ITC is the tax paid on purchases that can be used to reduce the tax liability on sales. Purpose: To prevent the tax-on-tax scenario, ensuring that businesses only pay tax on the value addition.
In Neha Enterprises v. Commissioner, Commercial Tax, Lucknow, Uttar Pradesh, the Supreme Court held that no ITC can be claimed for purchases linked to sales that are exempt from tax under Section 7(c) of the Uttar Pradesh Value Added Tax Act, 2008.
Section 13(7) also sets out that no facility for input tax credit shall be allowed to a dealer with respect to the purchase of any goods where the sale of such goods by the dealer is exempt from tax under Section 7(c) of the Act. The prohibition from allowing input tax credit is a statutory mandate.
The dealer claimed ITC on tax-exempt sales made to a manufacturer-exporter against Form-E, which is barred under Section 13(7). Since such sales are exempt under Section 7(c), the assessing officer correctly denied the ITC. The additional commissioner upheld this decision, as the law clearly disallows ITC for sellers on exempt transactions.
The Supreme Court, in cases involving Section 13(7) of the Income Tax Act, has protected the rights of assessees by holding that exemption under Section 11 or 12 can only be denied if there is clear evidence of violation of Section 13. In Director of Income-tax v. Bharat Diamond Bourse, the Court emphasized that the assessee’s explanation and the Tribunal’s acceptance of it cannot be disregarded without proper reasoning, ensuring judicial protection for the assessee in such disputes.
M/s Jhandu Mai Tara Chand v. Commissioner of Income-tax, Patiala, the High Court (interpreting Supreme Court principles) held that if the assessee has regularly employed a method of accounting and there is no material to reject it, the Income Tax Officer cannot arbitrarily add income or reject the books. This protects assessees from unjustified adjustments by tax officers.
Conclusion:The Supreme Court has unequivocally held that prohibitions on input tax credit, when set out in statute, are mandatory and must be strictly enforced. Policy considerations or administrative notifications cannot override clear statutory language. This principle ensures certainty and predictability in the application of tax laws.
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