M/S MODI NATURALS LTD.versusTHE COMMISSIONER OF COMMERCIAL TAX UP

                 [2023] 15 S.C.R. 746 : 2023 INSC 974



                            CASE DETAILS

                     M/S MODI NATURALS LTD.
                                     v.
        THE COMMISSIONER OF COMMERCIAL TAX UP
                (Civil Appeal No (S). 5822-5823 of 2023)
                          NOVEMBER 06, 2023
              [DR. DHANANJAYA Y. CHANDRACHUD, CJI,
           J. B. PARDIWALA AND MANOJ MISRA, JJ.]

                             HEADNOTES

      Issue for consideration: (a) Whether the assessee is entitled to claim
full amount of tax paid towards the purchase of raw Rice Bran as ITC on the
basis of the provisions of s.13(1)(a) r/w. S. No. 2(ii) of the Table appended
thereto and s.13(3)(b) r/w. Explanation (iii) of s.13 of the UP VAT Act?; (b)
Whether the scope of the word “goods” as defined u/s. 2(m) of the UP VAT
Act as outlined in s.13(1)(f) of the UP VAT Act should be limited to only
“taxable goods”?; (c) Whether the decision of the Supreme Court in the case
of M.K. Agro Tech has any application to the case on hand?
      Uttar Pradesh Value Added Tax Act, 2008 – On the basis of the
statutory provisions of s.13(1)(a) read with S.No. 2(ii) of the Table
appended thereto and s.13(3)(b) read with Explanation (iii) to s.13 of
the UP VAT Act, the assessee claimed full amount of tax paid as ITC
– The High Court relying on the decision of this Court in the case of
State of Karnataka v. M.K. Agro Tech Private Limited, took the view
that a dealer has no vested right to seek the benefit of ITC as the same
is just a concession by virtue of the provisions of the Act – The High
Court held that the provisions of s.13(1)(a) read with S. No. 2(ii) of the
Table appended thereto and s.13(3)(b) r/w. Explanation (iii) of the UP
VAT Act are not applicable as asserted by the assesee and the case of
the assessee stood covered by s.13(1)(f) of the UP VAT Act – Propriety:
     Held: A bare perusal of the scheme u/s. 13 of the UP VAT Act [and
specifically u/s. 13(1)(a)] makes it abundantly clear that in cases where the
                                    746
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                            747
              COMMERCIAL TAX UP

purchased goods (in the present case Rice Bran) are used in the manufacture
of taxable goods (in the present case RBO and physically refined RBO)
except the non-VAT goods, and where such manufactured goods are sold
within the State or in the course of inter-state trade and commerce, the
registered dealers (like the assessee herein) are entitled to claim input tax
credit of the full amount – The charging section of the UP VAT Act, therefore,
entitles the assessee to claim full amount of tax paid on the purchases as
ITC – Furthermore, s.13(3)(b) of the UP VAT Act, introduces the concept of
proportionality in the scheme of the enactment and by means of a deeming
fiction provides that where during the manufacture of VAT goods, exempt
and non-VAT goods (except as by-product or waste product) are produced,
the amount of ITC credit may be claimed and may be allowed in proportion
to the extent they are used or consumed in manufacture of taxable goods
other than the non-VAT goods and exempt goods – Explanation (iii) to
Section 13, forbids the Assessing Authority as well as the assessee from
raising any dispute in regard to the allowability of the ITC in cases where
exempted goods are being produced as a by-product or waste product during
the process of manufacture – The High Court committed an error in passing
the impugned judgment relying on the decision rendered in M.K. Agro Tech
– The impugned common judgment and order passed by the High Court is
set aside. [Paras 47, 48, 50]
    Uttar Pradesh Value Added Tax Act, 2008 – s. 2(m) – Scope of the
word “goods”:
     Held: The definition of “goods” under Section 2(m) of the UP VAT
Act does not differentiate between exempt and taxable goods and equally,
the word “goods” under Section 13(1)(f) of the UP VAT Act has also not
been qualified by the word “taxable”. [Para 29]
     Interpretation of Statutes – Taxing Statute:
      Held: It is well accepted that a statute must be construed in accordance
with the intention of the Legislature and the courts should act upon the true
intention of the Legislation while applying law and while interpreting law.
In the litigation on hand, we have been asked to interpret the provisions of
a taxing statute. [Para 36]
748         SUPREME COURT REPORTS                      [2023] 15 S.C.R.



       LIST OF CITATIONS AND OTHER REFERENCES

     State of Karnataka v. M.K. Agro Tech Private Limited, [2017] 12 SCR
1007 : (2017) 16 SCC 210 – held inapplicable.
      CIT v. Kasturi and Sons Ltd. (1999) 3 SCC 346 : [1999] 1 SCR 1207;
State of W.B. v. Kesoram Industries Ltd. (2004) 10 SCC 20 – relied on.
      Central India Spg. and Wvg. & Mfg. Co. Ltd. v. Municipal Committee,
Wardha [1958] SCR 1102; AIR 1958 SC 341; CIT v. Jalgaon Electric
Supply Co. Ltd. [1960] SCR 880 : AIR 1960 SC 1182; CIT v. Central India
Industries Ltd. [1972] 1 SCR 619 :(1972) 3 SCC 311; Azam Jah Bahadur
v. Expenditure Tax Officer (1971) 3 SCC 621 : AIR 1972 SC 2319 : [1972]
1 SCR 470; Kapil Mohan v. CIT [1998] 3 Suppl. SCR 647 : (1999) 1 SCC
430; State of M.P. v. Rakesh Kohli [2012] 6 SCR 661 :(2012) 6 SCC 312;
Rajasthan Rajya Sahakari Spg. & Ginning Mills Federation Ltd. v. CIT
(2014) 11 SCC 672; State Bank of Travancore v. CIT (1986) 2 SCC 11 :
1986 SCC (Tax) 289 – referred to.
     Partington v. Attorney General (1869) LR 4 HL 100; Cape Brandy
Syndicate v. IRC (1921) 1 KB 64; Canadian Eagle Oil Co. Ltd. v. Selection
Trust Ltd., 1946 AC 119 at p. 140 (HL); Ormond Investment Co. v. Betts
1928 AC 143 (HL); Mapp v. Oram 1970 AC 362 : (1969) 3 WLR 557 :
(1969) 3 All ER 215 (HL); IRC v. Ross and Coulter (1948) 1 All ER 616
(HL) – referred to.

       OTHER CASE DETAILS INCLUDING IMPUGNED
              ORDER AND APPEARANCES

     CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5822-5823
of 2023.
     From the Judgment and Order dated 03.05.2019 of the High Court of
Judicature at Allahabad in CTR Nos.148 of 2018 and 315 of 2017.
      Appearances:
    Arvind P Datar, Sr. Adv., Saubhagya Agarwal, Arjun Sharma, Shreyas
Maheshwari, Ms. Sukanya Das, M/s. Karanjawala & Co., Advs. for the
Appellant.
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                             749
              COMMERCIAL TAX UP

     R. K. Raizada, AAG, Bhakti Vardhan Singh, Anuroop Chakravarti,
Ankit Khatri, Advs. for the Respondent.
      Avi Tandon, Santosh Kumar Gupta, Ms. Meghna Tandon, Ami Tandon,
Srinivas Vishven, Mohit Prasad, Ms. Vanshika Gupta, Anish Agarwal, Mohit
Shivakumar, Dushyant Sharma, Advs. for the Intervenor.

