Input tax credit under TNVAT: proviso to Section 19(2) does not restrict manufacturers using inputs in production.

The proviso to the input tax credit provision under the Tamil Nadu Value Added Tax Act was construed as applying to the category of inter-State sales, not to manufacturers or dealers using purchased goods as inputs in manufacturing or processing. Full input tax credit on tax suffered inputs was therefore treated as available to assessees in that category, and any attempt to reduce credit by extending the proviso to them was unsustainable. The challenged assessment orders were consequently regarded as liable to be set aside.

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Issues: Whether the proviso to Section 19(2) of the Tamil Nadu Value Added Tax Act, 2006 could be applied to dealers and manufacturers falling under Section 19(2)(ii) so as to restrict or reverse input tax credit, and whether the impugned assessment orders were liable to be quashed.

Analysis: The dispute turned on the scope of the proviso inserted to Section 19(2) and its operation in the credit mechanism under the TNVAT Act. The proviso was understood as relating to the category covered by Section 19(2)(v), namely inter-State sales under Section 8(1) of the Central Sales Tax Act, 1956, and not to manufacturers or dealers covered by Section 19(2)(ii) who use purchased goods as inputs in manufacturing or processing. The earlier binding view holding that such manufacturers are entitled to full input tax credit on tax suffered inputs was followed, and the attempted reduction of credit by applying the proviso was held to be unsustainable.

Conclusion: The proviso could not be invoked against assessees falling under Section 19(2)(ii), and the reversal of input tax credit was illegal. The impugned orders were liable to be set aside and the writ petitions were allowed.

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