Court to decide whether subcontract payment deductions under VAT Rules are independent of statutory conditions and if Input Tax Credit can be denied to bona fide purchasers without fraud allegations
In a significant development concerning the Maharashtra Value Added Tax (VAT) Act, 2002, the Bombay High Court (Division Bench) has admitted multiple appeals filed by IJM (India) Infrastructure Limited against the State of Maharashtra. The appeals challenge key aspects of VAT liability and credit under the Maharashtra Value Added Tax Rules, 2005 and the Act itself.
The appeals arise from a common judgment dated 18th November 2025 by the Maharashtra Sales Tax Tribunal, Mumbai, which dealt with issues related to the determination of taxable turnover for works contractors and the entitlement to Input Tax Credit (ITC). The High Court bench comprising Justices Suman Shyam and Gautam A. Ankhad admitted the appeals on two substantial questions of law.
The first question pertains to Rule 58(1)(b) of the Maharashtra VAT Rules, 2005, which allows deductions for subcontract payments in calculating the taxable turnover of a works contractor. The Court will examine whether this rule operates as an independent and absolute provision or if it is conditioned on and subject to Section 45(4) of the Maharashtra VAT Act, 2002. This issue is critical because Section 45(4) imposes certain statutory conditions that may affect the allowance of such deductions.
The second question involves Section 48(5) of the Maharashtra VAT Act, 2002, which deals with the denial of Input Tax Credit to purchasers. The Court will determine whether this provision can be interpreted to deny ITC to a bona fide purchaser in the absence of any allegation of fraud, collusion, or connivance, especially when the State has failed to recover the tax from the defaulting selling dealer despite undertaking to do so before the High Court.
The appellant, represented by Mr. Rahul Sarda, argued that the interpretation of these provisions has wide-ranging implications for the taxation of works contracts and the rights of purchasers claiming ITC. On admission of the appeals, the appellant chose not to press interim applications but sought leave to withdraw them with liberty to revive if required. The Court allowed the withdrawal with liberty.
The respondent State, represented by the Additional Government Pleader Mr. Himanshu Takke, waived service of notice, and the matter is now fixed for further hearing. The High Court's decision on these questions will provide much-needed clarity on the interplay between VAT rules and statutory provisions, potentially impacting the entire works contract sector and VAT compliance in Maharashtra.
Bottom Line:
Maharashtra Value Added Tax Act, 2002 - Appeals admitted on substantial questions of law concerning whether deduction for sub-contract payments under Rule 58(1)(b) of the Maharashtra Value Added Tax Rules, 2005 is independent or subject to Section 45(4) of the Act, and whether Input Tax Credit can be denied to a bona fide purchaser under Section 48(5) absent fraud, collusion or connivance.
Statutory provision(s):
Maharashtra Value Added Tax Act, 2002 Sections 45(4), 48(5); Maharashtra Value Added Tax Rules, 2005 Rule 58(1)(b)