       JUDGMENT / ORDER OF THE SUPREME COURT

                                JUDGMENT
     J. B. PARDIWALA, J.
      1. Since the issues raised in both the captioned appeals are the same, the
parties are also the same and the challenge is also to the self-same judgment
passed by the High Court, those were taken up for hearing analogously and
are being disposed of by this common judgment and order.
      2. For the sake of convenience, the appellant shall hereinafter be
referred to as the assessee and the respondent shall hereinafter be referred
to as the revenue.
      3. These appeals are at the instance of an assessee, duly registered
under Section 17 of the Uttar Pradesh Value Added Tax Act, 2008 (for
short, ‘the UP VAT Act’) and are directed against the common judgment
and order dated 03.05.2019 passed by the High Court of Judicature at
Allahabad in the Commercial Tax Revisions Nos. 315 of 2017 and 148 of
2018 respectively, by which the High Court allowed both the Commercial
Tax Revisions filed by the revenue against the Orders dated 04.05.2016 and
05.07.2017 respectively passed by the Commercial Tax Tribunal, Bareilly
Bench, Bareilly and thereby took the view that the assessee is not entitled to
the full benefit of Input Tax Credit (for short, ‘ITC’) claimed on the goods
purchased by it for manufacturing its final product.
     FACTUAL MATRIX
      4. The assessee is a company engaged in the business of manufacture
and sale of Rice Bran Oil (for short, ‘RBO’) and Physical Refined RBO.
The assessee as stated above is a registered dealer under the UP VAT Act
and the RBO manufactured by the assessee falls within the ambit of “taxable
goods” under the UP VAT Act. For the purpose of manufacturing RBO, the
750           SUPREME COURT REPORTS                         [2023] 15 S.C.R.


assessee procures Rice Bran (for short, ‘inputs’/‘purchased goods’) and
follows the Solvent Extraction Process. During the manufacturing process of
RBO a by-product in the form of “De-Oiled Rice Bran” (for short, ‘DORB’)
is also produced. DORB falls within the category of exempted goods under
S. No. 4 of Schedule – I of the UP VAT Act.
     5. The dispute between the parties relates to the assessment years
2013-14 and 2015-16 respectively.
       6. The assessee by processing Rice Bran in its solvent extraction
plant produced 13.77% taxable goods i.e., RBO and 83.63% by-product
i.e., DORB. As stated, aforesaid by further refining the RBO, the physical
refined RBO is also produced. The record reveals that for the Assessment
Year 2013-14, the assessee purchased 8,21,935.71 quintals of Rice Bran
for a sum of Rs. 93,69,53,404.00 and paid tax of Rs. 4,68,47,670.00. By
processing the inputs, 1,13,180.54 quintals of RBO was produced and
6,87,138.25 quintals of DORB was produced. Out of 1,13,180.54 quintals of
RBO, 93,241.15 quintals of RBO was further refined to produce 76,068.37
quintals of physical refined RBO. The said quantity of physical refined RBO
and the balance quantity of RBO (19,939.40 quintals) was sold within the
State of Uttar Pradesh for Rs. 45,91,66,611 and Rs. 9,60,11,540 respectively
aggregating to a total of Rs. 55,51,78,151/-. The assessee’s tax liability on
the said sales was calculated at Rs. 2,77,58,908/-.
      7. On the basis of the statutory provisions of Section 13(1)(a) read with
S. No. 2(ii) of the Table appended thereto and Section 13(3)(b) read with
Explanation (iii) to Section 13 of the UP VAT Act, the assessee claimed full
amount of tax paid as ITC i.e., a sum of Rs. 4,68,47,670/-. The claim of the
assessee came to be rejected vide the Order of the Deputy Commissioner,
Tax Fixation, Div. – I, Pilibhit passed in terms of Section 28(2)(i) of the UP
VAT Act. It is the case of the revenue that had the assessee been permitted
to avail the full ITC, it would have led to a loss of Rs. 1,90,88,763.00 to
the State exchequer.
      8. In connection with both the Assessment Years i.e. 2013-14 and 2015-
16, respectively vide two separate orders, the Deputy Commissioner took
the view that in terms of Section 13(1)(f), the assessee could have availed
the ITC on the inputs only vis-à-vis the taxable sales, as the sale price of the
final goods was lesser than the manufacturing cost of the purchased goods.
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                           751
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

In other words, according to the Deputy Commissioner the term “goods” in
Section 13(1)(f) of the UP VAT Act means only the taxable goods. The matter
ultimately reached before the Additional Commissioner Grade II, (Appeals),
2nd Commercial Tax, Bareilly. The Incharge Additional Commissioner for
the Assessment Year 2015-16 took the view that the assessee was entitled
to claim full ITC and accordingly allowed the appeal of the assessee. The
Incharge Additional Commissioner accepted the case put up by the assessee
that the word “goods” in Section 13(1)(f) of the UP VAT Act cannot be
restricted to only “taxable goods”. However, for the Assessment Year 2013-
14, the Additional Commissioner proceeded to remand the matter to the Tax
Fixation officer for passing the re-tax fixation order.
      9. The revenue being dissatisfied with the view taken by the Additional
Commissioner went in appeal before the Commercial Tax Tribunal, Bareilly
Bench, Bareilly in so far as the Assessment Year 2015-16 is concerned. We
may clarify that so far as the Assessment Year 2013-14 is concerned, it was
the assessee who had to go before the Commercial Tax Tribunal by way of a
second appeal as the Additional Commissioner had allowed the appeal filed
by the assessee and had remanded the matter to the Tax Fixation Officer.
     10. Although the Commercial Tax Tribunal passed two separate orders
with respect to the two assessment years referred to above, yet the issues
between the parties remained common. Ultimately, it is the revenue who went
before the High Court with two Commercial Tax Revision Applications being
the Revision No. 148 of 2018 and Revision No. 315 of 2017 respectively.
Both the revision applications were heard analogously by the High Court.
      11. The High Court formulated the following substantial question of
law for its consideration: “Whether under the facts and circumstances of
the case, the Commercial Tax Tribunal was legally justified in granting the
benefit of ITC of Rs. 1,90,88,763.00 which was reversed by the Assessing
Authority?”
      12. The High Court relying on the decision of this Court in the case of
State of Karnataka v. M.K. Agro Tech Private Limited, reported in (2017) 16
SCC 210 took the view that a dealer has no vested right to seek the benefit
of ITC as the same is just a concession by virtue of the provisions of the
Act. The High Court held that the provisions of Section 13(1)(a) read with
S. No. 2(ii) of the Table appended thereto and Section 13(3)(b) read with
752           SUPREME COURT REPORTS                         [2023] 15 S.C.R.


