Input tax credit reversal is limited to destroyed or unusable inputs, not ordinary manufacturing loss during production.

Input tax credit under the Tamil Nadu Value Added Tax Act could not be reversed for inputs merely consumed in manufacture as invisible loss. The court read "inputs destroyed at some intermediary stage of manufacture" to cover only inputs withdrawn from production, rendered incapable of further use, and sold as scrap or physically destroyed with no residual value. On that interpretation, manufacturing loss in the course of producing the final product did not justify reversal, and the demand could not be sustained to that extent. The same principle also excluded reversal for goods traded as such where the statutory condition of intermediary-stage destruction was not met.

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Issues: Whether input tax credit could be reversed on inputs consumed during manufacture as manufacturing loss and on goods traded as such.

Analysis: The expression "inputs destroyed at some intermediary stage of manufacture" in Section 19(9)(iii) of the Tamil Nadu Value Added Tax Act, 2006 was held not to include inputs that are merely consumed in the manufacture of the final product. Reversal of input tax credit is warranted only where inputs are withdrawn at an intermediary stage, become incapable of further use, and are sold as scrap or physically destroyed with no residual value. There is no basis for reversal on inputs that are consumed during manufacture as invisible loss, and the demand could not be sustained insofar as it covered manufacturing loss on traded goods.

Conclusion: Input tax credit could not be denied or reversed on manufacturing loss or on traded goods sold as such, and the impugned demand on that basis was liable to be set aside.

Ratio Decidendi: Reversal of input tax credit is permissible only for inputs destroyed or rendered unusable at an intermediary stage of manufacture and not for inputs merely consumed in the manufacturing process as invisible loss.

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