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2011 (12) TMI 654 - HC - VAT and Sales TaxInput tax credit - whether input tax credit was liable to be reduced proportionately by 25% to the extent of manufacture of tax exempted Chaff ( Chokar ) in the process of manufacture of Aata , Maida and Suji , which are taxable wheat products and for manufacture of which the wheat was purchased by the respondent-assessee upon payment of Sales Tax/VAT and full input tax credit in respect of which was claimed u/s 18 of the Act against the tax payable by the assessee on the sale of Aata , Maida and Suji during the period in question? - Section 18 of the VAT Act of 2003. Held that - for the period in question before this Court in the present case, namely, 01.04.2006 to 30.06.2006 is prior to the amendment w.e.f. 02.04.2008 and, therefore, bran of wheat or Chaff/Chokar was exempted goods under Schedule-I of the VAT Act and there is no dispute on this from the side of the assessee - Admittedly, while the wheat bran, the exempted goods, were sold as exempted goods and were obtained in the process of manufacture of taxable goods viz. Aata , Maida and Suji as merely byproduct Section 18 of the Act of 2003 does not make any distinction between such byproduct or final product, which are taxable goods for the manufacture of which the raw material, namely, wheat was used. Input tax credit in the present case, was rightly reduced and was allowed only proportionately to the extent of manufacturing and sale of taxable goods by the assessee in the present case, namely, Aata , Maida and Suji , manufactured out of raw material (wheat) and such input tax credit could not be allowed to the extent of sale of VAT exempted goods, namely, wheat bran (Chaff/Chokar), which has been assessed by the Assessing Authority to the extent of 25% of the input tax credit and reverse tax has been imposed on the respondent-assessee. Revision petition disposed off - decided partly in favor of Revenue.
Issues Involved:
1. Entitlement to full Input Tax Credit (ITC) under Section 18 of the Rajasthan VAT Act, 2003. 2. Proportional reduction of ITC for the manufacture of VAT-exempted byproducts. 3. Applicability and interpretation of relevant case law. 4. Imposition of penalty under Section 61 of the VAT Act, 2003. Detailed Analysis: 1. Entitlement to Full Input Tax Credit (ITC): The core issue revolves around whether the assessee is entitled to full ITC under Section 18 of the Rajasthan VAT Act, 2003 for the period 01.04.2006 to 30.06.2006. The Rajasthan Tax Board upheld the assessee's entitlement to full ITC, dismissing the Revenue's appeal. The Assessing Authority had initially disallowed ITC proportionately by 25% for the manufacture of VAT-exempted wheat bran (Chaff/Chokar), which was not taxable. The Deputy Commissioner (Appeals) and the Tax Board relied on the Supreme Court's decision in Commissioner of Sales Tax, Bombay v. Bharat Petroleum Corporation Ltd. and the Punjab & Haryana High Court's decision in Sharda Cotton Ginning & Pressing Factory v. State of Haryana, which supported the assessee's claim for full ITC. 2. Proportional Reduction of ITC: The Assessing Authority's stance was that ITC should be proportionately reduced by 25% for the production of VAT-exempted wheat bran. The Revenue argued that Section 18 of the VAT Act mandates proportional ITC allowance when goods purchased are used partly for taxable and partly for exempted purposes. The Revenue contended that since wheat bran was exempted under Schedule-I of the VAT Act, ITC should be proportionately reduced. The Tax Board, however, held that the assessee was entitled to full ITC, as the byproduct (wheat bran) was not the intended manufactured product but emerged during the process of manufacturing taxable goods (Aata, Maida, and Suji). 3. Applicability and Interpretation of Relevant Case Law: The Revenue argued that the Supreme Court's decision in Bharat Petroleum Corporation Ltd. did not apply due to the specific statutory provisions in Section 18 of the VAT Act. The Supreme Court in Bharat Petroleum had allowed full ITC where the purchased goods were used in the manufacture of taxable goods, even if a byproduct was tax-exempt. The Court noted that the rules did not require purchased goods to be used only for taxable goods. The Punjab & Haryana High Court in Sharda Cotton Ginning & Pressing Factory also supported full ITC for the assessee. However, the Rajasthan High Court found that Section 18 explicitly required proportional ITC when goods are used for both taxable and exempted purposes, thus supporting the Revenue's position. 4. Imposition of Penalty: The Assessing Authority had imposed a penalty under Section 61 of the VAT Act for double the amount of tax. The Tax Board and Deputy Commissioner (Appeals) deleted the penalty, considering the issue debatable and not a result of deliberate misrepresentation by the assessee. The High Court upheld the deletion of the penalty, acknowledging that the assessee's claim for full ITC was made in good faith based on a plausible interpretation of the law. Conclusion: The Rajasthan High Court partially allowed the Revenue's revision petitions. It quashed the Tax Board's order to the extent that it set aside the imposition of reverse tax and proportionate reduction of ITC. The Court upheld the deletion of the penalty imposed under Section 61, recognizing the debatable nature of the issue and the absence of malafide intent by the assessee. The Court emphasized the specific provisions of Section 18, mandating proportional ITC when goods are used for both taxable and exempted purposes.
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