Benefit Of Input Tax Credit Can't Be Reduced Without Statutory Sanction : Supreme Court

The Supreme Court recently held that Rule 21(8) of the Punjab Value Added Tax Rules, 2005, which was notified on January 25, 2014, could not be applied to transactions before April 1, 2014, as the enabling amendment to Section 13 of the parent statute, the Punjab Value Added Tax Act, 2005, was effective from that date.

This means businesses that bought goods at a higher tax rate before this date are not subject to the limitation imposed by Rule 21(8) when claiming ITC, even if the tax rate was later lowered.

Rule 21(8) states that if the rate of tax on certain goods is reduced, then the input tax credit (ITC) on those goods lying in stock would also be admissible only at the reduced rate from the date of the tax reduction.

The core issue before the bench of Justice Abhay Oka and Justice Ujjal Bhuyan was whether the introduction of Rule 21(8) during the period from January 25, 2014, to April 1, 2014, was valid in the absence of an enabling provision in the parent statute, the Punjab VAT Act.

“The benefit of input tax credit is traceable to the statute. If the same has to be reduced, which will have an adverse civil consequence upon the beneficiary, it must have the requisite statutory sanction. In this case, the statutory sanction came on and from 01.04.2014 with the amendment of the first proviso to Section 13(1) of the Punjab VAT Act. Therefore, the High Court was justified in holding that prior to 01.04.2014, there was no statutory sanction to allow applicability of Rule 21(8) on the stock in trade i.e. on inputs already purchased for which transactions stood concluded at a higher rate of tax”, the Court answered.

The Court observed that taxable persons who had stock in trade as of January 25, 2014, or February 1, 2014 (the date from which Rule 21(8) was effective), had already paid tax at a higher rate when purchasing those goods. These goods were intended for use as inputs in manufacturing taxable goods. If Rule 21(8) were applied retrospectively, reducing the ITC to match the lower tax rate introduced later, it would cause serious financial loss to the taxable persons. Since ITC is a right accrued at the time of purchase, it cannot be reduced retroactively without clear statutory authorization. The Court held that Rule 21(8) could only apply to transactions occurring on or after April 1, 2014, when the amended provision allowed the State to restrict ITC.

State of Punjab amended the Punjab VAT Rules through a notification dated January 25, 2014, adding sub-rule (8) to Rule 21. On the same date, the State government reduced the tax rate on iron and steel goods from 4.5 percent to 2.5 percent. As a result, businesses that had purchased iron and steel at the earlier higher rate were only allowed ITC at the reduced rate when selling those goods after the tax cut.

The respondents, including Trishala Alloys Pvt. Ltd. and other companies, challenged this rule before the High Court, arguing that it retroactively reduced ITC that had already been earned at the higher tax rate. The High Court ruled in favor of the respondents, holding that on the date of introduction of Rule 21(8), there was no provision in the Punjab VAT Act that empowered the State to limit the ITC on goods already purchased before the rate reduction.

The amendment to Section 13(1) of the Punjab VAT Act changed the way ITC was granted. Previously, ITC was available at the time of purchase if the goods were intended for sale or manufacture. The amendment replaced “for sale” and “for use in manufacture” with “are sold” and “are used in manufacture,” meaning ITC could only be claimed after the goods were actually sold or used. However, before this amendment took effect, the State of Punjab introduced Rule 21(8) on January 25, 2014.

The High Court observed that the enabling amendment to Section 13(1) of the Punjab VAT Act came into effect only on April 1, 2014. Therefore, Rule 21(8) could not be applied before that date.

The State of Punjab appealed this decision, arguing that since ITC is linked to output tax, the change in the tax rate should also impact ITC. The State also pointed out that it had the power to make retrospective rules under Section 70(2) of the Punjab VAT Act, provided the change was in the public interest.

However, the Supreme Court upheld the High Court's decision and dismissed the appeals filed by the State of Punjab.

Case no. – Civil Appeal No. 2212 of 2024

Case Title – State of Punjab & Ors. v. Trishala Alloys Pvt. Ltd.

Citation : 2025 LiveLaw (SC) 221