Input tax apportionment cannot be applied mechanically when accounts identify taxable and exempt inputs; isolated sale of old vehicles not taxable.

Where a dealer maintained separate accounts and the input tax relating to exempt and taxable goods was identifiable, Rule 131's apportionment formula could not be applied mechanically; directly relatable input tax had to be allowed or disallowed on the basis of the actual accounts, and the restriction was set aside. A solitary or occasional sale of old vehicles, unconnected with the dealer's regular business and lacking the attributes of volume, continuity, regularity and profit motive, did not constitute business turnover, so tax on that sale was not leviable. The reassessment was directed to be revised accordingly.

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Issues: (i) Whether restriction of input tax by applying the apportionment formula under Rule 131 of the Karnataka Value Added Tax Rules was justified where the dealer maintained separate accounts and the input relatable to exempt and taxable goods was identifiable; (ii) Whether tax on the isolated sale of old vehicles was leviable under the Act.

Issue (i): Whether restriction of input tax by applying the apportionment formula under Rule 131 of the Karnataka Value Added Tax Rules was justified where the dealer maintained separate accounts and the input relatable to exempt and taxable goods was identifiable.

Analysis: Section 17 governs partial rebate where a dealer makes both taxable and exempt sales, and Rule 131 provides that directly relatable input tax on exempt goods is non-deductible, directly relatable input tax on taxable sales is deductible, and the formula applies only to non-identifiable or common input tax. The dealer had maintained separate books showing purchases, consumption and stock for exempt and taxable products, and the departmental circular also stated that where deductible input tax is identifiable from classified accounts, the general formula should not be applied without justifiable reason. On the facts, the authorities applied the formula mechanically without examining the actual accounts and the identifiable nexus of inputs.

Conclusion: The restriction of input tax by applying Rule 131 was not justified and was set aside in favour of the assessee.

Issue (ii): Whether tax on the isolated sale of old vehicles was leviable under the Act.

Analysis: Taxability depended on whether the transaction formed part of the dealer's business activity, judged by volume, frequency, continuity, regularity and profit motive. The sale of the old vehicles was a solitary or occasional disposal unconnected with the dealer's regular business, and such a one-time sale of discarded goods did not constitute business turnover for levy of tax.

Conclusion: Tax on the sale of old vehicles was not leviable and the levy was set aside in favour of the assessee.

Final Conclusion: The appeal succeeded, the input tax restriction and the levy on sale of old vehicles were both quashed, and the reassessment was directed to be revised accordingly.

Ratio Decidendi: Where input tax on exempt and taxable goods is separately identifiable from maintained accounts, the general apportionment formula cannot be applied mechanically; and a solitary disposal of used assets not connected with the regular course of business is not taxable as business turnover.

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