Set-off on taxed raw materials cannot be denied merely because tax-free inputs might have been available later.

Under section 8(1)(a) of the Madhya Pradesh General Sales Tax Act, set-off is available where raw materials are purchased on payment of full tax and the manufactured goods are not declared tax-free under sections 10 or 12. The decisive fact was that the assessee had actually paid tax on the raw materials; the benefit could not be denied merely because tax-free raw materials might also have been available under a later notification. Exemption notifications directed to a class of dealers or an industrial unit do not, by themselves, make the manufactured goods tax-free. The earlier set-off, therefore, could not be withdrawn.

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Issues: Whether the assessee was entitled to set-off under section 8(1)(a) of the Madhya Pradesh General Sales Tax Act, 1958 when it purchased raw materials at full rate of tax and the manufactured goods were not themselves declared tax-free, and whether the entitlement could be denied on the ground that tax-free raw materials could have been purchased.

Analysis: The statutory scheme of section 8(1)(a) allows set-off where raw materials are purchased on payment of tax at the full rate and the manufactured goods are not declared tax-free under sections 10 or 12. The decisive circumstance was that the assessee had in fact purchased raw materials on payment of tax. The exemption notifications operated in favour of the class of dealers or the industrial unit and did not declare the manufactured goods tax-free. Denial of set-off on the speculative basis that tax-free raw materials could have been purchased under a later notification was unsound. The reopening and withdrawal of the earlier set-off were therefore not justified.

Conclusion: The assessee was entitled to set-off under section 8(1)(a), and the objections raised by the department were rejected.

Ratio Decidendi: Where raw materials are purchased on payment of full tax and the goods manufactured are not declared tax-free, set-off under section 8(1)(a) cannot be denied merely because the assessee could have sourced raw materials tax-free or because the exemption benefits only the class of dealers.

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