Declared goods reimbursement limits State input tax credit denial, requiring notifications to be read down for inter-State resale transactions.

State VAT notifications denying or reducing input tax credit cannot be applied to declared goods that are both purchased and resold in the course of inter-State trade where section 15(b) of the Central Sales Tax Act mandates reimbursement of State tax. The note explains that Article 286(3) read with section 15(b) limits the State's power, so a notification under the Gujarat VAT framework must be read down to the extent it curtails that reimbursement. It further states that where a show cause notice rests entirely on such impermissible denial of credit for declared goods transactions, the notice loses its legal basis. The notification's broader validity is otherwise maintained.

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Issues: Whether the impugned notification could be applied to deny or reduce input tax credit in respect of goods which were both purchased and sold as declared goods in the course of inter-State trade and commerce; and whether the show cause notice founded on such denial was sustainable.

Issue (i): Whether the impugned notification could be applied to deny or reduce input tax credit in respect of goods which were both purchased and sold as declared goods in the course of inter-State trade and commerce.

Analysis: The earlier judgment upholding the notification was treated as not governing this specific controversy because the aspect of section 15(b) of the Central Sales Tax Act, 1956, in the context of both purchase and sale of declared goods, had not been consciously decided there. Article 286(3) of the Constitution of India read with section 15(b) of the Central Sales Tax Act, 1956 requires reimbursement of the State tax levied on declared goods sold in the course of inter-State trade or commerce. Section 11(6) of the Gujarat Value Added Tax Act, 2003 permits specification of goods for partial or full credit denial, but it cannot override the Central Act so as to curtail the extent of reimbursement mandated by section 15(b).

Conclusion: The notification could not operate to reduce input tax credit for goods which were both purchased and sold as declared goods, and it had to be read down to that extent.

Issue (ii): Whether the show cause notice founded on such denial was sustainable.

Analysis: Once the notification was held inapplicable to the petitioners' declared goods transactions, the basis of the notice disappeared.

Conclusion: The show cause notice was quashed and set aside.

Final Conclusion: The challenge succeeded only to the extent that the notification could not be enforced against declared goods purchased and resold in inter-State trade, while its general validity was maintained; the consequential notice was invalidated.

Ratio Decidendi: A State notification issued under a VAT law cannot curtail the reimbursement of tax mandated by section 15(b) of the Central Sales Tax Act, 1956 for goods that are both purchased and sold as declared goods in inter-State trade or commerce.

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