ITC ALLOWABILITY IN CASE OF CHANGE OF CONSTITUTION OF BUSINESS ENTITY

[Mr. M. GOVINDARAJAN]

Transfer of credit

A business entity may be converted into another business entity. The laws prevailing in India like that of Companies Act, Partnership Act allow such conversion and change the constitution of the business entity. In respect of tax matters and especially in input tax credit eligibility for the new business entity provisions are there in GST law.

Rule 41(1) of GST Rules, 2017 provides that a registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in Form GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee.

Rule 41(2) provides that the transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

Rule 41(3) provides that the transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in Form GST ITC-02 shall be credited to his electronic credit ledger.

Rule 41(4) provides that the inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Case laws

In M/S. ARUN STRUCTURALS VERSUS THE STATE TAX OFFICER, PUDUKKOTTAI - 2022 (4) TMI 416 - MADRAS HIGH COURT, the nature of the business of the petitioner’s predecessor was a partnership firm. One of the partners in the said firm met with an accident and died on 07.03.2017. The legal heirs of the deceased partners were added as new partners in the said firm and therefore there was a change in the constitution of partnership firm. Therefore a new registration was obtained from GST department for the newly constituted firm. The stock, input tax credit of the old firm was taken over by the new firm. The new firm filed the monthly return for April 2017 the petitioner reported the opening balance of input tax credit of Rs.17,60,473/- which was not reflected in the monthly online return. Therefore the petitioner sent a representation on 08.05.2017 requesting the Department to permit them to take the closing credit to the new firm.

The petitioner claimed the input tax credit in the monthly returns filed for the months from April 2017 to June 2017. The Department denied the input tax credit. Therefore the petitioner filed the present writ petition before the High Court. The petitioner submitted the following before the High Court-

• The petitioner was issued with pre-assessment notice for which the petitioner filed reply.
• The impugned order was passed without following the principles of Natural Justice.
• The petitioner was not heard before the passing the impugned order.

The Department contended the following before the High Court-

• The impugned input tax credit amount was not reflected in the monthly return filed for the month of June 2017 and therefore it was not open for the petitioner to transition the above said credit in the new GST regime.
• As per Rule 10(8)(a) of the Tamil Nadu Value Added Tax Rules, 2007 the transferee claiming input tax credit under section 19(14) of the TN VAT Act shall furnish the following details-

• Unavailed credit available in the account of transferor as certified by a Chartered Accountant or Cost Accountant;
• Inventory of stock transferred with date;
• Details of capital goods transferred; and
• Original tax invoices evidencing the payment of tax at the time of purchase.

• The petitioner did not file the above records for the transfer of input tax credit to the new TIN number.

The question to be answered in this case, as per the High Court, whether the above said credit lying unutilized in the hands of Arun Structurals (TIN No. 33604100485) and whether the above said credit could have been transferred in the name of the petitioner ‘Arun Structurals’ (TIN No. 33886477864) on 10.042017. If the above said credit could be validly transferred from the old firm to new firm, then the High Court questioned why the credit should not be allowed to the petitioner.

The High Court further observed that the impugned order has been passed without following the principles of Natural Justice and therefore it is to be quashed. The High Court remitted the matter back to the authorities to pass a speaking order. The Department may examine the records of the petitioner and the provisions of the law and ascertain whether the credit was validly transitioned to the petitioner after it took over the business of the erstwhile firm. If it is validly transmitted the same shall be allowed to be transmitted. The High Court also directed the petitioner to produce the documents that may be available to substantiate the same.

In TRAVANCORE MATS AND MATTINGS PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER, OFFICE OF THE ASSISTANT COMMISSIONER (ST) , THE SENIOR INTELLIGENCE OFFICER, THE STATE TAX OFFICER - 2022 (6) TMI 357 - MADRAS HIGH COURT the petitioner was a partnership firm. The said firm was converted into a private company. The petitioner is having branch office at Bhavani in Tamil Nadu. The Head office is at Cherthala, Kerala.

The petitioner paid the tax @ 12% from 01.07.2021. Subsequently the petition received an advise that they are not need to pay tax at 12% and payment @ 5% is enough. Accordingly the petitioner paid tax @ 5% from November 2017 to April 2019.  

A notice has been issued to the petitioner under Section 61 of the Act. The petitioner filed the reply for the same. Again a notice was issued on 07.10.2021 for the discrepancies in the return. Therefore the petitioner filed the present writ petition before the High Court against the notice. During the hearing the petitioners offered to pay tax @ 12 instead of rate @ 5%. Since they have already paid tax @ 5% they would pay the remaining 7% tax for the disputed period.

The petitioner contended that if they pay the entire tax due on demand to the extent of 12% of the whole period, then the petitioner would be eligible to make a claim from its head office and if such an application is made the input tax credit can be made by the petitioner is to be considered and permitted by the State Tax Authorities.

The State Tax Officer, Bhavani contended that the petitioner would pay the remaining tax due @ 7% out of 12%. The issue of availing input tax credit is to be decided by the jurisdictional GST Authorities and the respondent has no role to play.

The High Court observed that if the petitioner is eligible to claim the said input tax credit it became certain that the petitioner can very well claim the input tax credit from the jurisdictional State GST Authority where the petitioner is having head office. The High Court also considered the contentions of the petitioner that because of the change of the composition of the petitioner from partnership firm to Private Limited Company, there was a change of GST Registration number and it should not be taken as a different dealer or entity instead of the petition and that cannot stand in the way of claiming the input tax credit by the petitioner if he is eligible to claim under the provisions of the GST Act.

The High Court passed the following-

• Since the challenged against the orders has been given up the validity of the said orders are not decided in these writ petitions.
• The difference of tax as accepted by the petitioner should be paid within a period of 2 weeks from the date of receipt of the order.

It is open to the petitioner to make a claim of input tax credit at the jurisdictional GST Office in the State of Kerala. The same shall be considered and considered by the Authorities concerned and decided as per the eligibility of the petitioner under section 16 of the Act, the change of GST registration number from old and new in view of the change of composition of the petitioner’s firm into Private Limited Company shall not stand in the way.