In case of death of proprietor, whether Reversal of ITC is required?

[Rajan Atrawalkar]

In case of death of proprietor, business is continued by successor / legal heir and has obtained new registration. In such case it is Transfer of business as Going Concern and will be treated as Supply of service (Schedule II para 4 (c) ). This supply will be covered by Notification 12 para 2 and will be exempt supply. The balance ITC in the credit ledger can be transferred to the transferee by filing ITC 02.

Now the question is that whether as per section 17 (2) ITC previously claimed on the Stock of Goods to be transferred to new business required to be reversed being Exempt supply ? or to put it differently, Does the transferor is required to pay Tax on the stock? The transfer of stock will be treated as Exempt supply. Transfer of business is supply of Service. There may be cases where there is Nil balance in credit ledgers and having huge stock. This happens when the business is running is for a longer period and the profit portion has slowly converted in to stock.

[Ravinesh Sinha]

tax is not payable on goods as no itemised sale is being made . Further no reversal of ITC is required as it is just transfer of business to successor without any consideration meaning no supply . Successor is supposed to have taken all assets and liabilities . To me ,only ITC-02 is needed to be filed as compliance of GST

[Rajan Atrawalkar]

In GST the definition of Supply includes “Transfer”. Supply is a very wider term. Itemized sales is not necessary to be covered in the ambit of Supply. Mere Transfer is sufficient. So firstly, the transfer of Going concern is covered under the definition of supply. Secondly , the transfer of going concern is exempted by virtue of mega exemption notification 12 of 2017 at para 2. So, inward supply is of taxable whereas outward supply is exempt supply. Hence section 17 (2) of blocked credit gets attracted. Goods remained unsold (Stock) will be transferred to new business as “Going Concern” which will be treated as supply of service. Even though there may be no consideration , still valuation rules will come into picture and value will be determined according to valuation of stock . For better understanding the above facts , refer to definition of “Supply”, Schedule II para 4 (c), Notification 12/2017 para 2 and section 17 (2).

[Shilpi Jain]

I agree with Mr. Sinha. There is no supply in this case as was also held by the AP High Court.

[Rajan Atrawalkar]

Shilpi Jain, please provide citation.

[Rajan Atrawalkar]

In the recent article discussed by M. Govindrajan on TRANSFER OF BUSINESS AS A GOING CONCERN – SUPPLY OF SERVICES? Ruling of AAR in the case of Cosmic Ferro Allyos (2022 (5) TMI 181 is discussed and it was held to be supply of service and would treated as Exempt covered under entry 2 of Notification 12/2017 .

My discussion is based on the same analogy. When there is a transfer of business as a going concern, the same would be treated as Exempt supply. And when there is exempt supply as against taxable inputs, section 17(2) gets attracted and ITC will have to be apportioned accordingly. As, whole of the supply is exempt, whole of the ITC in relation to the supply will have to be reversed.

[Kunu Padhi]

As per provision under sub-section (3) of section 18 of the CGST Act,

“Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”
Further, according to sub-rule (1) of rule 41 of the CGST Rules:

“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.

so no need for reversal . He is eligible for credit in such a situation.

Circular No.133 03/2020-GST dt. 23.03.2020 of CBIC clarifies the same.

[Rajan Atrawalkar]

I have already considered the transferability of unutilized ITC in my original query. Transfer of unutilized ITC is not a problem. Question is regarding ITC on stock of goods of which ITC is already utilized in the forgoing returns and there is Nil balance of Unutilized ITC in the credit ledger or very negligible amount of unutilized ITC compared to the stock of goods lying unsold on the given date. The stock of goods lying unsold on the given date is generated out of profit from the forgoing years. My query is regarding ITC on stock of goods remained unsold on the given date. Section 18(3) , Rule 41(1) , circular 133 of 2020 talks about “transfer of input tax credit which remains unutilized in the electronic credit ledger” . So if there is no ITC lying in the credit ledger, no transfer of ITC to the new business. The new business will have start paying taxes on the very first sale as no opening balance of ITC. Again, the transferor of the business will need to reverse and pay tax on stock which remained unsold being transfer of exempt supply.

[Amit Agrawal]

Interesting query!

Section 17 (2) deals with scenario where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies.

One can argue that in transaction of 'transfer of business as going concern', there is no question in goods as partly used for effecting taxable supplies and partly for effecting exempt supplies. As I am aware of risks involved in this line of argument & counter arguments thereto, let's shift focus on main contention.

The real question here - to my mind - is whether 'Closing Stock' is used for effecting 'Transfer of business as Going Concern' (which is admittedly as exempt service)?

In my view, 'Closing Stock' is not used for effecting such exempt supply of service. Physical transfer of closing stock to the successor / legal heir is merely result of 'Transfer of business as Going Concern'.

Hence, in my humble submission, question of any reversal of ITC against such 'Closing Stock' does not arise.

Further, in 'Transfer of business as Going Concern', there is no supply of 'Closing Stock' - per se - to the successor / legal heir. Hence, question of any liability as 'outward supply' does not arise in my view.

In order to cover the 'risks' highlighted by the querist, one can think of intimating to the Dept. in writing suitably about details of 'closing stock' which is now available with successor / legal heir as result of Transfer of business as Going Concern'.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Rajan Atrawalkar]

In the term “Transfer of business as going concern” , the definition of word “Business” as per section 2(17) is wide enough. Relevant part of the definition at 2(17)(d) “supply or acquisition of goods including capital goods and services in connection with commencement or closure of business”. There is transfer of Assets and Liabilities and Goodwill and such other things bundled together to form the transfer. Of course, closing stock is part and parcel of such bundle. There cannot be transfer of business without closing stock as appearing in the closing balance sheet. Whole of the balance sheet is to be transferred to the new firm. Again, if one try to argue that there is no transfer of closing stock then section 17(5)(h) may come into picture. The argument that there is no transfer of closing stock in the transfer of business will not sustain at any level of adjudication or appeals.

