ITC reversal calculation in case of merger as a going concern

[Aditya Singh]

Company B got one of its business verticals merged into company A on 'going concern' basis with a pre-condition to settle the pending debts (Slim its books of accounts) and assumed only small portion of liabilities. The company B terminated the mutually agreed contract in year 1 and availed ITC accordingly, however, the relevant date for merger falls in year 2. Since transfer as going concern is an exempt service, it will trigger ITC reversal under Section 17 and Rule 42. How reversal will be calculated specifically T2, since T2 is availed in year 1 in common basket of ITC and exempt supply materialised in year 2. 

Q1. As per my understanding, T denotes a tax period not a particular financial year. For calculation of T in year 2, the T2 of year 1 must be added to T of year 2 i.e. T= T(y2) + T2(y1)

Q2. Also, this will be a case of reversal of ITC as per section 17 instead of wrong availment of ITC since Trigger for reversal i.e. exempt supply happened in year 2 (Legal jurisprudence: ITC reversal arises when exempt supply materialized, year of ITC availment is not important). Also, since there was no exempt supply in year 1 the taxpayer was perfectly eligible to avail ITC since event of exempt supply hapenned in year 2. 

The view and comments of experts are required. Please help. 

AI Summary

How to compute T2 and ITC reversal under Section 17 and Rule 42 when exempt merger follows prior ITC A taxpayer merged one business vertical into another on a going-concern basis in year 2 (an exempt supply), having earlier claimed common-basket ITC in year 1 after terminating a contract. The core legal issue is whether ITC reversal under Section 17 and Rule 42 is triggered in year 2 and how the T2 (input tax attributable to exempt supplies) is calculated when part of the ITC was availed in year 1. The taxpayer contends (1) T denotes tax period and should aggregate prior-period T2 amounts into the year-2 T, and (2) reversal follows Section 17 upon occurrence of the exempt transfer rather than being treated as wrongful availment in year 1. Expertise is sought on correct T2 computation and applicable treatment.