Explanation (iii) of the UP VAT Act are not applicable as asserted by the
assesee and the case of the assessee stood covered by Section 13(1)(f) of
the UP VAT Act. The High Court relying on Section 13(1)(f) of the UP VAT
Act took the view that the assessee is not entitled to claim full ITC on the
inputs. The High Court accordingly allowed both the revision applications
filed by the revenue.
      13. In such circumstances referred to above, the asseesee is here before
this Court with the present appeals.
      SUBMISSIONS ON BEHALF OF THE ASSESSEE
      14. Mr. Arvind Datar, the learned Senior Counsel appearing for the
assessee vehemently submitted that the High Court committed a serious error
in passing the impugned judgment. According to Mr. Datar the impugned
judgment of the High Court is incorrect as it has failed to take notice of the
fact that the case of the assessee herein is squarely covered by the provisions
of Section 13(1)(a) read with S. No. 2(ii) of the Table appended thereto
and Section 13(3)(b) read with Explanation (iii) of the UP VAT Act. It was
argued that the High Court erroneously held that Section 13(1)(f) of the UP
VAT Act is applicable to the case on hand.
      15. Mr. Datar further argued that the entire edifice of the impugned
judgment of the High Court is based on incorrect application of the decision
of this Court in case of M.K. Agro Tech (supra). He would argue that the
statutory provisions under the Karnataka Value Added Tax Act, 2003 and
UP VAT Act are distinct and different in all respects. He pointed out that
the UP VAT Act specifically carves out an exception for the by-products and
waste products respectively. Even if those are exempt goods or non-VAT
Goods, the ITC is permissible.
      16. Mr. Datar further argued that the definition of the word “goods”
under Section 2(m) of the UP VAT Act does not differentiate between the
exempted and taxable goods and equally the word “goods” under Section
13(1)(f) of the UP VAT Act cannot be said to be qualified by the word
“taxable”. He pointed out that, if the legislative intent was to qualify “goods”
with the word “taxable”, it could have been said so by the Legislature in
Section 13 of the UP VAT Act itself. It was argued that if the legislative
intent in the 2010 amendment was to limit the scope and ambit of the word
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                           753
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

“goods” under Section 13(1)(f) of the UP VAT Act solely to “taxable goods”,
there was nothing that prevented the concerned legislature from expressly
utilising the phrase “taxable goods” in Section 13(1)(f) of the UP VAT Act.
      17. In the last, Mr. Datar argued that in construing taxation statutes,
the court should apply the strict rule of interpretation. When the competent
legislature mandates taxing certain business/certain objects in certain
circumstances, it cannot be expounded/interpreted to those which were not
intended by the legislature.
     18. In such circumstances referred to above, Mr. Datar the learned
Senior Counsel prayed that there being merit in his appeals those may be
allowed and the impugned judgment passed by the High Court be set aside
and that of the Tribunal be affirmed.
     SUBMISSIONS ON BEHALF OF THE REVENUE
      19. Mr. R.K. Raizada, the learned Additional Advocate General
appearing for the State of UP on the other hand vehemently opposed both
the appeals submitting that no error, not to speak of any error of law could
be said to have been committed by the High Court in passing the impugned
judgment.
      20. The principal contention canvassed on behalf of the revenue is that
the use of the expression “except as by-product or waste product” in Section
13(3)(b) of the UP VAT Act is decisive and if the exempt goods or non-VAT
goods are being produced as the main products only and not being produced
as the “by-product or waste product” then in such circumstances, Section
13(3)(b) of the UP VAT Act would have no application. According to the
learned counsel, Section 13(3)(b) would be applicable only to a situation
wherein the manufacturing of the “VAT goods”, “exempt goods” and “non-
VAT goods” are not being produced as the “by-product” or “waste product”.
      21. It was argued that in the case on hand, the cumulative sale price
of the RBO and DORB respectively is more than the cost price and in such
circumstances, Section 13(3)(b) read with Explanation (iii) of the UP VAT
Act would have no applicability. It was also argued that Section 13(1)(f)
of the UP VAT Act starts with a non-obstante clause having an overriding
effect on the provision of Section 13(1)(a) of the UP VAT Act. The words
and expressions used in Section 13(1)(f) of the UP VAT Act require a textual
754          SUPREME COURT REPORTS                        [2023] 15 S.C.R.


interpretation matching with the contextual interpretation that Section 13(1)
(f) of the UP VAT Act seeks to remedy the mischief, caused by the words
used in the Table of Section 13(1)(a) of the UP VAT Act. Section 13(1)(f)
UP VAT Act restricts the amount of ITC figuring in Table of Section 13(1)
(a) UP VAT Act to the extent of tax payable on the sale value of goods or
manufactured goods, in specific cases, i.e., costing of the manufactured
taxable goods except the non-VAT goods being lower than the costing of
the taxable inputs.
     22. It was also argued that the High Court rightly placed reliance on
the decision of this Court in the case of M. K. Agro Tech (supra).
     23. In such circumstances referred to above, Mr. R.K. Raizada
submitted that there being no merit in both the appeals those may be
dismissed.
      ANALYSIS
      24. Having heard the learned counsel appearing for the parties and
having gone through the materials on record the following questions fall
for our consideration:
     a. Whether the assessee is entitled to claim full amount of tax paid
towards the purchase of raw Rice Bran as ITC on the basis of the provisions
of Section 13(1)(a) read with S. No. 2(ii) of the Table appended thereto and
Section 13(3)(b) read with Explanation (iii) of Section 13 of the UP VAT
Act?
     b. Whether the scope of the word “goods” as defined under Section
2(m) of the UP VAT Act as outlined in Section 13(1)(f) of the UP VAT Act
should be limited to only “taxable goods”?
     c. Whether the decision of this Court in the case of M.K. Agro Tech
(supra) has any application to the case on hand?
      RELEVANT PROVISIONS OF THE UP VAT ACT, 2008
    25. Before we advert to the rival submissions canvassed on either side,
we must look into few relevant provisions of the UP VAT Act:
      “2. Definitions
      xxx                         xxx                      xxx
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                    755
    COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

  (m) “goods” means every kind or class of movable property and
  includes all materials, commodities and articles involved in the
  execution of a works contract, and growing crops, grass, trees and
  things attached to, or fastened to anything permanently attached
  to the earth which, under the contract of sale, are agreed to be
  severed, but does not include actionable claims, stocks, shares
  or securities;
    Xxx                     xxx                            xxx
  (p) “input tax” in relation to a registered dealer who has
  purchased any goods from within the State, means the aggregate
  of the amounts of tax, -
  (i) paid or payable by such registered dealer to the registered
  selling dealer of such goods in respect of purchase of such goods;
  and
  (ii) paid directly to the State Government by the purchasing
  dealer himself in respect of purchase of such goods where such
  purchasing dealer is liable to pay tax under this Act on the
  turnover of purchase of such goods
  Provided that tax paid or payable in respect of transfer of right
  to use any goods shall not form part of the input tax
    Xxx                     xxx                    xxx
  (u) “manufacturer” in relation to any goods mentioned or
  described in column (2) of Schedule IV of this Act, means a
  dealer who, by application of any process of manufacture, after
  manufacture of a new commercial commodity inside the State,
  makes first sale of such new commercial commodity within the
  State, whether directly or otherwise; and includes a selling agent
  who makes sale of such new commodity on behalf of the person
  who has manufactured it;
  (v) “non-vat goods” means any of the goods mentioned or
  described in column (2) of Schedule-IV;
    Xxx                     xxx                    xxx
756           SUPREME COURT REPORTS                          [2023] 15 S.C.R.


