2025 (5) TMI 1522 - HC - VAT / Sales Tax

Dealer's Tax Exemption Under Section 7(c) Bars Input Tax Credit Claim as Per Statutory Prohibition in Section 13

The Commissioner, Commercial Tax U.P. Lucknow Versus S/S Romsong Scientific And Sargical Ind. Pvt. Ltd.

The Commissioner, Commercial Tax U.P. Lucknow Versus S/S Romsong Scientific And Sargical Ind. Pvt. Ltd. - 2025:AHC:77906 ISSUES PRESENTED AND CONSIDERED 1. Whether a dealer is entitled to avail input tax credit in respect of purchases of goods the sale of which is exempt from tax under the statute by virtue of notifications issued under section 7(c). 2. Whether an order allowing input tax credit in circumstances where section 13(7) of the Act operates to prohibit such credit can be sustained in law. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to input tax credit where sales are exempt under section 7(c) Legal framework: Section 7(c) (statutory exemption provision) exempts turnover of sale or purchase of specified goods by specified classes of dealers as may be notified; section 13 constitutes the scheme for availing input tax credit, with section 13(1) permitting credit to the extent provided under relevant clauses and section 13(7) specifying circumstances where input tax credit is not allowable, including where the sale of such goods by the dealer is exempt under section 7(c). Precedent Treatment: The Court applied and followed the reasoning of a binding higher-court decision addressing the same issue, which interpreted sections 7(c) and 13(7) to preclude allowance of input tax credit where sales are exempt under section 7(c). That precedent was treated as directly on point and controlling. Interpretation and reasoning: The Court adopted the statutory distinction between taxable persons, taxable goods and taxable events and observed that entitlement to input tax credit is governed strictly by section 13. While notifications under section 7(c) effectuate exemption from levy/collection of tax, they do not enlarge the statutory scheme for input tax credit where section 13(7) manifests a legislative prohibition. The Court reasoned that where the subject turnover admittedly falls under the statutory exemption (section 7(c)) read with the relevant notifications, the dealer's entitlement to input tax credit must be evaluated against the express bar in section 13(7). The legislative text of section 13(7) imposes a statutory mandate denying input tax credit in such circumstances, and that mandate cannot be overridden by an intent or policy expressed elsewhere (e.g., in notifications) to grant credit. Ratio vs. Obiter: The holding that section 13(7) disallows input tax credit where sales are exempt under section 7(c) was applied as ratio. Observations distinguishing between exemption from levy and entitlement to input tax credit, and emphasizing statutory textualism in tax jurisprudence, were treated as integral to the ratio rather than mere obiter. Conclusions: A dealer whose sales fall within the exemption under section 7(c) is not entitled to input tax credit under section 13 where section 13(7) applies to prohibit such credit. The prior higher-court decision to that effect governs and is followed. Issue 2 - Validity of an order allowing input tax credit contrary to section 13(7) Legal framework: Administrative or adjudicatory orders granting input tax credit must conform to the statutory scheme; where section 13(7) expressly prohibits credit, an order granting credit would conflict with statutory mandate. Precedent Treatment: The Court relied on the higher-court decision which affirmed that orders granting input tax credit in facts where section 13(7) applies are not tenable and must be set aside. Interpretation and reasoning: Applying the statutory prohibition in section 13(7) to the facts, the Court concluded the impugned order could not be sustained. The Court emphasized that the exemption from levy under section 7(c) does not translate into a right to input tax credit where the statute expressly excludes such benefit. Given the admitted factual position that the turnover falls within section 7(c) notifications, the statutory bar in section 13(7) operates decisively to deny credit; administrative attempts to permit credit in that factual matrix are incompatible with the statute. Ratio vs. Obiter: The determination that an order granting input tax credit contrary to the statutory prohibition must be quashed is ratio, directly following the controlling precedent and statutory text. Conclusions: The impugned order allowing input tax credit (in the circumstances where sales are exempt under section 7(c)) cannot be sustained and is quashed. The revision is allowed and the substantial questions of law are answered in favour of the revisionist and against the opposite party, consistent with the statutory scheme and precedent.