ITC Reversal u/r 29(2) of UP VAT Rules Unsustainable When Books of Account Accepted: Allahabad HC Remands BP Oil Mills Case [Read Order]

The Allahabad High Court has held that reversal of Input Tax Credit (ITC) under Rule 29(2) of the U.P. VAT Rules cannot be sustained when the dealer’s books of account are accepted and found defect‑free.

The dispute in B.P. Oil Mills Ltd. arose from the reversal of Input Tax Credit (ITC) by the Assessing Authority under Rule 29(2) of the U.P. VAT Rules.

The department alleged that the dealer failed to maintain separate accounts of purchases, sales, receipts, and dispatches in respect of goods consigned outside the State otherwise than by way of sale. On this basis, ITC was denied, and a demand was raised.

The dealer challenged the reversal, contending that its books of account were duly maintained, accepted by the authorities, and free from defects. It argued that denial of ITC merely on the ground of alleged non‑compliance with Rule 29(2) was unsustainable, particularly when substantive records were intact. The matter reached the High Court after the Tribunal upheld the reversal.

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The Allahabad High Court examined the statutory framework under Section 21(1)(v) of the U.P. VAT Act. This provision requires dealers consigning goods outside the State to maintain separate accounts, but importantly qualifies the requirement with the phrase “as far as possible.”

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The bench of Justice Piyush Agarwal interpreted this language as introducing flexibility, meaning that while separate accounts are expected, ITC cannot be denied if the dealer’s books are otherwise complete and accepted. The Court emphasised that the legislative intent was not to impose a rigid or absolute requirement, but to ensure reasonable compliance that allows effective verification.

In its reasoning, the Court noted that the Assessing Authority had not pointed out any defects in the dealer’s books of account. The records were accepted, and there was no finding of suppression, misstatement, or falsification.

In such circumstances, reversal of ITC solely on the ground of technical non‑compliance with Rule 29(2) was held to be unsustainable. The Court underscored that substantive rights like ITC cannot be denied on procedural lapses when the dealer has otherwise complied with statutory obligations.

The Court clarified that delegated legislation (Rules) cannot override the flexibility built into the parent statute. Thus, where books are accepted and defect‑free, ITC denial under Rule 29(2) cannot stand in light of Section 21(1)(v).

Ultimately, the High Court remanded the matter to the Tribunal for fresh consideration, directing it to re‑examine the case in light of the statutory interpretation provided.

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