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

ITC reversal on exempt transfer as going concern requires proportionate reversal including available prior-period common credits.
Transfer of a business as a going concern is an exempt supply that triggers proportionate reversal of common input tax credit in the tax period when the exempt transfer occurs. The reversal base for that period includes the total common ITC pool available then, comprising unutilised carried-forward credits and current-period credits; the standard proportionate allocation between taxable and exempt turnover determines the amount to be reversed. Recoverability of prior-period credits depends on their availability, transfer via ITC-02, and limitation or assessment status.