Input tax credit reversal for invisible loss requires fact-specific enquiry, not a mechanical percentage-based assessment approach.

A non-statutory circular under the Tamil Nadu VAT regime was not liable to be quashed merely because it guided assessments, as it was treated as subordinate guidance consistent with the earlier binding decision on the same scheme. By contrast, reversal of input tax credit for alleged invisible loss could not be directed on a mechanical uniform percentage basis. The assessing authority was required to issue a clear show cause notice, consider the dealer's objections, and make a fact-specific enquiry before taking any adverse action. The circular challenge failed, while the assessment notice was set aside and remitted for fresh consideration in accordance with law.

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Issues: (i) Whether the challenge to the circular dated 20.10.2011 was liable to be accepted; (ii) Whether the notice dated 20.02.2014 proposing reversal of input tax credit on account of alleged invisible loss was liable to be interfered with and the matter remitted for fresh consideration.

Issue (i): Whether the challenge to the circular dated 20.10.2011 was liable to be accepted.

Analysis: The impugned circular was treated as a non-statutory guideline and the issue was held to be governed by the earlier binding decision dealing with the same statutory scheme under the Tamil Nadu Value Added Tax Act. On that basis, the circular itself did not warrant quashing.

Conclusion: The challenge to the circular was rejected, against the petitioner.

Issue (ii): Whether the notice dated 20.02.2014 proposing reversal of input tax credit on account of alleged invisible loss was liable to be interfered with and the matter remitted for fresh consideration.

Analysis: The notice was found to require proper examination by the Assessing Officer after issuing a clear show cause notice and after considering the petitioner's objections. The Court followed the earlier ruling that a uniform ad hoc percentage for invisible loss could not be mechanically applied and that the assessing authority must undertake a fact-based enquiry before directing reversal of input tax credit.

Conclusion: The notice was set aside and the matter was remitted for fresh decision in accordance with law, in favour of the petitioner.

Final Conclusion: The petition challenging the circular failed, while the challenge to the assessment notice succeeded and required a fresh adjudication by the assessing authority.

Ratio Decidendi: A non-statutory circular need not be quashed merely because it guides assessment, but reversal of input tax credit on alleged invisible loss cannot be ordered mechanically on a uniform percentage without a fact-specific enquiry and a prior opportunity of hearing.

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