      (z) “registered dealer” means a dealer registered under Section
      17 or Section 18;
        Xxx                        xxx                        xxx
       (ah) “taxable dealer” means a dealer who is liable to pay tax
      under this Act;
      (ai) “taxable goods” means any goods except goods mentioned
      or described in column (2) of Schedule I;
        Xxx                        xxx                        xxx
      “13. Input tax credit
      (1) Subject to provisions of this Act, dealers referred to in the following
      clauses and holding valid registration certificate under this Act, shall, in
      respect of taxable goods purchased from within the State and mentioned
      in such clauses, subject to conditions given therein and such other
      conditions and restrictions as may be prescribed, be allowed credit of
      an amount, as input tax credit, to the extent provided by or under the
      relevant clause:
      (a) Subject to conditions given in column (2), every dealer liable to pay
      tax, shall, in respect of all taxable goods except non-vat goods, capital
      goods and captive power plant, where such taxable goods are purchased
      on or after the date of commencement of this Act, be allowed credit of
      the amount, as input tax credit, to the extent provided in column 3 of
      the table below:
                                    TABLE
  Serial                    Conditions                    Extent of amount of
   No.                                                      input tax credit
   (1)                           (2)                               (3)
    1.        If purchased goods are re-sold-            Full amount of
              (i) inside the State, or                   input tax
              (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.
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                            757
    COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

  2.      If purchased goods are                    Full amount of input
                                                    tax
          used in manufacture of
          -
          (i) any goods except non-vat goods
          and where such manufactured goods
          are sold in the course of the export
          of the goods out of the territory of
          India; or
         (ii) any taxable goods except non-
              vat goods and where such
              manufactured goods are sold
              either inside the State or in the
              course of inter-State trade or
              commerce.
   3.    If purchased goods are –                      Partial amount of
                                                       input tax, which is in
         (i) transferred or consigned outside
                                                       excess of four percent
              the State otherwise than as a
                                                       of the purchase price
              result of a sale; or
                                                       on which the dealer
         (ii) used in manufacture of any has paid tax either to
              taxable goods except non-vat the registered selling
              goods and such manufactured dealer or to the State
              g o o d s a re t r a n s f e r re d o r Government”
              consigned outside the State
              otherwise than as a result of
              a sale.
     Xxx               xxx                           xxx
  (f) Notwithstanding anything to the contrary contained in this sub-
  section where goods purchased are resold or goods manufactured
  or processed by using or utilizing such purchased goods are sold,
  at the price which is lower than
       (i) purchase price of such goods in case of resale; or
       (ii) cost price in case of manufacture,
758           SUPREME COURT REPORTS                         [2023] 15 S.C.R.


           the amount of input tax credit shall be claimed and be allowed
           to the extent of tax payable on the sale value of goods or
           manufactured goods. (Clause (f) was inserted w.e.f. 20-08-2010
           vide notif. no 1101(2) dt. 20-08-2010, U.P. Act No 19 of 2010)
                 xxx                       xxx                       xxx
      (3) (a)Where purchased goods are to be used or disposed of partially
      for the purpose specified in clause (a) of sub-section (1) or otherwise,
      the input tax credit may be claimed and be allowed proportionate to
      the extent they are used or disposed of for the purposes specified in
      such clause,
      (b)Subject to the provisions of this section where during process of
      manufacture of vat goods, exempt goods and non vat goods except as
      by product or waste product are produced, the amount of input tax
      credit may be claimed and be allowed in proportion to the extent they
      are used or consumed in manufacture of taxable goods other than
      non vat goods and exempt goods Explanation:- For the purpose of
      this subsection the “exempt goods” shall include taxable goods other
      than non vat goods, which are disposed of otherwise than by way of
      sale within the State or in the course of inter-State trade or commerce
      or sale in the course of export of goods out of the territory of India or
      sale out side the State.”
                 xxx                        xxx                      xxx
      Explanation:-For the purposes of this section, –
           (i) goods for use in manufacture of any goods includes goods
           required for use, consumption or utilization in manufacture or
           processing of such goods or goods required for use in packing
           of such manufactured or processed goods;
           (ii) manufacture of any goods includes processing of such goods
           and packing of such manufactured or processed goods; and
           (iii) where during the process of manufacture of any taxable
           goods any exempt goods are produced as by-product or waste-
           product, it shall be deemed that purchased goods have been used
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                             759
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

            in the manufacture of taxable goods. Conversely, where during
            the process of manufacture of any exempt goods any taxable
            goods are produced as by-product or waste product; it shall be
            deemed that purchased goods have been used in the manufacture
            of exempt goods.
            (iv) where during the process of manufacture of any vat goods
            any non-vat goods are produced as by-product or waste-product,
            it shall be deemed that purchased goods have been used in the
            manufacture of vat goods. Similarly, where during the process of
            manufacture of any non-vat goods any vat goods are produced as
            by-product or waste-product, it shall be deemed that purchased
            goods have been used in the manufacture of non-vat goods.
            (w.e.f.01.01.2008).”
                                                         (Emphasis supplied)
      26. As the entire debate revolves around the interpretation of Section 13
of the UP VAT Act, we must look into the Statement of objects and reasons
for the enactment of Section 13(1)(f) by way of the 2010 Amendment Act.
In the Statement of objects and reasons of the Uttar Pradesh Value Added
Tax (Amendment) Bill, 2010 (for short, “the 2010 Amendment”), it has
been stated that the amendment was to provide for –
     “xxx
     (d) limiting the input tax credit to the extent of tax payable on the sale
     value of goods or manufactured goods in cases where goods purchased
     are resold or goods manufactured or processed by using or utilizing
     such purchased goods are sold at a price lower than purchase price
     or cost price;”
                                                         (Emphasis supplied)
      27. The plain reading of the aforesaid would indicate that the legislative
intent was never to limit or circumscribe the scope of “goods” as outlined
in Section 13(1)(f) to only “taxable goods”. The amendment was effected
with some definite purpose. The mischief that was sought to be addressed
by virtue of introducing Section 13(1)(f) to the scheme of the UP VAT Act
was one where the goods (including taxable, exempt goods, by-products
760           SUPREME COURT REPORTS                         [2023] 15 S.C.R.


or waste products) manufactured were being sold at a price lower than the
cost price.
     28. It is in such cases that the extent of permissible or allowable
ITC would be limited to the tax payable on the sale value of the goods or
manufactured goods. We are at one with Mr. Datar that this was the sole
purpose of the 2010 Amendment.
     29. We are also at one with Mr. Datar that the definition of “goods”
under Section 2(m) of the UP VAT Act referred to above does not differentiate
between exempt and taxable goods and equally, the word “goods” under
Section 13(1)(f) of the UP VAT Act has also not been qualified by the word
“taxable”.
      30. Mr. Datar is right in his submission that the necessary corollary
to the reading of the provision ought to be that the goods which are
manufactured/produced by using or utilizing the purchased goods and whose
sale price is being considered for applying Section 13(1)(f) of the UP VAT
Act, ought to be taxable goods.
      31. The aforesaid is further manifested from the fact that wherever
the legislative intent was to qualify “goods” with the word “taxable”, it has
been so done by the Legislature in Section 13 of the UP VAT Act itself.
      32. Had the legislative intent of the 2010 Amendment been to limit the
scope and ambit of “goods” under Section 13(1)(f) solely to “taxable goods”,
there was nothing that could have prevented the Legislature from expressly
using the phrase “taxable goods” in Section 13(1)(f) of the UP VAT Act.
      33. Mr. Datar is right in his submission that the said omission in Section
13(1)(f) is all the more glaring considering that the said amendment was
inserted in the year 2010.
      34. In the aforesaid context, our attention was also drawn by Mr. Datar
to the provisions of Rule 23(6) of the Uttar Pradesh Value Added Tax Rules,
2006 (for short, “the UP VAT Rules”) (which provides for the computation
of reverse ITC in cases of a dealer other than a trader), wherein the word
“goods” has not been qualified by “taxable” and rather has used the word
“any” to expressly convey the unequivocal legislative mandate. Rule 23(6)
of the UP VAT Rules is reproduced hereunder:
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                               761
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

