Supreme Court Rules Against Input Tax Credit Claims for Purchases Linked to Exempt Sales Under UPVAT Act

Introduction

In a landmark judgment delivered on April 15, 2025, the Supreme Court of India addressed the contentious issue of Input Tax Credit (ITC) claims under the Uttar Pradesh Value Added Tax Act, 2008 (UPVAT Act). The Court held that dealers are not entitled to claim ITC on purchases when the subsequent sales are exempt from tax under Section 7(c) of the UPVAT Act. This decision emphasizes the strict interpretation of tax statutes, asserting that statutory language takes precedence over policy intentions.​

Background of the Case

The case revolved around a dealer who, during the assessment year 2010-11, sold raw materials worth ₹1.89 crore to a manufacturer-exporter. These sales were exempt from VAT under notifications dated February 24 and March 25, 2010, issued under Section 7(c) of the UPVAT Act, aiming to promote exports by exempting direct sales to exporters. Despite the exemption on sales, the dealer sought to claim an ITC of ₹6.42 lakh for taxes paid on the purchases linked to these exempt sales.​

The tax authorities and the High Court disallowed the ITC claim, citing Section 13(7) of the UPVAT Act, which explicitly prohibits ITC for transactions where the sale is exempt under Section 7(c). Challenging this decision, the dealer approached the Supreme Court, arguing that the policy intent to boost exports should allow for ITC claims on such purchases.​

Legal Provisions Involved

• Section 7(c) of the UPVAT Act: Empowers the state government to exempt specific sales or purchases from VAT through notifications, often used to promote certain economic activities like exports.​

• Section 13(7) of the UPVAT Act: Specifies that no ITC shall be allowed for the purchase of goods if the sale of such goods is exempt from tax under Section 7(c) or if the goods are used in manufacturing or packing exempted goods.​

Supreme Court's Analysis and Judgment

The Supreme Court, comprising Justices Pankaj Mithal and SVN Bhatti, examined the statutory provisions and the arguments presented. The Court emphasized that tax statutes must be strictly construed, and the clear language of the law cannot be overridden by policy considerations.​

The Court observed that Section 13(7) unambiguously prohibits ITC claims for purchases linked to exempt sales under Section 7(c). It rejected the dealer's argument that allowing ITC would align with the policy intent to promote exports, stating that such policy objectives cannot supersede explicit statutory provisions.​

The judgment clarified that tax exemptions and ITC entitlements operate independently. Availing an exemption under Section 7(c) precludes simultaneous claims for input credits, as per the statutory mandate. Therefore, the dealer's claim for ITC on purchases related to exempt sales was rightly disallowed by the tax authorities and the High Court.​

Implications of the Judgment

This ruling has significant implications for dealers operating under the UPVAT Act and similar tax regimes. It underscores the necessity for dealers to thoroughly understand the interplay between tax exemptions and ITC entitlements. Claiming ITC on purchases linked to exempt sales is not permissible, even if the exemption aims to promote beneficial economic activities like exports.​

The judgment reinforces the principle that statutory provisions in tax laws must be interpreted strictly, and policy intentions cannot override clear legislative language. Dealers must exercise due diligence in their tax planning and compliance to avoid disallowed ITC claims and potential legal disputes.​

Conclusion

The Supreme Court's decision in this case reaffirms the importance of adhering to the explicit provisions of tax statutes. By ruling that ITC cannot be claimed for purchases linked to exempt sales under Section 7(c) of the UPVAT Act, the Court has provided clarity on the boundaries of ITC entitlements. This judgment serves as a crucial reference point for dealers and tax practitioners, emphasizing the need for strict compliance with statutory requirements in tax matters.

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