ITC Availability

[Ethirajan Parthasarathy]

An Individual is registered under GST on account of letting out commercial property. He does not maintain any books of account.

Is he eligible to get ITC on:-

1. Replacement of windows and doors of the let out property. Whether such expenditure is capitalized or not evidenced.
2. On painting the commercial building.

In the case of commercial entity, certain expenditure on building owned is treated as revenue expenditure. Can GST department sit on the judgment whether such expenditure should have to be capitalized like what happens in IT proceedings so that they can disallow ITC claim

[GUNASEKARAN K]

Dear Mr. Ethirajan Parthasarathy,

First, The Books of accounts is must to tracking the ledger of expenditures, incomes and Tax ledgers.

Replacement of windows, doors and re-painting are purely periodical maintenance expenses. If it is newly constructed building then those expenses treated as Fixed assets along with construction cost.

If the expenditure is capital nature according to GAAP, then ITC not eligible; else ITC is eligible.

[Shilpi Jain]

Restriction u/s 17(5) is for re-construction, renovation,additions or alterations or repairs.

Painting and replacement would fall under the category of repairs and to the extent these are not capitalised credit would be eligible.

Maintaining accounts may not be very relevant though the other conditions for availing the credit like having credit, using for business, etc. should all be satisfied to be eligible for the credit.

In my view, GST department cannot comment on the correctness of accounting i.e. whether to capitalise or not, since the GST law does not state that the capitalisation should be in accordance with accounting standards, etc.

[KASTURI SETHI]

Sh.Ethirajan Parthasarathy Ji,

The following aspects are undisputed :-

1. Books of accounts are a statutory record.

2. Expenses incurred on repair, maintenance etc. are revenue expenditure and must be reflected in the Statement of Profit & Loss otherwise ITC will not be admissible. If capitalized, such expenses will become ineligible for ITC.

3. Expenses mentioned at serial no.1 and 2 in your query are revenue expenditures.

4.Depreciation on the tax component should not be claimed.

Without maintenance of books of accounts, how the assessee will prove that these expenses are revenue expenditure and NOT capital expenditure ?

[Shilpi Jain]

How would you have claimed under Income Tax this expenditure can also be seen. If you have claimed it as a revenue expense it can be shown that the said expense is not capitalised

[KASTURI SETHI]

Income Tax department will also examine books of accounts etc. Only filing of Income Tax return would not suffice. There must be some basis to claim any expense as revenue expenditure.

[Ganeshan Kalyani]

Capital assets are those which stays for a longer period of time and gives benefit over a period of time. Generally, it is understood from the amout of cost incurred that it is revenue in nature or capital asset. The asset value is substantial and its value gets reduced over a period of time by way of depreciation and gets debited to Profit & Loss account. On the other hand, the expenses which occurs every year are allowed to be debited to Profit and Loss account by full value. These details can justified or clarified by keeping proper books of accounts. Otherwise, it would be difficult to satisfy the department. As regards claim of input tax credit the same is allowed on repairs if the amount is small satisfying the nature of revenue expense.

[KASTURI SETHI]

Well explained by Sh. Ganeshan Kalyani Ji.

[Padmanathan KV]

A. The restriction of ITC is provided in Section 17(5) which reads as below:

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

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;

A.1. There is no doubt as to the goods or service in consideration here is related to immovable property (i.e. commercial building) which is not a plant or machinery.

A.2. Therefore, the issue now is whether replacement of windows and doors and painting etc., would fall under the term 'construction', which is clarified in the explanation above as "repairs to the extent of capitalisation" is "construction".

B. Section 155 deals with burden of proof - Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

B.2. I did not find any specific requirement under section 35 read with rule 56 with regard to maintenance of a 'Fixed Asset Register' or similar account /record /book in which the capitalization is to be made.

B.4. However that being said, since the burden of proof is on the Registered Person to prove that ITC is eligible u/s 155, the Registered Person has to maintain such register to prove that said goods or service are not capitalized.

[Padmanathan KV]

Regarding last part of the query,

Can GST department sit on the judgment whether such expenditure should have to be capitalized like what happens in IT proceedings so that they can disallow ITC claim?

No. The department cannot require an expenditure to be capitalised unless there is some justifiable grounds to do so.

