(1) A dealer claiming input tax under Section 18, in respect of capital goods, as defined under clause (x) of Section 2, shall, apply in Form JVAT 118 to the Prescribed Authority within thirty days of commencement of commercial production or sale of taxable goods or at the time of applying Registration under Section 25 of the Act.

(2) The Prescribed Authority shall review such application to ensure that it contains all the information required and inform the dealer within one month from the date of receipt of the application that it was received within the prescribed time, and where it is not satisfied that the particulars contained in the application are correct and complete, and after giving the dealer a reasonable opportunity of being heard, it shall reject the application for reasons to be recorded in writing and for this purpose the prescribed authority shall issue a notice in JVAT 302.

(3) The Prescribed Authority shall inform the dealer eligible for Input Tax Credit in Form JVAT 406 within thirty days of receipt of an application, which is correct and complete.

(4) Deduction of input tax under Section 18 shall be subject to the following conditions.-

(a) In the case of a dealer selling goods in the course of export out of the territory of India and the capital goods are used for the sale of such goods, wholly or partially, the deduction shall be allowed in the month in which such sales are first made.

(b) In other cases the deduction shall be apportioned in equal monthly instalments over a period of three years from the date indicated in Form JVAT 118 during which period the capital goods are used for the business of taxable goods, wholly or partially.

(c) Where there is a change in use of the capital goods from sale of exempt goods or non-taxable transactions to sale of taxable goods wholly or partially, the value of capital goods eligible for Input Tax Credit shall be calculated on the basis of a formula as per sub-rule (5)(ii) of Rule 26.

(d) The deduction shall be claimed by the dealer in his monthly return.

(e) No deduction of input tax shall be allowed where the use of capital goods relates wholly to the sale of exempt goods, other than when such goods are sold in the course of export out of the territory of India.

(f) Where the use of capital goods relates to both the sale of goods in the course of export out of the territory of India or sale of taxable and exempt goods and also to taxable goods that are disposed otherwise than by way of sale or non-taxable transactions, the deductible element of input tax shall be calculated on the basis of the formula as per sub-rule (5)(ii) of Rule 26 or as specified by the Prescribed Officer.

(5)(a) Where there is a change in use of the capital goods, after the claim and for Input Tax Credit has been allowed, and the dealer is no longer eligible for such Input Tax Credit, the dealer shall inform the Prescribed Authorities within ten days of such change in use.

(b) The Prescribed Authority shall inform the dealer in Form JVAT 307 that he is no longer eligible for the input tax rebate under the scheme with effect from the end of the month preceding the month in which such change of use occurred.

6) Where the capital goods are sold within a period of three years from the date of the commencement of commercial production or sale of taxable goods or sale of any goods in the course of export out of the territory of India,-

a) the purchasing dealer may claim the full input tax in his next return where the sale price falls below the notified value, or claim input tax under the provisions of this Rule; and

b) the selling dealer shall pay full tax on such sale.

(7) Where the capital goods are disposed of otherwise than by way of sale within a period of three years from the date of the commencement of commercial production or sale of taxable goods or sale of any goods in the course of export out of the territory of India the dealer shall pay tax calculated on the prevailing market value of such goods at the time of such disposal.