2025 (5) TMI 1515 - HC - GST

Entitlement to claim ITC by a registered dealer for goods that remained as closing stock and were not re-sold before the introduction of the GST regime - HELD THAT - The case in hand it is admitted by the opposite party that there was a closing stock as on 30.6.2020 which shows that the goods purchased by the opposite party have not been re-sold. Input tax credit availed with the dealer was transferred under the GST Act in Form GST TRAN -1. It is also not in dispute that the opposite party realises that he cannot claim the input tax credit as available to him then he filed Form GST TRAN -2 reversing the same input tax. Section 13 of the VAT Act prescribes various modes of availment of input tax as input tax credit on fulfilment of the conditions mentioned therein. Once the dealer admittedly on the date of introduction of GST with effect from 1.7.2017 has not sold the goods the input tax available with it cannot be said as input tax credit on the purchase of said goods as admittedly same was not sold. This Court in the case of S/S Janki Industries 2025 (3) TMI 1240 - ALLAHABAD HIGH COURT has dealt with in detail the issue involve in the present case therefore the said judgement is squarely applicable in the facts of the present case. Conclusion - The benefit of ITC under the UP VAT Act cannot be claimed for goods that remained unsold in closing stock at the time of transition to the GST regime. The introduction of the GST Act resulted in discontinuation of business under the VAT Act terminating the entitlement to carry forward ITC. Revision allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the benefit of Input Tax Credit (ITC) under the UP VAT Act can be claimed by a registered dealer for goods that remained as closing stock and were not re-sold before the introduction of the GST regime?

(b) Whether the transition from the UP VAT Act to the GST Act amounts to discontinuation of business under the earlier tax regime, thereby affecting the entitlement to carry forward ITC?

(c) The applicability and interpretation of Section 13 of the UP VAT Act and Section 18 of the UP Trade Tax Act concerning the availment and carry forward of ITC, especially in light of the introduction of the GST regime.

(d) The relevance and applicability of precedents, including the judgment in the case of M/s Farooq Agencies and the decision in S/S Janki Industries, to the facts of the present case.

(e) Whether the filing and subsequent reversal of ITC through Forms GST TRAN-1 and GST TRAN-2 under the GST Act affect the entitlement to ITC claimed under the earlier VAT regime.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Entitlement to ITC for Unsold Closing Stock under UP VAT Act

The legal framework revolves around Section 13(1)(a) of the UP VAT Act, which permits a registered dealer to claim input tax credit only if the purchased goods are re-sold either inside the State, in the course of inter-state trade, or for export outside India. The Court emphasized that ITC is linked to taxable sales of goods and cannot be claimed if the goods remain in closing stock and are not sold.

The Court relied heavily on the precedent set in S/S Janki Industries, where it was held that ITC cannot be accorded if the purchased goods are not re-sold. The facts in the present case reveal that the opposite party had a closing stock as on 30.6.2017, indicating that the goods were not sold before the GST regime commenced on 1.7.2017.

The Court interpreted the statutory provisions strictly, concluding that since the goods remained unsold, the input tax credit claimed under the VAT Act was not legally permissible. The Court applied the law to the facts, determining that the opposite party's claim to ITC for these goods was contrary to the statutory conditions.

Competing arguments by the opposite party, which suggested entitlement to ITC despite unsold stock, were rejected as inconsistent with the statutory scheme and judicial precedent.

Issue (b): Effect of Transition from UP VAT Act to GST Act on Business Continuity and ITC Carry Forward

The opposite party argued that the introduction of the GST regime did not amount to discontinuation of business under the earlier VAT regime and thus should not affect ITC entitlement. In support, reliance was placed on the Apex Court's decision in R. Hanumathappa, which dealt with the Mysore Income Tax Act.

The Court examined the analogy and found the provisions of the Mysore Income Tax Act not comparable or analogous to the UP VAT Act or the GST Act. Since the opposite party failed to demonstrate such analogy, the reliance on that precedent was held to be misplaced and not applicable.

Further, the Court considered Section 18 of the UP Trade Tax Act and the judgment in M/s Farooq Agencies, which clarified that the introduction of a new tax regime (such as the UP VAT Act replacing the Trade Tax Act) effectively ends the earlier regime, amounting to discontinuation of business under the old Act for tax purposes.

Applying this reasoning, the Court held that the transition from the UP VAT Act to the GST Act similarly resulted in discontinuation of the business under the VAT regime as of 30.6.2017. Therefore, the ITC available under the VAT Act could not be carried forward beyond that date.

The opposite party's submission that the Court in Farooq Agencies had imposed an additional condition under Section 18 was rejected after scrutiny of the statutory provisions and judicial reasoning. The Court reaffirmed that no new condition was added but that the legal effect of the new regime's introduction was correctly identified as termination of the old regime.

Issue (c): Filing and Reversal of ITC under GST Forms TRAN-1 and TRAN-2

The opposite party had filed Form GST TRAN-1 to carry forward ITC from the VAT regime to the GST regime but subsequently filed Form GST TRAN-2 reversing the ITC claimed, effectively relinquishing the balance ITC available.

The Court noted this sequence and observed that the reversal of ITC through TRAN-2 indicated the opposite party's acknowledgment that the ITC could not be legitimately claimed. This conduct reinforced the conclusion that the ITC benefit under the VAT Act was not available for the closing stock as on 30.6.2017.

The Court held that the impugned order granting ITC benefit without considering this material was erroneous and liable to be set aside.

Issue (d): Applicability of Precedents and Interpretation of Statutory Provisions

The Court extensively discussed the precedents cited by both parties. The revisionist relied on the earlier decision in S/S Janki Industries, which the Court found directly applicable and authoritative. The opposite party's attempt to distinguish that precedent or to rely on Farooq Agencies and other Apex Court judgments was not accepted due to factual and legal dissimilarities.

The Court emphasized the strict interpretation of Section 13 of the VAT Act and the effect of the new GST regime on the continuity of business and ITC claims. It rejected the argument that the introduction of GST did not amount to discontinuation of business under the VAT Act.

3. SIGNIFICANT HOLDINGS

"Input tax credit can be claimed as per Section 13 (1) (a) table i.e. if purchased goods are re-sold-(i) inside the State, or(ii) in the course of inter-state trade or commence; or (iii) in the course of the export of the goods out of the territory of India. Once the purchased goods are re-sold as taxable sale as contemplated under Section 13 of the VAT Act, then only input tax credit can be availed and not otherwise."

"On introduction of new tax regime i.e. UP VAT Act, the erstwhile regime come to an end. When the new tax regime come into place, the opposite party discontinued its business under the old Act i.e. Trade Tax Act, accordingly."

"The provisions of Mysore Income Tax Act are not analogous to the VAT Act and GST Act. In the event, the provisions are not analogous, the judgement is of no aid to the opposite party."

"The opposite party admittedly on the date of introduction of GST with effect from 1.7.2017 has not sold the goods, the input tax available with it cannot be said as input tax credit on the purchase of said goods as admittedly same was not sold."

The Court concluded that the benefit of ITC under the UP VAT Act cannot be claimed for goods that remained unsold in closing stock at the time of transition to the GST regime. The introduction of the GST Act resulted in discontinuation of business under the VAT Act, terminating the entitlement to carry forward ITC. The filing and reversal of ITC through GST forms confirmed the opposite party's acknowledgment of this position. Consequently, the impugned order granting ITC benefit was set aside, and the revision was allowed in favor of the Revenue.