Input tax credit on exempt turnover may be proportionately restricted, while penalty fails where the dispute is bona fide and debatable.

Input tax credit under the Rajasthan Value Added Tax Act, 2003 was restricted proportionately where taxable and exempt goods were manufactured from the same raw material, so credit could be claimed only to the extent attributable to taxable sales and not against exempt turnover. Penalty under Section 61 was treated as unsustainable because the dispute involved a bona fide debatable issue and did not show deliberate suppression, wrong returns, or mala fides in claiming credit. The revision was dismissed on the earlier decision applying identical facts, while deletion of penalty on the debatable issue was maintained.

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Issues: (i) whether input tax credit could be reduced proportionately in respect of exempt goods under Section 18 of the Rajasthan Value Added Tax Act, 2003; (ii) whether penalty under Section 61 of the Rajasthan Value Added Tax Act, 2003 was sustainable.

Issue (i): Whether input tax credit could be reduced proportionately in respect of exempt goods under Section 18 of the Rajasthan Value Added Tax Act, 2003.

Analysis: The order follows the earlier view that, where taxable and exempt goods are both manufactured from the same raw material, input tax credit is allowable only to the extent attributable to taxable sales and cannot extend to exempt turnover. The disallowance of proportionate credit and levy of reverse tax were treated as justified on identical facts.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

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

Analysis: The imposition of penalty was found unsustainable because the dispute concerned a debatable question and did not establish deliberate suppression, wrong returns, or mala fides in claiming input tax credit.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The revision was dismissed by applying the earlier decision on identical facts, while the penalty deletion on the debatable issue was left undisturbed.

Ratio Decidendi: Input tax credit attributable to exempt goods may be restricted proportionately, but penalty is not warranted where the dispute turns on a bona fide debatable question and does not show deliberate wrongdoing.

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