      “23. Computation of reverse input tax credit in cases of a dealer other
      than trader:
      (1) In case of a dealer, other than a dealer referred to in sub-rule (1) of
      rule 22, amount of reverse input tax credit, in respect of any quantity
      or measure of any goods-
      xxx                           xxx                                xxx
      (6) In respect of any quantity or measure of any goods manufactured
      or processed by using or utilizing purchased goods, sold at the price
      which is lower than cost price, the amount of reverse input tax credit
      shall be equal to the differential amount of tax paid or payable on the
      purchase price of such goods and tax paid or payable on sale price of
      manufactured or processed goods sold.”
    35. We take notice of the fact that “taxable goods” has been separately
defined under Section 2(ai) of the UP VAT Act. The definition reads thus:
      “(ai) “taxable goods” means any goods except goods mentioned or
      described in column (2) of Schedule I;”
      GENERAL PRINCIPLES FOR INTERPRETATION OF TAXING
      STATUTES
      36. It is well accepted that a statute must be construed in accordance
with the intention of the Legislature and the courts should act upon the true
intention of the Legislation while applying law and while interpreting law.
In the litigation on hand, we have been asked to interpret the provisions of
a taxing statute.
     37. Justice G.P. Singh, in his treatise Principles of Statutory
Interpretation (14th Edn. 2016 p. 879) after referring to Micklethwait, In
re;1 Partington v. Attorney General2, Rajasthan Rajya Sahakari Spg. &
Ginning Mills Federation Ltd. v. CIT3, State Bank of Travancore v. CIT4



1 (1855) LR 11 Ex 452 : 156 ER 908
2 (1869) LR 4 HL 100
3 (2014) 11 SCC 672
4 (1986) 2 SCC 11 : 1986 SCC (Tax) 289
762            SUPREME COURT REPORTS                                [2023] 15 S.C.R.


and Cape Brandy Syndicate v. IRC5, summed up the law in the following
manner:
      “A taxing statute is to be strictly construed. The well-established rule in
      the familiar words of Lord Wensleydale, reaffirmed by Lord Halsbury6
      and Lord Simonds7, means:
      “The subject is not to be taxed without clear words for that purpose;
      and also that every Act of Parliament must be read according to the
      natural construction of its words.””
      38. In a classic passage Lord Cairns stated the principle thus:
      “If the person sought to be taxed comes within the letter of the law he
      must be taxed, however great the hardship may appear to the judicial
      mind to be. On the other hand, if the Crown seeking to recover the tax,
      cannot bring the subject within the letter of the law, the subject is free,
      however apparently within the spirit of law the case might otherwise
      appear to be. In other words, if there be admissible in any statute, what
      is called an equitable construction, certainly, such a construction is
      not admissible in a taxing statute where you can simply adhere to the
      words of the statute.”
      39. Viscount Simon quoted8 with approval a passage9 from Rowlatt,
J. expressing the principle in the following words: (Cape Brandy case10,
KB p. 71)
      ‘… in a taxing Act one has to look merely at what is clearly said. There
      is no room for any intendment. There is no equity about a tax. There
      is no presumption as to a tax. Nothing is to be read in, nothing is to
      be implied. One can only look fairly at the language used.’”
      40. It was further observed:
      “In all tax matters one has to interpret the taxation statute strictly.


5 (1921) 1 KB 64
6 Ed: Tennant v. Smith, 1892 AC 150 at p. 154
7 Ed. : St Aubyn v. Attorney General, 1952 AC 15 at p. 32 (HL)
8 Ed. : Canadian Eagle Oil Co. Ltd. v. Selection Trust Ltd., 1946 AC 119 at p. 140 (HL)
9 Cape Brandy Syndicate v. IRC, (1921) 1 KB 64
10 Ibid.
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                              763
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

      Simply because one class of legal entities is given a benefit which is
      specifically stated in the Act, does not mean that the benefit can be
      extended to legal entities not referred to in the Act as there is no equity
      in matters of taxation….”
      41. Yet again, it was observed:
      “It may thus be taken as a maxim of tax law, which although not to be
      overstressed ought not to be forgotten that,
            ‘the subject is not to be taxed unless the words of the taxing
            statute unambiguously impose the tax [on] him’, (Russell v.
            Scott11, AC p. 433).
      The proper course in construing revenue Acts is to give a fair and
      reasonable construction to their language without leaning to one side
      or the other but keeping in mind that no tax can be imposed without
      words clearly showing an intention to lay the burden and that equitable
      construction of the words is not permissible [Ormond Investment Co.
      v. Betts12 ]. Considerations of hardship, injustice or anomalies do
      not play any useful role in construing taxing statutes unless there be
      some real ambiguity [Mapp v. Oram13]. It has also been said that if
      taxing provision is
            ‘so wanting in clarity that no meaning is reasonably clear, the
            courts will be unable to regard it as of any effect [IRC v. Ross
            and Coulter [IRC v. Ross and Coulter14]’.”
     42. Further elaborating on this aspect, the learned author stated as
follows:
      “Therefore, if the words used are ambiguous and reasonable open
      to two interpretations benefit of interpretation is given to the subject
      [Central India Spg. and Wvg. & Mfg. Co. Ltd. v. Municipal Committee,
      Wardha15]. If the legislature fails to express itself clearly and the


11   1948 AC 422 : (1948) 2 All ER 1 (HL)
12   1928 AC 143 (HL)
13   1970 AC 362 : (1969) 3 WLR 557 : (1969) 3 All ER 215 (HL)
14   (1948) 1 All ER 616 (HL)
15   AIR 1958 SC 341
764             SUPREME COURT REPORTS                          [2023] 15 S.C.R.


       taxpayer escapes by not being brought within the letter of the law,
       no question of unjustness as such arises [CIT v. Jalgaon Electric
       Supply Co. Ltd.16 ]. But equitable considerations are not relevant in
       construing a taxing statute, [CIT v. Central India Industries Ltd. 17],
       and similarly logic or reason cannot be of much avail in interpreting
       a taxing statute [Azam Jah Bahadur v. Expenditure Tax Officer 18]. It
       is well settled that in the field of taxation, hardship or equity has no
       role to play in determining eligibility to tax and it is for the legislature
       to determine the same [Kapil Mohan v. CIT19]. Similarly, hardship
       or equity is not relevant in interpreting provisions imposing stamp
       duty, which is a tax, and the court should not concern itself with the
       intention of the legislature when the language expressing such intention
       is plain and unambiguous [State of M.P. v. Rakesh Kohli 20 ]. But just
       as reliance upon equity does not avail an assessee, so it does not avail
       the Revenue.”
      43. The passages extracted above, were quoted with approval by this
Court in at least two decisions being CIT v. Kasturi and Sons Ltd.21 and State
of W.B. v. Kesoram Industries Ltd.22 (hereinafter referred to as “Kesoram
Industries case”, for brevity). In the later decision, a Bench of five Judges,
after citing the above passage from Justice G.P. Singh’s treatise, summed up
the following principles applicable to the interpretation of a taxing statute:
       “(i) In interpreting a taxing statute, equitable considerations are
       entirely out of place. A taxing statute cannot be interpreted on any
       presumption or assumption. A taxing statute has to be interpreted in
       the light of what is clearly expressed; it cannot imply anything which
       is not expressed; it cannot import provisions in the statute so as to
       supply any deficiency; (ii) Before taxing any person, it must be shown
       that he falls within the ambit of the charging section by clear words