[KASTURI SETHI]

Both assessees and Govt. have to go by the definition of 'capital expenditure' and 'revenue expenditure'. Capital expenditure cannot be treated as revenue expenditure and vice versa. If treated so, that will be irregular practice. Recovery can be made along with interest and penalty.

In pre-GST era, in order to avail 100 % Cenvat Credit on parts,components, acesssories of capital goods, the assessees used to treat the same as revenue expenditure.

Regarding Q.No.1 please go through the following decisions of AARs :-

2019 (5) TMI 248 - AUTHORITY FOR ADVANCE RULING - RAJASTHAN - IN RE : RAMBAGH PALACE HOTELS PVT. LTD.

2020 (1) TMI 1430 - AUTHORITY FOR ADVANCE RULING, UTTAR PRADESH - IN RE : DWARIKESH SUGAR INDUSTRIES LTD.

[Amit Agrawal]

Every registered person is required to maintain accounts & other records as prescribed in Section 35 read with Rule 56. And there is no option not to maintain them under GST.

W.r.t. two expenditures described in the query, tax-payer can easily prove them as revenue expenditure.

If required, kindly produce the P&L & balance-sheet where it can be shown that these expenditures were not capitalised to the underlying immovable property but treated as revenue expenditure.

Note: Kindly note that there is one third of rent amount as deduction available under income tax act towards these kind of expenses. However, that is separate law. And your profit under GST against 'renting of immovable property' can be different than the 'taxable income' shown under the head "Income from House Property' in income tax due to actual expenditure incurred is higher / lower than the one third of rent amount claimed as deduction.

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

[Padmanathan KV]

Learned friend Amit Ji,

According to your views, whether the books of accounts under section 34 read with rule 56 limited to only those prescribed thereunder?

If so, regular accounts like ledger, day book, fixed asset register, etc are not seen prescribed under the said section or rule.

Rather only some records like outward supply register, stock register, input tax availed register, details of supplier and recipient etc. are mentioned therein.

what is your interpretation on this? Kindly share for the benefit of all.

[Amit Agrawal]

@ Shri Padmanathan Ji,

Every registered person needs to maintain accounts & other records which are prescribed u/s 35 read with rule 56. However, before limiting oneself, one must also note & take into account the sub-rule (18) which states that "Every registered person shall, on demand, produce the books of accounts which he is required to maintain under any law for the time being in force."

So, if registered person is required to maintain regular accounts like ledger, day book, fixed asset register, etc (words taken from your last post) as part of 'books of accounts' under any law for the time being in force (say, under income tax act or Company law etc.), then, that requirements of all such records become requirements under GST Act too.

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

[Padmanathan KV]

Learned Amit Ji,

Thank you so much for clarifying. In many case, such as the query under consideration here, the assessee may not be required to maintain books of accounts under Company law or Income Tax Act (as the rental income may not be business income). So in such situations, the requirement under sub-rule (18) may be not be relevant, in my humble opinion, as there my not be presception under any other law.

Nevertheless, in my opinion, the Registered Person is required to maintain such records to prove that expenditure has not been capitalized but rather treated as revenue expenditure ONLY due to the operation of section 155.

[Amit Agrawal]

@ Shri Padmanathan Ji,

I agree with you on the last post. And my earlier views given at serial No. 11 were after considering these contingencies only.

[Padmanathan KV]

Learned Amit Ji,

I agree with your Post In Sno 11 and I was only trying to gain more insight your views regarding books of accounts.

There is neither inconsistency in the said views nor do I have any disagreement. I was only trying to take the thought process regarding section 34  rwr 56 to a logical conclusion.

[Ethirajan Parthasarathy]

Thanks to everyone for very useful discussion on my query. While GST Law mandates maintaining books of accounts, in practical situation, individuals who have non business income do not maintain any such books. In view of this, I wonder whether ITC is available even on expenditures on painting the building which everyone knows is not a capital expenditure because it cannot be proved that it is not capitalized in the absence of books of account.

[KASTURI SETHI]

Dear Sir,

" Everyone knows____" will not suffice. Documentary evidence is required.

[Amit Agrawal]

Law of the land has to be followed. And I do not see much trouble doing the same for specific situation under discussion here.

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