Input tax credit on manufacturing inputs cannot be denied merely because an unavoidable by-product is later used as fuel.

Input tax credit could not be denied where castor seeds were purchased wholly for manufacture of castor oil and oil-based products, and the deoiled cake arose only as an unavoidable residue in that process. The partial-use proviso did not apply because no part of the purchase was diverted to any independent non-qualifying purpose. The fuel exclusion also did not apply because the seeds were not bought for fuel use, and the by-product could not be treated as a deliberate fuel purchase. On that basis, the disallowance of credit was unsustainable and the related penalty also could not stand.

---

---

Issues: Whether input tax credit could be denied on the ground that deoiled cake, an inevitable by-product arising in the course of manufacturing castor oil, was used as fuel, and whether the connected penalty survived.

Analysis: The purchase of castor seeds was found to be intended wholly for manufacture of castor oil and oil-based products, bringing the transaction within the input tax credit provision for raw materials used in manufacture. The Court held that the proviso for partial use did not apply because no part of the purchased seeds was diverted for any other independent purpose; the deoiled cake emerged only as a residue in the manufacturing process. The Court further held that the fuel-related exclusion did not apply because neither the seeds nor any part of the purchase was bought for use as fuel, and the by-product could not be treated as a deliberate fuel purchase. On that reasoning, the penalty based on disallowance of input tax credit also could not stand.

Conclusion: The respondent was entitled to input tax credit, the disallowance was unsustainable, and the penalty was not exigible.

Ratio Decidendi: An unavoidable by-product generated during manufacture does not justify denial of input tax credit where the entire purchased input is used for the intended taxable manufacture and no part of the purchase is independently intended as fuel or for another disqualifying use.

---