16    AIR 1960 SC 1182
17    (1972) 3 SCC 311 : AIR 1972 SC 397
18    (1971) 3 SCC 621 : AIR 1972 SC 2319
19    (1999) 1 SCC 430 : AIR 1999 SC 573
20    (2012) 6 SCC 312 : (2012) 3 SCC (Civ) 481
21    (1999) 3 SCC 346
22    (2004) 10 SCC 201
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                           765
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

     used in the section; and (iii) If the words are ambiguous and open
     to two interpretations, the benefit of interpretation is given to the
     subject and there is nothing unjust in a taxpayer escaping if the letter
     of the law fails to catch him on account of the legislature’s failure
     to express itself clearly.”
      44. Applying the aforesaid principles of interpretation, we fi nd
it difficult to accept the case put up by the revenue as doing so would
permit the assessing authority to do something indirectly what he cannot
do directly i.e., get around the mandate of the exception carved out by
Section 13(3)(b) read with Explanation (iii) by invoking Section 13(1)(f)
of the UP VAT Act.
     45. It is also pertinent to note that indisputably, the DORB which is
produced as part of the Solvent Extraction process is a by-product of the
manufacturing process. Our attention was drawn by Mr. Datar to a letter
dated 13.01.2015 addressed by the Additional Commissioner (Legal)
Commercial Tax, UP to all Zonal Additional Commissioner Grade-I,
Commercial, Tax Uttar Pradesh (Annexure P-1) which reads thus:
     “Letter No. Legal-2(1) Rice export (2014-15)/1458/ Commercial Tax
     Sender:
     The Commissioner
     Commercial Tax
     Uttar Pradesh
     To
     All Zonal Addl. Commissioner Grade-1
     Commercial Tax
     Uttar Pradesh
                                             Lucknow dated 13 Jan. 2015
     Sir,
     After examining the records of traders/ manufacturer of the rice bran
     oil, the Joint Commissioner (SIB) Commercial Tax Gonda vide his DO
766           SUPREME COURT REPORTS                         [2023] 15 S.C.R.


      letter No. 47/ Jt. Comm. (SIB) Commercial Tax Gonda dated 16.7.2011
      has submitted a detailed report. Copy of which is attached. In this
      context the Addi. Commissioner Grade-1 Commercial Tax Faizabad
      Zone, Faizabad has given the following report:
      The Joint Commissioner (SIB) Commercial Tax Gonda in the
      perspective of provisions of section 13(3) (B) read with section
      13(1)(f) of the VAT Act has expressed this presumption that if
      the sale of any taxable goals is effected at the low price than the
      purchase cost of the raw material then the trader shall get the
      benefit of ITC only up to the extent of sale value of manufactured
      goods. The trader produce the rice bran oil by purchasing the
      rice bran in which de-oiled rice bran is received as a byproduct/
      waste product. In this way such produced is sold at much lower
      price in the perspective of cost of production whereas ITC is
      being claimed on the entire amount of utilized rice bran which is
      in contra to Section 13(1)(f). In this manner the trader shall get
      the benefit of ITC on the utilized rice bran up to the limit of sale
      of produced rice bran.
      Hence in relation to above please examine the records manufacturing
      units of your zone involved in the extraction of rice bran and oil cake.
      The details of action taken in this regard be please made available within
      a period of one week.
      Encl: as above
                                                               Yours faithfully,
                                                          Sd/- Sadhna Tripathi
                                                          Addl. Commissioner
                                                      (Legal) Comm. Tax HQ,
                                                                          UP”
                                                          (Emphasis supplied)
     46. It is to be noted that the DORB falls within exempted goods under
S. No. 4 of Schedule I of the UP VAT Act. The relevant Entry is reproduced
below for ease of reference:
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                         767
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

                             “SCHEDULE I
[See clause (b) of Section 7 of Uttar Pradesh Value Added Tax Act, 2008]
                     LIST OF EXMEPTED GOODS

               SI. NO.                  Name and description of goods
                  (1)                                   (2)
                I [1.]                      xxx          xxx            xxx
                 xxx                        xxx          xxx            xxx
                   4.                 Aquatic feed; poultry feed including
                                      balanced poultry feed; cattle feed
                                      including balanced cattle feed; and
                                      cattle fodder including green fodder,
                                      chuni, bhusi, chhilka, choker, javi,
                                      gower, de-oiled rice polish, de-oiled
                                      rice bran, de-oiled rice husk, de-
                                      oiled paddy husk or outer covering
                                      of paddy; aquatic, poultry and cattle
                                      feed supplement, concentrate and
                                      additives thereof; wheat bran and
                                      de-oiled cake but excluding oil cake;
                                      rice polish; rice bran and rice husk;
                                      sanai and dhaincha”
     47. A bare perusal of the scheme under Section 13 of the UP VAT Act
[and specifically under Section 13(1)(a)] makes it abundantly clear that in
cases where the purchased goods (in the present case Rice Bran) are used in
the manufacture of taxable goods (in the present case RBO and physically
refined RBO) except the non-VAT goods, and where such manufactured
goods are sold within the State or in the course of inter-state trade and
commerce, the registered dealers (like the assessee herein) are entitled to
claim input tax credit of the full amount. The charging section of the UP
VAT Act, therefore, entitles the assessee to claim full amount of tax paid
on the purchases as ITC.
      48. Furthermore, Section 13(3)(b) of the UP VAT Act, introduces the
concept of proportionality in the scheme of the enactment and by means
of a deeming fiction provides that where during the manufacture of VAT
768          SUPREME COURT REPORTS                         [2023] 15 S.C.R.


goods, exempt and non-VAT goods (except as by-product or waste product)
are produced, the amount of ITC credit may be claimed and may be allowed
in proportion to the extent they are used or consumed in manufacture of
taxable goods other than the non-VAT goods and exempt goods.
       49. Section 13(3)(b), however, leaves a grey area with respect to cases
where the process of manufacture (such as in the present case) results in the
production of VAT goods and by-products or waste products. In such cases,
the legislature has done well to take care of the grey area by providing for
another legal fiction in the form of Explanation (iii) to Section 13 wherein
it is provided that during the manufacture of any taxable goods, any exempt
goods are produced as by-product or waste product, it shall be deemed that
the purchased goods have been used in the manufacture of taxable goods.
      50. Explanation (iii) to Section 13, therefore, forbids the Assessing
Authority as well as the assessee from raising any dispute in regard to the
allowability of the ITC in cases where exempted goods are being produced
as a by-product or waste product during the process of manufacture.
      WHETHER THE HIGH COURT WAS RIGHT IN PLACING
      RELIANCE ON THE DECISION OF THIS COURT IN THE
      CASE OF M.K. AGRO TECH PRIVATE LIMITED (SUPRA)
    51. The revenue has relied upon the decision of this Court in M.K.
Agro Tech (supra), as the basis for denying ITC to the assessee.
     52. The decision in the case of M.K. Agro Tech (supra), was rendered
by this Court, examining the claim of ITC by an assessee on the goods
purchased under the Karnataka Value Added Tax Act, 2003 (for short
“Karnataka VAT Act”).
      53. In the case of M.K. Agro Tech (supra), the assessee was engaged
in the manufacture of sunflower oil (taxable goods), which is extracted from
sunflower cake, by employing solvent extraction process. Sunflower oil cake
is the input/raw material on which VAT was payable. During the extraction
process, a ‘by-product’ in the form of de-oiled sunflower oil is produced.
The said by-product was also exempted under the Karnataka VAT Act.
     54. Section 17 of the Karnataka VAT Act relates to partial rebate and
deals with contingencies where the final products are more than one and
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                          769
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

