Input tax credit reversal needs factual enquiry and hearing; ad hoc loss percentages and unreasoned refund denial are unsustainable.
Reversal or denial of input tax credit on wastage, export-linked purchases, and capital-goods refund claims requires a factual enquiry into the manufacturing process, actual loss, and the statutory nexus with exported goods; a fixed ad hoc percentage cannot be applied mechanically. An unreasoned rejection of a refund claim, without disclosure of the basis and without hearing the taxpayer, violates natural justice. The impugned findings were set aside and the matters were remitted for fresh adjudication after notice, objections, inspection, and personal hearing.
Issues: (i) whether reversal of input tax credit on wastage under Section 19(9) of the State Act could be made by applying a uniform percentage for invisible and visible loss; (ii) whether input tax credit could be denied on purchases on the ground that the commodities were not exported when they were claimed to have been used in the manufacture of exported goods; and (iii) whether rejection of refund of input tax credit on capital goods, without disclosure of reasons and without hearing, was sustainable.
Issue (i): whether reversal of input tax credit on wastage under Section 19(9) of the State Act could be made by applying a uniform percentage for invisible and visible loss.
Analysis: The assessment was founded on adoption of fixed percentages for invisible and visible loss. The applicable approach requires the assessing authority to undertake a factual enquiry into the manufacturing process and the actual quantum of loss, rather than proceed on an ad hoc percentage. A uniform percentage cannot be mechanically applied without inspection and fact-finding.
Conclusion: The adoption of a uniform percentage for reversal of input tax credit was unsustainable and called for interference.
Issue (ii): whether input tax credit could be denied on purchases on the ground that the commodities were not exported when they were claimed to have been used in the manufacture of exported goods.
Analysis: The claim required examination of whether the purchased goods were consumed in the manufacture of goods exported under the statutory scheme. The petitioner had not been given an opportunity to object, and the issue could not be decided without considering the manufacturing link and the factual position through appropriate enquiry.
Conclusion: The denial of input tax credit on this ground was unsustainable and required reconsideration.
Issue (iii): whether rejection of refund of input tax credit on capital goods, without disclosure of reasons and without hearing, was sustainable.
Analysis: The impugned order did not state any specific reason for rejecting the claim, and the nature of the alleged dispute was not disclosed. The petitioner was also denied an opportunity of hearing. The order was therefore vitiated by violation of natural justice and lack of reasons.
Conclusion: The rejection of the refund claim on capital goods could not be sustained.
Final Conclusion: The writ petitions succeeded to the extent that the impugned findings on all three heads were set aside and the matter was sent back for fresh adjudication after notice, objections, inspection, and personal hearing in accordance with law.
Ratio Decidendi: Reversal or denial of input tax credit affecting refund claims must be preceded by notice, hearing, and a factual enquiry into the actual manufacturing process and loss, and cannot rest on a uniform ad hoc percentage or an unreasoned rejection.