Input tax credit reversal requires factual inquiry into manufacturing loss, furnace oil use, and compliance with revisional directions.

Input tax credit restrictions for invisible manufacturing loss cannot rest on an arbitrary percentage; a proper factual inquiry into the actual loss and the statutory conditions is required before reversal. The treatment of furnace oil used as an input in manufacture must be examined on its own factual and statutory basis, rather than by relying on a different context involving loss, damage or destruction, so the matter requires fresh consideration. Reversal linked to inter-State sales without C forms must also conform to the revisional authority's year-wise direction, and the assessing order cannot stand independently where that direction governs the issue.

---

---

Issues: (i) Whether the reversal of input tax credit on account of invisible loss in the manufacturing process could be sustained on an ad hoc percentage without a proper fact-finding exercise; (ii) Whether input tax credit on furnace oil used as fuel in manufacture could be reversed; (iii) Whether the reversal of input tax credit relating to inter-State sales without C forms could stand.

Issue (i): Whether the reversal of input tax credit on account of invisible loss in the manufacturing process could be sustained on an ad hoc percentage without a proper fact-finding exercise.

Analysis: The earlier direction required the assessing authority to ascertain the actual quantum of loss and to examine the manufacturing process before applying any restriction on input tax credit. Despite that direction, the assessment again fixed invisible loss at 4% without disclosing any basis or undertaking the required factual inquiry. A uniform percentage adopted without examining the actual manufacturing loss was contrary to the earlier mandate and the statutory scheme governing restrictions on input tax credit.

Conclusion: The finding on invisible loss was set aside and the issue was decided in favour of the assessee.

Issue (ii): Whether input tax credit on furnace oil used as fuel in manufacture could be reversed.

Analysis: The claim was that furnace oil was an essential consumable used in manufacture and was neither damaged in transit nor destroyed before manufacture. The statutory provisions and return format relied on by the assessee were said to deal with loss, damage, destruction, or inputs destroyed before manufacture, not with consumption of an input in the manufacturing process. The assessing authority had relied on an external decision, but the factual and statutory setting was treated as different and the matter required reconsideration by the authority.

Conclusion: The reversal of input tax credit on furnace oil was set aside and the issue was remitted for fresh consideration in favour of the assessee.

Issue (iii): Whether the reversal of input tax credit relating to inter-State sales without C forms could stand.

Analysis: The related revision had already been dealt with by the revisional authority, which directed year-wise determination under the relevant provision. In view of that direction, the assessing order on this aspect could not stand independently and had to conform to the revisional order.

Conclusion: The reversal on this count was set aside, with a direction to comply with the revisional authority's order.

Final Conclusion: The assessment was interfered with on all three issues, with two matters sent back for fresh consideration and the third made subject to compliance with the revisional direction, leaving the assessee substantially successful.

Ratio Decidendi: Input tax credit restrictions relating to manufacturing loss cannot be sustained on an arbitrary or ad hoc percentage and require a proper factual inquiry into the actual loss and the statutory conditions before reversal is ordered.

---