Proportionate input tax credit applies where exempt by-products arise from taxable manufacturing, but bona fide disputes may avoid penalty.

Section 18 of the Rajasthan Value Added Tax Act, 2003 permits input tax credit only to the extent goods are used for taxable purposes and requires proportionate reduction where they are used partly for exempt output. Where wheat purchased for manufacture of taxable products also yielded exempt wheat bran as a by-product, full credit was not available and proportionate disallowance was upheld because the statutory scheme contained an apportionment mechanism. On penalty under Section 61, a debatable interpretation of the credit provision and a bona fide claim were held insufficient to establish deliberate false return or mala fide conduct, so penalty was not justified.

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Issues: (i) Whether input tax credit under Section 18 of the Rajasthan Value Added Tax Act, 2003 could be claimed in full when exempt wheat bran was generated as a by-product in the manufacture of taxable wheat products, or whether it was liable to proportionate reduction. (ii) Whether penalty under Section 61 of the Rajasthan Value Added Tax Act, 2003 was sustainable in the facts of the case.

Issue (i): Whether input tax credit under Section 18 of the Rajasthan Value Added Tax Act, 2003 could be claimed in full when exempt wheat bran was generated as a by-product in the manufacture of taxable wheat products, or whether it was liable to proportionate reduction.

Analysis: Section 18 allowed input tax credit only to the extent goods purchased were used for the specified taxable purposes and expressly provided proportionate allowance where the goods were used partly for those purposes and partly otherwise. Wheat bran was exempt under Schedule-I for the relevant period. The Court held that the statutory text did not distinguish between a main product and a by-product, and the assessee's purchase of wheat had resulted partly in exempt output. The earlier authorities relied upon by the assessee were distinguished because the present provision itself contained an apportionment mechanism. On that basis, the earlier reduction of credit by the Assessing Authority was found consistent with the Act.

Conclusion: The assessee was not entitled to full input tax credit, and proportionate disallowance of credit in relation to the exempt by-product was upheld in favour of Revenue.

Issue (ii): Whether penalty under Section 61 of the Rajasthan Value Added Tax Act, 2003 was sustainable in the facts of the case.

Analysis: The dispute turned on a debatable interpretation of the input tax credit provision, and the assessee had asserted a bona fide claim before the appellate authorities. In those circumstances, the Court held that the case did not justify a finding of deliberate false return or mala fide claim warranting penalty. The deletion of penalty by the appellate forums was therefore approved.

Conclusion: Penalty was not sustainable and its deletion was upheld in favour of the assessee.

Final Conclusion: The revision petitions succeeded only to the extent of restoring proportionate disallowance of input tax credit, while the deletion of penalty was maintained.

Ratio Decidendi: Where the taxing statute expressly provides proportionate input tax credit for goods used partly for taxable purposes and partly otherwise, full credit cannot be claimed merely because the exempt output emerges as a by-product; penalty is not justified where the dispute is debatable and the claim is bona fide.

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