the output tax is payable only on some products with the other remaining
products being exempted from the payment of tax. In the said case as no tax
was payable on the ‘by-product’, the ITC was only partially admissible.
Rule 131 of the Karnataka Value Added Tax Rules, 2005 (for short “KVAT
Rules”) relates to the apportionment of ITC in cases of dealer falling under
Section 17 of the Karnataka VAT Act.
     55. The relevant portion of Section 17 of the Karnataka VAT Act and
Rule 131 of KVAT Rules are reproduced below:
     “17. Partial rebate.- Where a registered dealer deducting input tax.-
     (1) makes sales of taxable goods and goods exempt under Section
     5, or
        xxx              xxx                      xxx
     Rule 131. Apportionment.— Apportionment of input tax in the case
     of a dealer falling under section 17 shall be calculated as follows.-
     (1) All input tax directly relating to sale of goods exempt under
     section 5 other than such goods sold in the course of export out of
     the territory of India, is non-deductible.
     (2) All input tax directly relating to taxable sales may be deducted,
     subject to the provisions of section 11.
     (3) Any input tax relating to both sale of taxable goods and exempt
     goods, including inputs used for non-taxable transactions, that is,
     the non-deductible input tax, may be calculated on the basis of the
     following formula:”
                                                        (Emphasis supplied)
     56. This Court while examining Section 17 of the KVAT Act, read with
Rule 131 of the KVAT Rules, held that ITC was admissible to the extent of
inputs used in the sale of taxable goods. The relevant observations of this
Court are reproduced below:
     “28. The first mistake which is committed by the High Court is to ignore
     the plain language of sub-section (1) of Section 17. This provision
     which allows partial rebate makes the said provision applicable on
     the ‘sales’ of taxable goods and goods exempt under Section 5. Thus,
770           SUPREME COURT REPORTS                          [2023] 15 S.C.R.


      this sub-section refers to ‘sale’ of the ‘goods’, taxable as well as
      exempt, and is not relatable to the ‘manufacture’ of the goods. The
      High Court has been swayed by the fact that while extracting oil from
      sunflower, cake emerges only as a by-product. Relevant event is not the
      manufacture of an item from which the said by-product is emerging.
      On the contrary, it is the sale of goods which triggers the provisions
      of Section 17 of KVAT Act. Whether it is by-product or manufactured
      product is immaterial and irrelevant. Fact remains that de-oiled cake
      is a saleable commodity which is actually sold by the respondent
      assessee. Therefore, de-oiled cake fits into the definition of “goods”
      and this commodity is exempt from payment of any VAT under Section
      5 of the KVAT Act. Thus, provisions of Section 17 clearly get attracted
      when ‘sale’ of these goods takes place.
      29. Secondly, as rightly pointed out by the learned counsel for the
      appellant, the High Court has not considered the import and effect
      of sub-rule (3) of Rule 131 of the KVAT Rules. We have already
      reproduced Rule 131, including sub-rule (3) thereof. After perusing
      Rule 131 in its entirety, it becomes clear that sub-rule (1) pertains
      to input tax directly relatable to sales of exempt goods which is non-
      deductible. Likewise, sub-rule (2) mandates that input tax directly
      relating to sale of goods shall be deductible. On the other hand, sub-
      rule (3) covers those cases where input tax is not directly relatable to
      exempt goods and taxable goods. It is therefore, applied in those cases
      where input tax relating to both sale and taxable goods and exempt
      goods is known. In that situation, formula is given under this sub-rule
      to work out the partial deduction. The High Court has neither take
      note of nor discussed sub-rule (3).
      xxx                                   xxx                        xxx
      32. On literal interpretation of Section 17 it can be gathered that it does
      not distinguish between by-product, ancillary product, intermediary
      product or final product. The expressions used are ‘goods’ and ‘sale’ of
      such goods is covered under Section 17. Both these ingredients stand
      satisfied as de-oiled cakes are goods and the respondent assessee
      had sold those goods for 8 (1993) Supp 4 SCC 536 9 (2015) 15 SCC
      125 Civil Appeal Nos. 15049-15069/2017 Page 24 of 26 valuable
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                          771
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

     consideration. We may point out there that the assessing authorities
     recorded a clear finding, which was accepted by the Tribunal as well,
     that records and statement of accounts of the respondent assessee
     clearly stipulates that after solvent extraction is completed, 88% of
     de-oiled cake remains and only 12% remains is the oil which is further
     refined in the refinery. This clearly shows that major outcome (88%)
     of the solvent extraction plant is de-oiled cake which in itself is a
     marketable good having market value.”
                                                      (Emphasis supplied)
      57. In the case of M.K. Agro Tech (supra), this Court held that only
partial ITC was permitted to the assessee as they were making taxable and
exempted sales from the dutiable raw materials procured by them. In Para
28, this Court has elaborated on the scheme under the Karnataka VAT Act, to
emphasise that the provision which allows partial rebate is made applicable
on the ‘sales’ of taxable goods and goods exempt under Section 5. It refers
to ‘sale’ of ‘goods’, taxable as well as exempt, and is not relatable to the
‘manufacture’ of the goods. Further elaboration has been made to hold that
upon the ‘sale’ of goods exempted under Section 5 of the Karnataka VAT
Act, partial rebate shall only be admissible.
     58. This Court in the said case, permitted only partial ITC as the
wordings of the provision relates only with ‘sale’ and not ‘manufacture.
This distinction has also been acknowledged.
      59. In such circumstances as aforesaid, we are of the view that the
decision of M.K. Agro Tech (supra), is not applicable to the case on hand
as the provisions under the Karnataka VAT Act are quite different compared
to that of the UP VAT Act in regard to the scheme of ITC.
     60. Section 11 of the Karnataka VAT Act reads thus:
     “11. Input tax restrictions. –
     (a) Input tax shall not be deducted in calculating the net tax payable
         in respect of —
         tax paid on purchases attributable to sale of exempted goods
         exempted under Section 5, except when such goods are sold in
         the course of export out of the territory of India;”
772           SUPREME COURT REPORTS                          [2023] 15 S.C.R.


