No ITC for Dealer on Tax-Exempt Sales: Supreme Court Upholds Disallowance u/s 7(c) of UP VAT Act [Read Judgment]

The Supreme Court of India held that a dealer is not entitled to claim Input Tax Credit (ITC) on sales that are exempt from tax under Section 7(c) of the Uttar Pradesh Value Added Tax (UP VAT) Act, 2008, even if such sales are made to manufacturer-exporters using Form-E.

Neha Enterprises (appellant), a registered dealer under the UP VAT Act, had reported a turnover of Rs. 1.89 crore from sales to manufacturer-exporters during the assessment year 2010–11. These sales were made without charging tax, relying on exemption notifications issued under Section 7(c). The dealer claimed ITC of Rs. 6.42 lakh on the purchase tax paid on these goods, asserting that it was entitled to the credit under Section 13(1) of the Act.

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The Assessing Officer initially allowed the ITC but later reversed the decision, citing Section 13(7), which bars ITC on sales exempt under Section 7(c). This disallowance was upheld by the First Appellate Authority and again by the Commercial Tax Tribunal in Meerut. Both authorities held that once a transaction falls under Section 7(c), Section 13(7) categorically denies any ITC benefit to the seller.

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The appellant filed a revision before the Allahabad High Court, which also upheld the disallowance, noting that the statute clearly prohibits ITC on tax-exempt sales under Section 7(c), regardless of the dealer's intent or the policy objective of promoting exports.

Before the Supreme Court, the appellant’s counsel argued that the denial of ITC ran counter to the State’s export promotion policy and that Section 13(1) should be interpreted to allow credit in such cases. The revenue countered that tax statutes must be interpreted strictly and that Section 13(7) expressly prohibits ITC on exempt sales.

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The bench comprising Justices Pankaj Mithal and S.V.N. Bhatti observed that Section 13(1) allows ITC on certain sales, but Section 13(7) operates as an exception, barring credit where the dealer's sales are tax-exempt under Section 7(c). The court also observed that the dealer, by choosing to conduct tax-exempt sales under the notification, implicitly accepted the limitations on ITC.

The court dismissed the civil appeal and held that the prohibition under Section 13(7) is a legislative mandate that cannot be overridden by policy considerations or administrative circulars.

To Read the full text of the Order CLICK HERE

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