No ITC on Goods Sold Under Tax Exemption: Supreme Court Upholds Sec 13(7) of UP VAT Act - 2025-07-07

No Input Tax Credit on Sales Exempt Under Section 7(c) of UP VAT Act, Rules Supreme Court

New Delhi – The Supreme Court, in a significant ruling on tax law, has held that a dealer is not entitled to claim Input Tax Credit (ITC) on goods whose sale is exempt from tax under Section 7(c) of the UTTAR PRADESH VALUE ADDED TAX ACT , 2008. A bench led by Justice S.V.N. Bhatti dismissed a civil appeal filed by a dealer, affirming that the specific prohibition in Section 13(7) of the Act overrides the general provisions for allowing ITC.

Case Background

The case involved a registered dealer who, during the assessment year 2010-11, made sales amounting to ₹1.89 crore to a manufacturer-exporter. These sales were made against Form-E, rendering them exempt from tax under Section 7(c) of the UP VAT Act, as per government notifications aimed at promoting exports.

The dealer had claimed an Input Tax Credit of ₹6,42,260 on the purchase tax paid for these goods. While initially allowed, the assessing officer later reversed this credit, a decision that was subsequently upheld by the Additional Commissioner, the Commercial Tax Tribunal, and the High Court. The dealer then appealed to the Supreme Court.

Arguments Presented

Appellant's Contention: The dealer argued that denying ITC was counterproductive to the state's policy of encouraging exports. Counsel for the appellant, Mr. Udayan Jain , urged the court to interpret the law based on its policy intent, contending that the dealer's claim fell within the general scope of Section 13(1), which allows for ITC.

Respondent's Contention: Representing the revenue department, Mr. Bhakti Vardhan Singh argued that ITC is a statutory concession available only as per the explicit terms of the law. He emphasized that the dealer's sales were admittedly exempt under Section 7(c). Consequently, the clear and unambiguous language of Section 13(7) — which explicitly bars ITC on such exempt sales — must be applied. He stressed that in taxing statutes, literal interpretation prevails over perceived intent when the language is clear.

Court's Analysis and Ruling

The Supreme Court meticulously analyzed the statutory framework of the UP VAT Act. The bench noted the "admitted circumstance" that the dealer's turnover fell squarely within the tax exemption provided by Section 7(c). The core issue was whether ITC could be claimed despite this exemption.

The judgment explained the legislative scheme: - Section 13(1) provides the general framework for allowing ITC. - Section 13(7) acts as a specific exception or prohibition.

The court highlighted the precise wording of Section 13(7)(ii), which states that no ITC shall be allowed where "sale of such goods by the dealer is exempt from payment of tax under clause (c) of section 7."

> "The prohibition from allowing input tax credit is a statutory mandate," the judgment noted. "In the teeth of clear expression in section 13(7) of the Act, we find it difficult to give effect to the intent or policy made known through notifications to grant input tax credit."

The bench concluded that the dealer, by availing the benefit of tax exemption under Section 7(c), was statutorily barred from claiming ITC on the corresponding purchases. The court found no legal infirmity in the decisions of the lower authorities and the High Court.

Final Decision

Dismissing the civil appeal, the Supreme Court affirmed the reversal of the Input Tax Credit. The ruling solidifies the principle that specific statutory prohibitions in tax law will override general benefit provisions, and that tax concessions must be claimed strictly in accordance with the letter of the law.