GST ITC on repairs

[Madhavan iyengar]

A company has incurred expenses on repairs work, and painting work for admin and factory buildings and these expenses are debited to Profit and loss account

will ITC be allowable.on these expenses incurred for repair and painting work and debited to profit and loss account

[MUKUND THAKKAR]

Not Eligible to take ITC on repairs work and painting work for admin and factory Buildings covered under block ITC 17(5)

[KASTURI SETHI]

Sh. Madhavan Iyengar Ji,

Are you not satisfied with replies posted against Issue ID No.115131 dated 3.7.19 ? If not satisfied ? Then why & how ? Looking forward to your response.

[Madhavan iyengar]

kasturi sir

In my view repairs relating to building as per explanation to sec 17(5)(d)

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;

What it means on plain reading is that if the repairs as per sec 17(5)(d) are debited to profit and loss account then it should be allowed and if capitalised under building ITC wont be allowed.

The GST law is now relying / linked with accounting for allowance of ITC this is akin to Definition of capital assets definition which means what has been capitalised in books

Pls correct my understanding.

[KASTURI SETHI]

Dear Sir,

You have echoed my views. The definitions of' 'construction', and, 'To the extent of capitalization' detailed in Explanation above have not been changed. Your views do not require correction. Such repairs fall under the accounting term, 'revenue expenditure' which is opposite to 'capital expenditure'.

So far as above highlighted definitions exist, ITC will be allowed on such repair expenses. In view of the above, the definition of 'Capital assets' being akin to accounting principles as explained by you, would not have repercussion on availability of ITC on repair expenses. To disallow ITC all conditions of Section 17(5) (d) should be qualified (disqualified). The terms, 'To the extent of capitalization' and 'Construction' allow ITC.

[KASTURI SETHI]

In continuation of above, emphasis is supplied on 'Revenue expenditure (Not capitalized' and 'Construction which, inter alia' includes repair'. Both the terms break the chain of Section 17(5)(d).

[Madhavan iyengar]

kasturi sir

in continuation of the discussion and as so finely elaborated by you i am just laying down an example which you may correct and modify as this will become an issue of interpretation and litigation suppose building cost capitalised in books is rs. 5 lacs as on 31st march 18 in april and may 18 repairs to building is debited and capitalised for rs. 30000/- since rs. 30000/- is capitalised under building no ITC is available suppose rs. 30000 is debited to profit and loss account then ITC will be available ( though erroneous accounting cannot be pardoned as it will amount to fraudulent accounting)

just to clarify my thoughts that accounting will drive the ITC - for prupsoe of sec 17(5)(d) under GST law as far as repairs to immovable property are concerned of course the used in course or furtherance of business test is to be satisfied.

though prudent accounting will not allow regular repairs to be capitalised/ since it does not increase the capacity/ life of asset it is only to maintain the asset in running condition .and where substantial repairs are carried out to increase life of immovable assets and debited to profit and loss account will dept challenge the same.

[KASTURI SETHI]

Dear Sh.Madhavan Ji,

"suppose rs. 30000 is debited to profit and loss account then ITC will be available ( though erroneous accounting cannot be pardoned as it will amount to fraudulent accounting)"

Why do you consider charging repair expenses (incurred on capital assets) in P & L account as erroneous accounting or fraudulent accounting ? How it goes out of purview of the term, 'revenue expenditure' ? I have no commerce background. Pl. clarify. Your clarification will enable me to reply your query.

[Madhavan iyengar]

Kasturi sir

The norm used for expenditure capitalisation of assets is whether it results in increase the life of asset or increases the production capacity if the expenditure is a normal recurring one or expenditure incurred to maintain the asset in running condition it would be treated as repairs.

Now another point which i would like to put forward is when any repairs is incurred in relation to an item of assets (like buildings etc) on which credit is not allowed then the repairs related to that item would it also fall in same category of disallowance but this view may not hold good under the GST law as it provides exception stating that expenses to the extent capitalised as under:

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;

[KASTURI SETHI]

We are to follow the CGST Act. Repair expenses are not capitalised. It is not in dispute that repair expenses are part of revenue expenditure. We are following the definition of 'revenue expenditure' correctly as per accounting principles. Repair expenses are far less than the cost of original building or machinery. In simple terms day-to-day expenses for upkeep of machinery or building are revenue expenditure. You are going too deep or too far. If we properly account for repair expenses as revenue expenditure, we are going as per GST law there is not even remote possibility for challenge by the department. If still any point we can discuss further in this forum.

[Madhavan iyengar]

kasturi sir

thanks for giving a very good perspective and view of law and from the departmental angle and the point is well taken

[KASTURI SETHI]

Sh. Madhavan Iyengar Ji,

Really I also relish discussion with you. Thus we reinforce each other on this public platform. I also learn from you. Age does not matter. One can learn from youngster. Our doors should remain open otherwise we would be stagnant water.Just to inform you I have 5 years' experience in Audit as Supdt. and Inspector and we got training (twice for so many days) how to conduct audit from NACEN Faridabad. I jot down the important terms and points which are very useful in this GST regime. Legal/ dictionary meaning of every phrase or term remains the same.

[KASTURI SETHI]

Pl.read 'Jotted down' instead of 'Jot down' in above reply.

[Madhavan iyengar]

kasturi sir

yes i also reciprocate the same and fully agree with you as the issues are deliberated threadbare and you have been instrumental to give a line of thinking so that we dont digress from the issue and the issues are taken to a logical conclusion and as all would agree and appreciate the cost is very heavy for mistake, as in indirect tax if we err at transaction stage then the taxable person has to pay a very heavy price at a later date

[RAMNIRANJAN KANDOI]

IF REPAIRS TO BLDG DEBITED TO PROFIT & LOSS ACCOUNT, ITC IS ALLOWABLE.

AI Summary

Debate on ITC eligibility for GST on building repairs and painting; Section 17(5) may block credits. A discussion on the eligibility of Input Tax Credit (ITC) under the Goods and Services Tax (GST) for expenses incurred on repairs and painting of administrative and factory buildings. The main issue revolves around whether such expenses, when debited to the profit and loss account, qualify for ITC. One participant argues that ITC is not permissible under blocked credits as per Section 17(5). However, another participant contends that if repair expenses are not capitalized but treated as revenue expenditure, ITC should be allowed. The discussion emphasizes the importance of proper accounting treatment in determining ITC eligibility.