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.

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.