ITC reversal on fixed assets written off in the books

[Ramesh Pokar]

A private limited company has written off the residual value of computers in its books of accounts at the end of their useful life of 3 years, as per Schedule II of the Companies Act.

Is ITC reversal required? If yes, should it be done under Rule 40(2) or as per Schedule I of the CGST Act?

Is it not an anomaly in the law that the Companies Act provides a useful life of 3 years for computers, whereas the GST law provides 5 years?

Request valuable inputs from the experts. Thank you

[Sadanand Bulbule]

Dear Sir

ITC needs to be reversed in terns of Section 17[5][h] of the CGST Act, which speaks about "write-off" segment as per the procedure prescribed.

[Sadanand Bulbule]

Please read it as:

" Written off" segment

[Ramesh Pokar]

Thank you sir for your reply, but sir section 17(5)(h) talks about goods written off, in the query capital goods have been written at the end of useful life of the assets. 

[Sadanand Bulbule]

Dear Sir

 Broadly speaking for the purpose of Section 17[5][h], the concept of 'goods' also includes "capital goods".

[KASTURI SETHI]

Sh.Ramesh Pokar Ji,

Q. No.1 : Is ITC reversal required? If yes, should it be done under Rule 40(2) or as per Schedule I of the CGST Act ?

Reply : Reversal is required under Rule 40 (2) of CGST Rules. It is covered under the definition of 'Capital Goods'. .See Section 2 (19) of CGST Act.

Q.No.2 : Is it not an anomaly in the law that the Companies Act provides a useful life of 3 years for computers, whereas the GST law provides 5 years ?

Reply : No anomaly. Both Acts are independent of each other. Both Acts have different specific purposes and statutory responsibilities to be complied with accordingly.

I also concur with all the replies of an expert, namely, Sh.Sadanand Bulbule, Sir

[Amit Agrawal]

In my view, reversal of ITC is NOT required in given situation as subject goods are still getting used for business by the tax-payer and same were written off only to comply provisions of Company Law. 

IMHO, there is lacuna / gap in law / rule to deal with a situation where "used" capital goods (but whose economic life is not yet over) are written off, lost, stolen or destroyed. 

No rule specifically deal with above situation.

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

[VENU K]

In my opinion permanent transfer or disposal of business assets is something that has to be factually arrived at. Just because company law requires a write off in a number of years it does  not mean that the asset has ceased to exist  or disposed off. Schedule 1 merely creates a legal fiction of supply even if there is no consideration in case of permanent transfer as well as disposal. Permanent transfer requires two parties where as Disposal does not need two parties. One cannot tax something that is still existing and working in the business just on the basis of disclosures in the financial statements. Moreover disposal would mean something that has been discarded as having no value. Disposal cannot be assumed in the case of a business asset that is still existing in the business.

If it is written off because it has ceased to work due to complete breakdown, then reversal will be required. A treatment under another law ipso facto cannot result in a different tax treatment in GST.

Rule 40 (2) The amount of credit in the case of supply of capital goods or plant and machinery, for the purposes of sub-section (6) of section 18, shall be calculated by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods.

Sec 18(6) talks about supply of capital goods or plant and machinery on which input tax credit has been taken.

Schedule 1 clause 1 can deem permanent transfer or disposal as a supply where input tax credit is availed even if there is no consideration.

[Amit Agrawal]

In continuation of my post above at Sr. No. 6, section 18(6) & Rule 40(2) has no application in given situation as there is no supply. 

There is no permanent transfer or disposal of business assets in described situation. Hence, Schedule-I does not cover situation under discussion here.  

P.S. 'Reversal of ITC' & 'Paying taxes against outward supply' are TWO different things under law. 

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

[Sadanand Bulbule]

Dear all

1] While welcoming the experts on the topic under discussion, I wish to add that Section 17[5] contains non obstante clause and overrides Section 16[1] and Section 18[1]. Therefore in my opinion ITC needs to be denied, even if the actual written off goods are used exclusively for business purpose.

2] The term used is written off. Further, as per clause (h) of subsection (5) of section 17 states that goods are written off, not value written down. The liability to forego the credit would arise, only when the goods are entirely written off and not its value.

Experts are free to counter academically.

[Shilpi Jain]

Is the computer discarded? Is it not with the Company for use?

If it is still physically with the Company, then in my view there is no requirement to reverse any ITC.

[Sadanand Bulbule]

Dear all

 It is also worth to refer:

The CBIC Circular No:170/02/2022-GST dated 6th July 2022 refers to the reclaim of ITC, only under specific situations, where the reversal/ineligibility is on a provisional basis and ITC can be claimed on satisfaction of a condition under Section 16[2][d] e.g. non-payment of supplier beyond 180 days, delayed receipt of goods, etc. The Circular treats the ITC ineligible under section 17(5) as absolutely ineligible and non-reclaimable.  

[Amit Agrawal]

In continuation of my posts above, providing depreciation on 'Computers' as per Schedule II of the Companies Act, is NOT akin to 'goods written off'. There is big difference between goods getting depreciated in books of account due to their usage over period of time and goods being 'written off'.

Therefor, IMHO, Section 17(5)(h) cannot be applied to the given situation under discussion here. 

Without prejudice to above, there is no mechanism prescribed under GST Law and Rules made thereunder, to calculate amount of ITC to be reversed when 'capital goods which are used by the tax-payer for some years' (& whose economic life is not yet over) are written off, lost, stolen or destroyed. 

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

[Amit Agrawal]

Though on somewhat different context, one may refer to the discussion we had under Issue-ID: 118820 bearing subject-line as 'SEC 17(5)(h)', wherein I have explained why Section 17(5)(h) does NOT apply where a fire destroys "Finished Goods / FG" even though those FG were manufactured by the tax-payer using input goods / services and the tax-payer has indeed availed ITC against such input goods / services. 

I also explained that 'there is no legal provision / rules to demand "reversal of ITC against inputs" which are "contained in semi-finished or finished goods" when such "semi-finished or finished goods gets destroyed by fire"

In above referred discussion, I had also explained why the quoted ruling therein (i.e. 2023 (9) TMI 852 - AUTHORITY FOR ADVANCE RULING, TELANGANA IN RE: M/S. GEEKAY WIRES LIMITED) is legally unsustainable. 

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

[Shilpi Jain]

Do have a look at my article on this topic https://www.taxtmi.com/article/detailed?id=9286

[sunil jain]

It is just to update that in the Companies Act, useful life of capital asset is prescribed and there is no requirement to write off till asset is in use, even if at NIL value or at salvage value. Hence normally companies dot not write off residual value of the asset just just after useful life period specified in company law. Hence in those cases otherwise also, there is no question of reversal of ITC.

Thanks,

CA. R.K. Aggarwal 

AI Summary

Debate on ITC reversal for written-off computers: Rule 40(2) vs. Schedule I of CGST Act. Legal gap identified. A private limited company inquired about the requirement to reverse Input Tax Credit (ITC) on computers written off at the end of their useful life, as per the Companies Act. The discussion centered on whether ITC reversal is necessary under Rule 40(2) or Schedule I of the CGST Act, given the discrepancy between the Companies Act's 3-year useful life for computers and the GST law's 5-year period. Opinions varied: some experts argued ITC reversal is required under Section 17(5)(h) of the CGST Act, while others contended it is not necessary if the assets are still in use for business purposes. The discussion highlighted a potential gap in the law regarding the treatment of written-off capital goods.