Reclaim of ITC (through TRAN-1) after reversal - redrafted issue id 121043

[Raam Srinivasan Swaminathan Kalpathi]

Dear experts

One of the client had on account of a technical glitch in the portal while filing TRAN-1 reversed the eligible ITC in the books of account in 2018. Subsequently, when the GST department provided one more chance to avail the lapsed ITC the client had successfully filed the same in 2022 through TRAN-1 and an acceptance letter was also received from the department.

The reversed ITC was reclaimed in the books of account by way of credit to the statement of profit and loss account. Now, department has issued notice claiming GST on this ITC reclaim as the same was credited to the statement of profit and loss. One point is this amount does not amount to supply and outside the purview of the GST department. Is there any other legal issue which I am overlooking? Experts please advise. Thanks

[Sanjeev Agarwal]

Your primary contention is correct. A concise response (under 2,500 characters) could be:

In my view, the demand is legally unsustainable if it is based solely on the credit of restored transitional ITC to the Statement of Profit and Loss. GST is attracted only on a "supply" as defined under section 7 of the CGST Act. Restoration of eligible TRAN-1 credit, accepted by the department, does not involve any supply of goods or services, consideration, or any deemed supply under Schedule I.

The ITC was originally reversed in the books in 2018 only because of a technical glitch that prevented availment through TRAN-1. Once the Government reopened the TRAN-1 facility and the credit was successfully availed in 2022, supported by the department's acceptance, the accounting entry merely reinstated an asset that had earlier been written off. The fact that the reversal was routed through the Statement of Profit and Loss does not alter the nature of the transaction.

Accounting treatment cannot determine GST liability. There is no charging provision under the CGST Act that levies GST merely because an amount is credited to the profit and loss account. The department must first establish a taxable supply before invoking the charging section.

However, one aspect that should be examined is the exact allegation in the show cause notice. If the notice is based only on the P&L credit, the demand appears weak. If it alleges wrongful availment of ITC, excess utilization, or invokes sections 73/74 on any other ground, those allegations would need to be addressed separately.

Also, distinguish the GST issue from the income-tax treatment. Crediting the amount to the Statement of Profit and Loss may have income-tax implications depending on the earlier deduction claimed, but that does not create a GST liability.

Unless the department can point to a specific charging provision under the CGST Act, mere restoration of a previously reversed ITC through an accounting entry should not be subjected to GST.

[KASTURI SETHI]

Dear Sir,

Is the amount of transitioned credit involved in refund claim indirectly ? Any possibility ?

Input Tax Credit and transitioned credit are entirely different concepts. Transitioned credit can only be utilized for payment of tax on outward tax liability and not for refund claim.

[Raam Srinivasan Swaminathan Kalpathi]

Respected Sir

This issue has cropped up because of GSTR-9C reconciliation in 2022-23. The said amount allowed by the GST department in TRAN-1 in 2022-23 (reversed ITC in 2018-19) was reclaimed in the books in 2022-23. The TRAN-1 reclaim was credited to the statement of profit and loss account (under Other Income) as the same was debited to the said statement in 2018-19. ICAI Guidance Note on GSTR-9C mandates inclusion of 'Other Income' also while reconciling turnover for GSTR-9C purposes. Department Notice in ASMT-10 was based on this difference. I was seeking guidance on filing a reply to the difference between the books, GSTR-9 and GSTR-9C. Thanks and appreciate the concern. Also my gratitude to the suggestion from respected Sri.Sanjeev Agarwal.

[KASTURI SETHI]

Dear Sir,

Thanks for prompt elaboration of your query. I got your issue. Must try on AI Tool of TMI and Gemini AI. Both sites can help you a lot in this direction.

There is sufficient material on this issue on both AI sites.

[Sanjeev Agarwal]

Reply to ASMT-10

The difference pointed out during reconciliation between the turnover as per the audited financial statements and the turnover reported in GSTR-9/GSTR-1 pertains to an accounting adjustment and does not represent any taxable supply under the CGST Act, 2017.

During FY 2018-19, the eligible transitional Input Tax Credit (ITC) could not be availed owing to a technical glitch in filing TRAN-1. Consequently, the amount of eligible ITC was reversed in the books of account by debiting the Statement of Profit and Loss.

Pursuant to the directions of the Hon'ble Supreme Court and the reopening of the TRAN-1 filing facility by the Government, the said eligible transitional ITC was successfully availed during FY 2022-23. The jurisdictional GST authorities accepted the TRAN-1 claim and issued the requisite acceptance/approval.

Since the expenditure had been charged to the Statement of Profit and Loss in FY 2018-19, the restoration of the admissible ITC was accounted for by crediting the Statement of Profit and Loss under "Other Income" in FY 2022-23, thereby restoring the earlier write-off. This is purely an accounting adjustment and does not arise from any supply of goods or services.

As required by the ICAI Guidance Note on GSTR-9C, "Other Income" is included while reconciling the turnover as per the financial statements. However, such inclusion for reconciliation purposes does not determine taxability under the CGST Act. The amount represents restoration of an admissible asset and not consideration for any outward supply.

Accordingly, the difference reflected in GSTR-9C is only a reconciliation difference arising from accounting presentation and has no nexus with taxable turnover. The amount has not been omitted from GST returns, nor does it constitute a supply under section 7 of the CGST Act, 2017. Therefore, no GST liability can arise merely because the accounting entry appears under "Other Income" in the financial statements.

In view of the above facts, it is respectfully submitted that the reconciliation difference may kindly be accepted as explained and the proceedings initiated vide ASMT-10 may be dropped.

[KASTURI SETHI]

Sh.Sanjeev Agarwal Ji,

Sir, I relish your articles and now I shall relish your replies in Discussion Forum. Your replies are a bonanza for me in indirect taxation field. It is a fact. No exaggeration at all.

Thank you very much.

[Sanjeev Agarwal]

Shri Kasturi Sethi Ji, Thanks for our kind Blessings, Regards

[Raam Srinivasan Swaminathan Kalpathi]

Profuse thanks to both the experts for their erudite suggestions. Most obliged.

[Shilpi Jain]

There is nothing that you are missing. You are right that mere entry in the profit and loss account cannot lead to GST Liability.

AI Summary

Transitional ITC restoration through TRAN-1 does not become taxable merely because accounting treatment credits it as other income.
Restoration of eligible transitional ITC through accepted TRAN-1 filing, after an earlier book reversal caused by a technical glitch, may be credited to the Statement of Profit and Loss as reinstatement of a previously written-off asset. Its presentation as "Other Income" can produce a GSTR-9C reconciliation difference but does not itself make the amount taxable turnover. GST liability requires a taxable supply; the accounting restoration, absent goods or services, consideration, or deemed supply, is characterised as an accounting adjustment. Separate allegations concerning wrongful availment or excess utilisation require independent examination.