Input tax credit on timber purchases allowed in full where exempt firewood arose only as an incidental by-product.

Input tax credit on timber purchases could not be proportionately reduced merely because a small quantity of sawing residue was sold later as exempt firewood. The Gujarat VAT Act credit restrictions applied only where the purchased goods themselves were used partly for non-specified purposes or in exempt manufacture; here, the entire timber was used as raw material for manufacture of taxable sawn timber or logs, and the exempt firewood arose only as an incidental by-product. The assessee was therefore entitled to full input tax credit, and no proportionate reversal was justified.

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Issues: Whether input tax credit on purchase of timber was required to be proportionately reduced because a small part of the sawing residue was sold as exempt firewood.

Analysis: The entitlement to credit under section 11 of the Gujarat Value Added Tax Act, 2003 depended on whether the purchased goods were used partially for non-specified purposes. The entire timber was purchased and used as raw material for manufacture of taxable sawn timber or logs. The fact that a small incidental by-product emerged during the process and was sold as exempt firewood did not mean that the timber itself was used only partly for the specified manufacturing purpose. The proviso to section 11(3)(a), and the connected restrictions in section 11(5)(h) and section 11(8)(a), apply only where the purchased goods are themselves used partly for other purposes or in exempt manufacture. On the same reasoning, the credit could not be reduced merely because waste material incidentally arose during manufacture.

Conclusion: The assessee was entitled to full input tax credit on the timber purchases, and proportionate reduction was not justified.

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