DEPRECIATION ON CAPITAL GOODS WITH GST COMPONENT, Goods and Services Tax - GST

[Sadanand Bulbule]

Dear experts

Section 16[3] of the CGST Act reads as under:

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.

It means, to claim ITC, registered person has to claim depreciation on the value of the capital goods purchased without including the GST paid.

In view of this , what would be implications on Section 17[5][d] in terms of recent judgement of Hon'ble Supreme Court in Safari Retreat case?

My understanding is, taxpayers falling under 16[3] cannot claim the benefit of " ITC " under Section 17[5][d].

There are some such instances claiming both depreciation and ITC without anticipating backfire from the department.

Your validations plz.

Posts / Replies

[Sadanand Bulbule]

Section 2[19] defines as under:

(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;

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, Your analysis is full of reason and logic de jure. Further, I explain as under :-

Depreciation and ITC on capital goods cannot be claimed/availed simultaneously. Either depreciation or ITC. GST paid on the capital goods is an integral part of the price of the capital goods. Depreciation can be claimed on the price which includes GST and but then, in that situation ITC cannot be claimed on the GST component of the price. Hence either depreciation or ITC can be claimed. In simple words, in order to claim depreciation, the registered person is required to forfeit ITC of GST paid on capital goods as per Section 16(3) of CGST Act.

Your Q. What would be implications on Section 17[5][d] in terms of recent judgement of Hon'ble Supreme Court in Safari Retreat case ?

Your view : "My understanding is, taxpayers falling under 16[3] cannot claim the benefit of " ITC " under Section 17[5][d]".

My view. Yes. I fully agree with you. The benefit provided under exception clause of Section 17 (5) (d) is hit by Section 16 (3) of the Act.

Your observation based on your experience : There are some such instances claiming both depreciation and ITC without anticipating backfire from the department.

My view : Such persons who have claimed depreciation and ITC on capital goods both will face the music by way of payment of interest and penalty..

Disclaimer : These are my personal views and meant for education purpose only and not meant for any judicial or semi-judicial proceedings.

[Sadanand Bulbule]

Dear Sir.
So kind of you for simplifying the complex issue and your timely validation too. 🙏🙏

[Amit Agrawal]

I noted context of your question (i.e. what would be implications on Section 17[5][d] in terms of recent judgement of Hon'ble Supreme Court in Safari Retreat case?)

So, my views below is in the context of said SC ruling:

I have also noted following explanation given under Section 17(5)(d) (i.e. Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;)

As you rightly noted, Section 16[3] of the CGST Act reads as under:

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.

As can be seen from above, restriction of u/s 16(3) is limited to 'Capital goods and plant and machinery'. 

Supreme Court in Safari Retreat case has already ruled that "plant and machinery" as per explanation given is different from "Plant or Machinery". So, "plant and machinery” used u/s 16(3) does not cover "Plant or Machinery" (i.e. those passing functionality test) on which ITC is allowed by SC in Safari Retreat case

BUT, section 2(19) defines “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;

Thus, restrictions u/s 16(3) will apply for ANY goods the value of which is capitalised by the taxpayer in its books of accounts AND which are used or intended to be used in the course or furtherance of business

BUT, as per Section 2(51), “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;.

Thus, capital goods has to be 'goods' first and hence, they should be movable. 

And, if any goods are procured & used in construction of immovable property (which is either plant or machinery), depreciation will be claimed by the tax-payer on 'Immovable property' so constructed and not against 'goods i.e. movable property' used in construction of such immovable property. 

Moreover, once goods are used for construction & immovable property comes into existences, such goods are already used as intended  tax-payer in the course or furtherance of business without capitalisation of 'goods' per se by the tax-payer.

And capitalisation & there-after depreciation under Income Tax Act (i.e. that of immovable property so constructed & NOT against goods used for construction per se) can happen only after such immovable property is used by the tax-payer for his business. Hence, such goods cannot be called as ‘capital goods’ u/s 2(51).

So, it can be very well argued that the restrictions u/s 16(3) will not apply for above situation where an immovable property is constructed which falls as "Plant or Machinery" (i.e. those passing functionality test) on which ITC is allowed by SC in Safari Retreat case

P.S. This is likely an aggressive view and same should be used only for defending past conduct if absolutely necessary. But, for the tax-payer availing ITC using Safari Retreat ruling, it is better to avoid taking depreciation against ITC portion against goods used for construction of immovable property.

Also, if a taxpayer is using M/s Bharti Airtel Ltd., 2024 (11) TMI 1042 - SUPREME COURT) and claiming property so constructed as ‘movable property’ (here, I am not talking about immovable property like shopping mall), then, above arguments cannot be used.

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

[Sadanand Bulbule]

Dear Sir

Thanks for your expansion of discussion with multi dimensions. May taxpayers derive due benefits arising from the output of the entire deliberations. 

[KALLESHAMURTHY MURTHY]

Dear Sirs,

The query raised by Sri Sadanad Bulbule Sir is optive and timely need. Answers of Sri Sethi Sir and deep discussions by Sri Amit Agrawal Sir, elaborating on the applicability of sections and meanings of capital goods treated as movable within the meaning of Safari Retreat Judgement give immense knowledge to the taxpayers and readers.

Thanks to all.

[Sadanand Bulbule]

Dear all 

I wish to add here that, ITC benefit under Section 17[5][c] & [d] arising by way of Hon'ble Supreme Court's judgement rendered in Safari Retreat - 2024 (10) TMI 286 - SUPREME COURT case is not as easy as milking the cow or plucking the hanging fruits in the tree.

Rather it is in the wisdom & discretion of the adjudicating authority. So taxpayers/professionals need not relax banking upon the ratio of the said judgement. They need to continue the fight against fallible orders on this issue.

Authority prevails over the rulings and not vice versa. Knocking the doors of court once again is only the remedy.

[DEVARA SIVAPRASAD]

Here the subject query is whether is whether depreciation under the Income Tax Act,1961 and I/P Tax Credit can be availed simultaneously. The answer is "Absolute No."

While coming to the question of "Immovable Property," it has not been defined under the GST Act, 2017. So, as per Apex Court ruling, the definition as Provided under the General Clauses Act, 1897 should be taken. As per the General Clauses Act, 1897, the said definition read as follows:

Section 3(26) "immovable property" shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;

Section 17(5)(d) along with the explanation when read in Conjunction read with the Section 3(26) of the General Clauses Act, 1897, it is very that the said restriction is meant for Goods or Services or both used in construction of an Immovable Property (Civil Structure) on his own account even if it is used in the Course or furtherance of Business.

While coming to Apex Court decision and principle, it appears that Goods or Services or both used in the construction of "plant and Machinery" for that particular Supply.

Once "such Plant and Machinery/Assembly" becomes qualified to be called as "Plant and Machinery" as mentioned in terms of the Section 17(5) of the GST Act, 2017, then either I/P Credit or depreciation can only be availed in terms of Section 16(3) ibid even though "such Assembly/Plant and Machinery" exempted/escaped from the restriction as envisaged under Section 17(5(d) ibid.

Therefore, the issue is very clear and unambiguous.