Input tax credit under VAT requires actual tax borne by the dealer, not supplier exemption or value-added theory.

Under the Karnataka VAT scheme, liquor became taxable for CL-9 licence holders operating in urban areas from 01.03.2014, and input tax credit was available only where tax had actually been borne on purchases. Because the assessee bought liquor from an exempt dealer, no input tax arose in its hands, so Section 10 could not support credit. Rule 3(2)(f) was confined to deductions linked to the dealer's own exempt sales, not to a supplier's exemption. The statutory machinery for net tax computation was therefore sufficient, and the value-added theory could not displace the requirement of actual input tax.

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Issues: Whether the assessee, a CL-9 licence holder running a bar and restaurant in an urban area, was liable to VAT on the entire turnover and whether it could claim input tax credit or deduction under Section 10 and Rule 3(2)(f) on the footing that the liquor purchased from an exempt dealer represented value addition only.

Analysis: Entry 59A of the Third Schedule and the notifications issued under Section 5(1) of the Karnataka Value Added Tax Act, 2003 made liquor taxable in the hands of CL-9 licence holders operating in urban areas from 01.03.2014. The scheme of Section 10 contemplates input tax credit only where tax has in fact been borne on purchases forming the dealer's input tax. Since the seller from whom the assessee purchased liquor was exempt, no input tax arose in the assessee's hands. Rule 3(2)(f) was held to be available only where the assessee itself sells goods exempt under Section 5 and seeks deduction of amounts relating to such exempt sales from total turnover. The assessee could not invoke that rule merely because its supplier was exempt. The machinery under the Act for computation of net tax and turnover was held to be sufficient, and the value-added theory did not override the statutory requirement of actual input tax.

Conclusion: The assessee was not entitled to input tax credit or deduction under Rule 3(2)(f), and tax was rightly levied on the entire taxable turnover. The answer was against the assessee and in favour of the Revenue.

Ratio Decidendi: Input tax credit and deduction from taxable turnover are permissible only where the dealer itself has suffered input tax or sells exempt goods within the statutory scheme; exemption in the hands of the supplier does not create a deductible input tax claim for the purchaser.

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