of an amount as input tax credit to the extent provided by or under the relevant clause to which the applicable condition is attracted. If the purchased goods are resold in the course of exporting the goods out of India, then the full amount of input tax credit can be claimed. Section 13(7) outlines the circumstances under which such a benefit cannot be allowed. 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. The prohibition from allowing input tax credit is a statutory mandate, and the view taken by the orders impugned, in the facts and circumstances of this case, is available and correct. 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 dealer availing section 7(c) of the Act knows the extent to which the input tax credit could be claimed.”, the court observed

Accordingly, the Court dismissed the appeal and upheld the impugned orders denying ITC's claim.

Case Title: NEHA ENTERPRISES VERSUS COMMISSIONER, COMMERCIAL TAX, LUCKNOW, UTTAR PRADESH

Citation : 2025 LiveLaw (SC) 423

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Appearance:

For Appellant(s) : Mr. Udayan Jain, Adv. (argued by) Ms. Kajal Sharma, Adv. Mr. Ranjan Mishra, Adv. Ms. Geetika Vyas, Adv. Mr. Harsh Jaiswal, Adv. Ms. Amiti Gupta, Adv. Mr. Sonal Jain, AOR

For Respondent(s) :Mr. Bhakti Vardhan Singh, AOR(argued by)