The concept of transferring a company as a 'going concern' was examined by the Delhi High court in ln re Indo Rama Textile Limited2012 (8) TMI 79 - DELHI HIGH COURT. In this case the Delhi High Court held that a company is said to be transferred as a 'going concern' when the assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.

An Education Guide’ published by the Central Board of Excise & Customs, Para 7.11.15 reads as follows:

What does the term “transfer of a going concern‟ mean?

Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business, but shall not cover mere or predominant transfer of an activity comprising a service. Such sale of business as a whole will comprise comprehensive sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. Since the transfer in title is not merely a transfer in title of either the immovable property or goods or even both it may amount to service and has thus been exempted.

The suggestion put forth about writing a letter to department about transfer of closing stock to the transferee firm will not solve the problem in any way. On the contrary it will prove that there is transfer (supply) of closing stock without consideration.

[Amit Agrawal]

I respectfully disagree with above post of my learned professional colleague!

'Transfer of business as Going Concern' is neither commencement or closure of business, in my view.

Physical transfer of closing stock to the successor / legal heir is merely result of 'Transfer of business as Going Concern' and same cannot be equated with a scenario where 'Closing Stock' is being used for effecting such exempt supply of service. And I do not see any reason for deviation from my views, after going through post of my learned professional colleague.

Section 17 (5) (h) got no role in the activity under discussion as we are NOT dealing with a situation where "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples".

With regards to other contexts quoted by my learned friend, I believe that same were not in the context of dealing with the issue under discussion here (i.e. whether ITC needs to be reversed on 'Closing Stock; in given situation).

With regards to suggestion about intimation in writing to Dept., I never said that it is 'transfer' of closing stock. I am sure one can draft suitable letter craft-fully to take care of risks, while simultaneously ensuring that there will be no charge of suppressing facts with intention to evade taxes etc.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Amit Agrawal]

Just to avoid any confusion, if any:

Physical transfer of closing stock to the successor / legal heir as result of 'Transfer of business as Going Concern', is NOT the same is 'transfer' (i.e. 'supply' in the context under discussion here) of any goods to someone else.

My views in two past above should be read in this context.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Amit Agrawal]

In addition to above, one more thing to be considered in given facts:

Can a dead person (i.e. proprietor who died) can 'supply' after his death (irrespective of whether such supply is 'taxable or exempted')? I believe same is not possible.

And if there is no supply, there cannot be an exempt supply and hence, how can provisions of Section 17 (2) come into play? They cannot, in my humble view.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Amit Agrawal]

Clause 4 (c) of Schedule 2 (under the head - Transfer of business assets) under Section 7 of the CGST Act, 2017 reads as under:

"where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person."

In the context of ongoing discussion, following points are worth noting from above provisions:

A. If business is transferred as a going concern, it is excluded from the head 'Transfer of business assets'.

A1. In other words, it is understood under GST law that 'Business Assets (which definitely includes 'closing stock') are NOT treated as 'transferred / Supplied' when a business itself is transferred as a going concern.

A2. Once above position is agreed, it becomes clear that Business Assets (which includes 'closing stock') is NOT being used for effecting said exempt supply of service (i.e. Transfer of Business as going concern). And thereby, against these business assets, provisions of Section 17 (2) will not come into picture even when 'Transfer of Business as going concern' is exempted service.

B. Deeming friction (i.e. about goods forming part of the assets) created in above entry applies only when any person ceases to be a taxable person.

B1. This deeming friction cannot be extended, in my view, when 'any person ceases to be a person' (i.e. when proprietor dies).

C. This provision also does not apply when 'the business is carried on by a personal representative who is deemed to be a taxable person'. This is taken a different scenario to a situation when 'the business is transferred as a going concern to another person'.

C1. In other words, 'the business is transferred as a going concern to another person' and 'the business is carried on by a personal representative who is deemed to be a taxable person' are TWO different scenario.

C2. To my mind, there is no supply when business is transferred to legal heir / successor upon death of the proprietor as this situation is covered by above-said sub-clause (ii) and not under sub-clause (i).

LASTLY and as said in my earlier posts, for any 'supply' u/s 7, there has to be two persons involved. After death of the proprietor, there can NOT be a supply between such proprietor and his legal heir / successor in my view.

In nutshell, I strongly feel that question/s of outward liability towards transfer of closing stock or ITC reversal u/s 17 (2) do not arise, in given situation.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Amit Agrawal]

Dear Shri Rajan Atrawalkar Ji,

Request for your counter argument please.

[SHARAD ANADA]

Pl. Refer Circular No. 96/15/2019-GST Dated the 28th March, 2019 F. No. CBEC-20/16/04/2018 – GST Clarifications in respect of transfer of input tax credit in case of death of sole proprietor – Reg.

[Amit Agrawal]

Dear Shri Rajan Atrawalkar Ji,

Request for your counter argument please.

AI Summary

Transfer of business as going concern: whether ITC on closing stock must be reversed when a proprietor dies is contested. Whether death of a sole proprietor and continuation of the business by a successor requires reversal of previously claimed input tax credit on unsold closing stock is disputed. One view treats transfer of a business as a going concern as an exempt supply that may trigger ITC apportionment and reversal; the opposing view holds that no supply arises on death when assets pass to a legal heir or personal representative, and statutory transfer provisions for unutilized credit and Schedule II support non-reversal.