Input tax credit under VAT may be restricted on a rational anti-evasion basis, but narrow read-down protected sales to State Governments.

Input tax credit under the Tamil Nadu VAT regime was treated as a statutory concession that the Legislature could condition and exclude on a rational basis. The restriction denying credit where inter-State sales fell under Section 8(2) of the Central Sales Tax Act and Form C was unavailable was upheld as generally valid because the classification between registered and unregistered dealer transactions was linked to preventing tax evasion and protecting revenue. However, for exclusive sales to other State Governments, the anti-evasion rationale did not apply; the provision was therefore read down so that such purchasers were treated as registered dealers for this limited purpose, subject to a certificate from the purchasing State Government.

---

---

Issues: (i) Whether Section 19(5)(c) of the Tamil Nadu Value Added Tax Act, 2006 and Rule 10(9)(a) of the Tamil Nadu Value Added Tax Rules, 2007 are constitutionally valid and intra vires the Central Sales Tax Act, 1956 and the Constitution of India; (ii) Whether the denial of input tax credit to dealers making inter-State sales exclusively to other State Governments required the provision to be read down.

Issue (i): Whether Section 19(5)(c) of the Tamil Nadu Value Added Tax Act, 2006 and Rule 10(9)(a) of the Tamil Nadu Value Added Tax Rules, 2007 are constitutionally valid and intra vires the Central Sales Tax Act, 1956 and the Constitution of India.

Analysis: Input tax credit under the VAT scheme is a statutory concession and not an indefeasible right. The Legislature may prescribe conditions and exclusions for granting that concession. The impugned restriction denied credit for inter-State sales falling under Section 8(2) of the Central Sales Tax Act, 1956 where the dealer could not furnish Form C, and the classification between sales to registered dealers and sales to unregistered dealers was held to have a rational nexus with the object of preventing tax evasion and protecting revenue. The provision was therefore not shown to be arbitrary or violative of the constitutional guarantees invoked.

Conclusion: The impugned provision and rule were upheld as generally valid and intra vires.

Issue (ii): Whether the denial of input tax credit to dealers making inter-State sales exclusively to other State Governments required the provision to be read down.

Analysis: State Governments are deemed dealers under the Act, but they are exempt from registration and therefore cannot issue Form C. In the case of sales exclusively to other State Governments, the apprehension of tax evasion that justified the restriction was absent. Denying credit in that limited class created an unreasonable disadvantage despite the genuineness of the transactions. To preserve the constitutional validity of the classification, the provision had to be construed to treat such State Governments as registered dealers for this limited purpose, subject to production of a certificate from the purchasing State Government.

Conclusion: The provision was read down in favour of dealers making exclusive sales to other State Governments, who were entitled to input tax credit without insisting on Form C, subject to the prescribed certificate.

Final Conclusion: The appeals were substantially rejected, but the statutory restriction was modified to protect dealers whose inter-State sales were made exclusively to other State Governments, in which case input tax credit could not be denied merely for want of Form C.

Ratio Decidendi: Input tax credit under a VAT statute is a concessional benefit that may be restricted by the Legislature on a rational basis, but a classification that operates without a real anti-evasion justification in a distinct category must be read down to avoid unconstitutional discrimination.

---