      61. Section 11(a)(1) of the Karanataka VAT Act as above specifically
stipulates that where a sale of exempt goods takes place i.e., there is no output
tax received on such sale, the input tax paid for manufacturing/processing
such exempt goods cannot be credited while calculating the net tax. It is
beyond any pale of doubt that the UP VAT Act does not provide for any
such scheme or provision that aims at achieving the same.
     62. Au contraire, Explanation (iii) to Section 13 read with Section
13(3)(b) UP VAT Act, as outlined above, seeks to create a deeming fiction
where during the manufacture of any taxable goods any exempt goods
are produced as by-product or waste product, it shall be deemed that the
purchased goods have been used in the manufacture of taxable goods. The
scheme under the UP VAT Act therefore, is wholly distinct from the one
provided in the Karnataka VAT Act.
      63. The Karnataka VAT Act with the aid of Section 17 read with Rule
131 of the Karnataka VAT Rules seeks to provide a statutory mechanism
for grant of partial rebate where a registered dealer deducting input tax
makes sale of taxable goods as well as exempt goods. The apportionment
and attribution of input tax deductible between such sales and dispatch of
goods for such purpose, shall be made in accordance with Rule 131 of the
KVAT Rules and any input tax deducted in excess becomes re-payable
forthwith. Further, Rule 131 of the KVAT Rules specifically provides that
all input tax directly relating to sale of goods exempt under Section 5 other
than such goods sold in the course of export out of the territory of India, is
non-deductible.
       64. However, the scheme under the UP VAT Act is not the same as in
Karnataka and no such provision regarding calculation of the apportionment
etc., has been provided for under the UP VAT Act. The reliance by the High
Court therefore on this decision is not correct. It is not applicable to the
facts of the present case, and could not have been relied upon to deny the
full ITC to the assessee.
      65. Under Section 13(1)(a) read with S. No. 2 (ii) of the table appended
and Section 13(3)(b) read with Explanation (iii) of Section 13, the scheme
of ITC is concerned with the ‘manufacture’ of goods and not ‘sale’ as dealt
with in M.K. Agro Tech (supra).
 M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                           773
     COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

      66. Further, the deeming fiction as provided by the Explanation (iii) to
Section 13 makes all the difference. It says that where during the manufacture
of any taxable goods, any exempt goods are produced as by-products or
waste product, it shall be deemed that the purchased goods have been used
in the manufacture of taxable goods, creating a wholly distinct scheme to
the one envisaged under the Karnataka VAT Act.
     67. The following illustration highlights the difference between the
ITC scheme envisaged under the Karnataka VAT Act and the scheme under
the UP VAT Act:
     I. Karnataka VAT Act, 2003
     Total Sales = Rs. 1,000/-
     Taxable goods = Rs. 250/-
     Exempt goods/By-product = Rs. 700
     Non-tax goods = Rs. 50
     Total ITC on purchases = Rs. 100
     In terms of the formula prescribed in Rule 131(3), the non-deductible
     ITC shall be as follows:
     700 + 50/1000 * 100 = Rs. 75
     Only Rs. 25/- will be allowed as ITC and Rs. 75 will be disallowed
     under Section 17 of the Karnataka VAT Act, read with Rule 131
     of the KVAT Rules.
     II. Uttar Pradesh VAT Act, 2008
     Total Sales = Rs. 1,000/-
     Taxable goods (RBO) = Rs. 250
     Exempt goods (DORB) = Rs. 700
     Non-VAT goods = Rs. 50
     Total ITC on purchases = Rs. 100/-
     In terms of Explanation (iii) to Section 13 of the UP VAT Act, both
     the taxable goods and the by-product will be eligible to claim ITC.
774           SUPREME COURT REPORTS                              [2023] 15 S.C.R.


      The disallowance will be limited to non-VAT goods which is Rs.
      50/-, thus the disallowance of ITC will be Rs. 5/- only.”
     68. The aforesaid discussion as regards the salient features of the two
enactments can be outlined briefly as under:
 Provisions of the U.P. VAT Act and         Provisions of the Karnataka VAT
          U.P. VAT Rules                     Act and Karnataka VAT Rules
 13. Input tax credit                     Section 11. Input tax restrictions. –
                                          (a) Input tax shall not be deducted
 (1) ...
                                          in calculating the net tax payable in
 (f) Notwithstanding anything to the respect of-
 contrary contained in this sub-section
 where goods purchased are resold
 or goods manufactured or processed
 by using or utilizing such purchased
                                          (1) tax paid on purchases attributable to
 goods are sold, at the price which in
                                          sale of exempted goods exempted under
 lower than
                                          Section 5, except when such goods are
 (a) purchase price of such goods in case sold in the course of export out of the
 of resale; or                            territory of India;”
 (b) cost price in case of manufacture,
 the amount of input tax credit shall be
 claimed and be allowed to the extent of
 tax payable on the sale value of goods
 or manufactured goods.

                                           Section 17. Partial rebate. –Where a
                                           registered dealer deducting input tax-
                                           (1) makes sales of taxable goods and
                                           goods exempt under Section 5, or
                                           (2) in addition to the sales referred to in
                                           clause (1), dispatches taxable goods or
                                           goods exempted under Section 5 outside
                                           the State not as a direct result of sale
                                           or purchase in the course of inter-State
                                           trade, or
M/S MODI NATURALS LTD. v. THE COMMISSIONER OF                     775
    COMMERCIAL TAX UP [J. B. PARDIWALA, J.]

                         (3) puts to use the inputs purchased
                         in any other purpose (other than sale,
                         manufacturing, processing, packing or
                         storing of goods), in addition to use in
                         the course of his business,
                         apportionment and attribution of input
                         tax deductible between such sales and
                         dispatches of goods or such purpose,
                         shall be made in accordance with
                         Rules or by special methods to be
                         approved by the Commissioner or any
                         other authorised person and any input
                         tax deducted in excess shall become
                         repayable forthwith.”


                         Rule 131. Apportionment.-
                         Apportionment of input tax in the
                         case of a dealer falling under Section 17
                         shall be calculated as follows –
                         (1) All input tax directly relating to
                         sale of goods exempt under Section 5
                         other than such goods sold in the
                         course of export out of the territory
                         of India, is non-deductible.

                         (2) All input tax directly relating to
                         taxable sales may be deducted,
                         subject to the provisions of Section
                         11.

                         (3) Any input tax relating to both sale
                         of taxable goods and exempt goods
                         including inputs used for nontaxable
                         transactions, that is, the nondeductible
                         input tax, may be
                         calculated on the basis of the
                         following formula:
776            SUPREME COURT REPORTS                      [2023] 15 S.C.R.



                                       (Sales of exempt goods + nontaxable
                                       transactions) x Total input
                                       tax.
                                       (i) Non-deductible input tax = -------
                                       -----
                                       Total sales (including non-taxable
                                       transactions)
                                       (4)….
                                       (5) Where in the case of any dealer,
                                       the Commissioner is of the opinion
                                       that the application of the formula
                                       prescribed under clause (3) does not
                                       give the correct amount of deductible
                                       input tax, he may direct the dealer to
                                       adopt a special formula as he may
                                       specify. “

      69. For all the foregoing reasons, we have reached to the conclusion
that the High Court committed an error in passing the impugned judgment
relying on the decision of this Court rendered in M.K. Agro Tech (supra).
      70. In the result, both the appeals succeed and are hereby allowed.
      71. The impugned common judgment and order passed by the
High Court of Allahabad is hereby set aside and the orders passed by the
Commercial Tax Tribunal dated 04.05.2016 and 05.07.2017 are hereby
restored.
      72. Pending applications if any shall stand disposed of.


Headnotes prepared by:                                           Appeals allowed.
Ankit Gyan