Input Tax Credit on Closing Stock – No Vested Right to Carry Forward Unless ITC Had Matured Under VAT❞
"A tax credit is not an absolute right—it is a conditional, statutory benefit. It matures only when the preconditions prescribed by law are satisfied."
— Allahabad High Court in Commissioner Commercial Tax v. S/S Ravi Prakash Rahul Prakash
[2025] 174 taxmann.com 771 (All)
Judgment at a Glance
The Allahabad High Court has, in a recent and significant ruling, clarified the legal position on transitional input tax credit (ITC) concerning unsold closing stock under VAT, carried into the GST regime. The judgment decisively settles that no vested right to transitional ITC arises where the input tax under the UPVAT regime had not matured into a credit due to absence of a taxable resale.
Key Legal Proposition:
Section 140(1) of the CGST/UPGST Act permits transition of credit only if:
Such credit was admissible under the previous law (e.g., UPVAT), and
Such credit is eligible under GST law.
Where the input tax credit never crystallised under the VAT law, no right can be said to have accrued for transition into GST.
Deep Legal Dive: Why ITC on Closing Stock Was Denied
| Parameter | Legal Position Under UPVAT | Effect Under GST Transition |
|---|---|---|
| Nature of Input Tax Credit | Contingent benefit, conditional on resale of purchased goods | Cannot be treated as a vested right under GST |
| Statutory Condition (UPVAT) | Section 13(1): Credit available only on resale of goods as taxable sales | If goods not resold, ITC not matured → Not eligible for transition |
| Closing Stock as on 01.07.2017 | Held as inventory; not yet sold | No ITC allowed under UPVAT → Ineligible to be carried forward |
| Legal Character of Credit | Not enforceable unless VAT conditions fully met | Section 140 bars transition of unenforceable credit |
| GST Classification of Stock | Irrelevant to VAT conditions | ITC entitlement judged under old law, not GST status |
What the Court Held
-
Unmatured Credit Cannot Be Transitioned:
Since the goods were unsold as of 1 July 2017, no enforceable right to ITC existed under UPVAT. Thus, the transition claim was without merit. -
Vested Rights Doctrine Inapplicable:
The Court distinguished between tax paid on purchases and tax credit entitlement. Until the resale, tax paid remains a cost, not credit. -
TRAN-2 Filing Not Voluntary, But Mandatory:
The department’s insistence that the dealer revise the TRAN-2 return to reverse the incorrect credit was valid, as the transitional claim had no legal basis. -
GST Classification Doesn’t Determine VAT ITC:
Just because the goods were taxable under GST does not create a retrospective VAT credit, especially when VAT conditions weren't met.
Principle Reaffirmed
The Court reaffirmed its earlier ruling in Janki Industries Nai Basti, where a similar denial of transitional credit was upheld on the same logic. The consistency of interpretation lends this case greater weight as a guiding precedent.
Professional Interpretation: Key Lessons for Practitioners
-
Transitional ITC ≠ Automatic Right
Professionals must educate clients that mere tax payment under VAT does not equal eligible credit unless all legal preconditions were met. -
Closing Stock ≠ Carry Forward
Verify whether goods forming part of closing stock on 30.06.2017 were resold under UPVAT. If not, no credit should have been transitioned. -
Dual Eligibility Test
Transitional credit is subject to eligibility under both:
- VAT (pre-GST law) and
- GST (post-July 2017 law) -
Audit of TRAN-1/2 Entries Now Critical
Any mismatch in the closing stock vis-à-vis resold goods should be critically examined and reconciled. Clients may face reversal notices, interest liability, or show cause if errors remain.
Strategic Compliance Tip:
Cross-verify VAT returns, sales registers, and closing stock before availing transition credit. Ensure ITC was earned and not merely booked. Adopt a conservative approach in claiming legacy credits—litigation risk is now well-established.
Conclusion: No Resale, No Credit – Law Now Settled
The ruling sends a clear message—input tax credit that had not matured under the previous law cannot be grandfathered into GST. Transitional credit is not a loophole for reviving dormant or contingent benefits from the VAT era.
Professionals should update their advisory notes, realign TRAN-1/2 reconciliation processes, and prepare clients for possible scrutiny on transitional credit already claimed.
“Credit is not a matter of right unless law expressly grants it. Legacy tax regimes cannot be rewritten under the guise of transition.”
— Allahabad High Court
