Reversal of ITC u/r 42

[kanwaljeet singh]

Respected members,

I had a doubt regarding reversal of ITC o n cotton seed used for manufacturing of cotton seed cake(exempt) and cotton seed oil(taxable @5%), first doubt is that in this case will I have to apply rule 42 or I can simply take 90% of itc on cotton seed as for exempt supply( cotton seed cake production ratio) and balance 10% as itc for taxable supply(oil ratio)

And secondly if I had to apply rule 42, then in that case if In a particular tax period i had not sold oil i,e no taxable sales, just sale of exempted cotton seed cake, then my entire itc on cotton seed for that month has to be reversed as per rule 42 since in that case my exempt sales shall be total sales

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AI Summary

Reversal of input tax credit must follow turnover-based monthly allocation with annual adjustment, using prior-period figures if no taxable sales.
ITC used for both exempt and taxable supplies must be reversed on a turnover basis for each tax period rather than by production ratio. Monthly reversals use that period's exempt turnover, with the preceding period's turnover applied if there are no sales. An annual computation reconciles monthly reversals and permits correction of excess availing or excess reversal when accounts are finalised.