capital goods destroyed in fire, Goods and Services Tax - GST

[Kaustubh Karandikar]

In case of capital goods destroyed in fire on which ITC is claimed, the ITC to be reversed on it whether will be on

1) entire ITC originally claimed or

2) as per the formula prescribed under Rule 44(6) of CGST Rules 2017?

Posts / Replies

[Amit Agrawal]

I think there is lacuna / gap in law / rule to deal with a situation where "used" capital goods (but whose economic life is not yet over) are lost, stolen or destroyed.

No rule specifically deal with above situation.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Kiran Tahelani]

It has to be done as per the formula prescribed under Rule 44(6) of CGST Rules 2017

[Amit Agrawal]

With due respect, Rule 44 (6) is for 'the purposes of sub-section (6) of section 18' and Section 18 (6) deals with ' supply of capital goods or plant and machinery, on which input tax credit has been taken'.

Same does not deal with a situation where "used" capital goods (but whose economic life is not yet over) are destroyed in fire.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Thanks Amit ji for your kind advice. Will it not be advisable to reverse the ITC based on formula prescribed under Rule 40(2) of CGST Rules, 2017 since there is no specific guidelines on this, to avoid litigation?

[Kiran Tahelani]

I apologize for quoting wrong rule in my earlier post, i stand corrected amit sir.

However, as per my understanding if the capital goods after destroyed completely and sold as scrap then the reversal of such credit needs to be done as per rule 40(2) read with section 18(6). However if capital goods is written off completely without being sold, then one may not require to reverse the credit, however matter is not free from litigation.

please correct if i am misunderstanding something

[Amit Agrawal]

Dear Shri Kaustubh Karandikar Ji,

If objective is to avoid litigation, then, rule 40 (2) can be taken as guide. But, in absence of any specific rule dealing with the given situation, some Dept's officer can always demand full reversal of original ITC quoting Section 17 (5) (h).

In other words, reversing ITC using 'rule 40 (2) as guide' is good starting point to show your bonafides to avoid litigation. But, it does not provide guarantee that litigation will not happen.

Moreover, I hold a view that Section 17 (5) (h) does not apply to given situation as what is destroyed by fire is 'used capital goods whose economic life was still not over' and not the goods on which ITC was taken.

This is more so when there are no rules prescribed to calculate amount of ITC required to be reversed in given situation under discussion.

Needless to say that my views are also litigation-prone.

Some additional points to ponder: If I remember correctly, in excise regime, there are some case-laws dealing with 'inputs written off' where tribunal held that no reversal of ITC is required for 'partial' written off of any inputs. This had resulted into further amendment into relevant rules to cover even 'partial' written off requiring full ITC reversal (but re-credit, when used into manufacturing).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Dear Amit ji, yes, as you rightly mentioned there was a provision under the earstwhile Excise Regime. As correctly pointed out by you, department might demand full reversal since there is no specific provision. Thanks for the valuable inputs sir.

[Amit Agrawal]

Dear Ms. Kiran Tahelani Ji,

No need to apologise! I am glad that you started contributing on TMI earnestly. Fresh ideas and views are always welcome. Please continue to do good work

W.r.t. your post at serial no. 5 dealing with a situation where "if the capital goods after destroyed completely (presumably by fire), and sold as scrap" then section 18(6) (thereby Rule 40 (2) or 44 (6)) itself does not apply, in my humble view, because what is supplied here is 'scrap' and not 'capital goods' per se.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

You are welcome, Shri Kaustubh Karandikar Ji!

[Kiran Tahelani]

thank you amit sir for your kind words.

also thank you for guiding me/ correcting me in this matter patiently.

[Amit Agrawal]

You are welcome, Ms. Kiran Tahelani Ji!

[Alkesh Jani]

Shri

In this regards my view is as under :-

The definition of 'goods' and 'capital goods' is given below :-

“(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

(19) “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;”

From above, it is very clear that goods includes Capital goods, now Section 17 (5)(h) is given below :-

“(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;”

From above, it is clear that, when capital goods are destroyed due to fire, the ITC of the remaining life is to be reversed.

Thanks

[Shilpi Jain]

When there is no mechanism prescribed for the amount to be reversed, a reasonable method can be adopted as was held by tribunals in many cases under the cenvat regime. So considering useful life as 5 years the reversal can be calculated. It makes no sense to reverse full credit when the asset indeed has been used for making taxable supplies.

[Padmanathan Kollengode]

Dear experts, only a loud thinking for litigation and not an opinion on the query.

Section 17 (5) reads as under:

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

Can a position be taken that 17(5) can be invoked only before the capital goods is put to use and once it is put to use, sec. 17(5) does not apply? since the word used is "shall not be available" (does not say "has to be reversed").

[Padmanathan Kollengode]

Dear experts,

Also can a position be taken that where no mechanism is prescribed, reversal itself is not envisaged?

The Supreme Court in the case of CIT v. B. C. Srinivasa Setty, 1981 (2) TMI 1 - SUPREME COURT, held that no capital gains tax is payable by an assessee where it was not possible to compute the capital gains u/s.48 of the Act.

Although its in different proposition, can this principle be applied?

[Abhijith Mohan]

Dear Experts,

- As per Schedule I of the CGST Act 2017

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION includes (1) Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.

Hence it seems that the case of capital goods getting destroyed and disposed falls under Section 18 of the act and Reversal of ITC can be computed as prescribed under Rule 44(1)(b) and 44(6) of the CGST Rules 2017.