1. Introduction
Since from very inception of GST, couple of times on recommendation of GST Council, Government has rationalized the rates of GST. Due to this, the concept of inverted duty structure arose for number of goods.
In many cases, business houses are either not able to use the balance of ITC or not able to apply for refund (due to ineligibility or cost benefit analysis or other reasons) and so, electronic credit ledger of registered person shows/keeps on growing the ITC. On other side they have the burden of income tax liability. So an issue arises, whether such unutilized ITC can be written off?
Query
Querist is registered under GST Acts. He is engaged in supplying the goods which are falling under inverted duty structure he is having the right to get the refund on account of inverted duty structure u/s 54(3)(ii) of CGST Act and SGST Act. Querist has sought an opinion
| As to whether writing off the input tax credit under GST law is an allowable expenditure under Income Tax Act? |
| Can it be written of partly or fully as per the choice of assessee? |
| If so, how shall it be declared in GST law? |
2. Applicable Legal Provision
Section – 28, Income-tax Act, 1961
Profits and gains of business or profession.
Sec. 28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—
| (i) | the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; | |||
Section – 37(1), Income-tax Act, 1961
General.
Section 37(1) – Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
Evaluation of the case:
On a careful reading of Income Tax Act so far as allowability of expenditure under the head of business or profession is concerned, in order to claim the deduction of expenditure , following conditions must be satisfied:
| (1) | Expenditure should be allowable under the allowability sections (here section 30 to section 37(1) of provide for the provision on allowability of expenditure) |
| (2) | Expenditure should not be disallowable under the disallowability sections |
It may be observed that Income Tax Act does not have any provision to disallow the writing off the input tax credit. So we need to test this issue under the umbrella of allowability sections.
Sections 30 to section 37 are cumulative and not mutually exclusive. Hence if expenditure is not covered by section 30, it can be claimed u/s 31. If the same is not allowed u/s 31, the assessee can approach next section and this way he can check the allowability u/s 37.
On perusal of Income-tax Act, it is clear that writing off the input tax credit of GST does not fall into section 30 to section 36 of Income-tax Act. So as per the above we need to examine the allowability u/s 37.
Section 37(1) allows the deduction of expenditure if following conditions are satisfied:
| The expenditure is not a personal expenditure, |
| The expenditure is not a capital expenditure, |
| The expenditure is not of a nature described in sections 30 to 36 |
| The expenditure incurred by an assessee is not for any purpose which is an offence or which is prohibited by law |
| The expenditure incurred by an assessee is not relating to corporate social responsibility. |
The terms ‘loss’ and ‘expenditure’ have distinct meanings. Simply speaking “Losses – we suffer and Expenses – we incur”. For example, loss of stock or furniture by fire is a loss and not an expenditure. While drafting sections 30 to 37(1), the Parliament has used the term ‘Expenditure’ and not the ‘loss’. Even section 37(1) also allows the deduction of ‘expenses’. Hence, a pertinent issue arises- can we claim the deduction of losses u/ss 30 to 37(1)? The answer is ‘No’. The Courts have held that even if losses are not allowable u/ss. 30 to 37(1), these can be claimed u/s 28.
The Apex Court has held in case of Badri Das Daga v. CIT [1958] 34 ITR 10 (SC) and Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) that the deduction of loss can be claimed on the basis of ordinary commercial principle though there may not be any specific provision in the Act for allowability of such deductions.
On the basis of numerous court decisions, it can be concluded that following conditions should be satisfied for the deduction of losses-
| Loss should be real and not bogus, fictitious or notional, |
| Loss should be in nature of revenue and not the capital, |
| It must have been suffered and not merely anticipated to suffer in future, |
| It should be incidental to or spring from the carrying on of the business, |
| It should not be illegal, and |
There should not be prohibition or restriction in the Act against the allowability of deduction.
3. Judicial Precedents-In case of ABCAUS 3085 (2019) (07) ITAT
| The Revenue was aggrieved by the order of the CIT(A) in deleting the disallowance in respect of service tax recoverable’ by accepting the self-serving claim of the assessee without fulfilling the conditions laid down under rule 46A of Income- tax Rules ( the Rule ). |
| The assessee was taking credit of service tax paid by it on input services under CENVAT Credit Rules, 2004. In such scenario, the expense was booked by the net amount, i.e. net off service tax. The amount of service tax was booked in the service tax recoverable account and was adjusted through the liability of payment of service tax. |
| During the relevant year, the assessee had charged service tax amount which could not be set off against the output service tax by debiting the same to P&L account. The said amount was not debited as expenditure in earlier years since the same was recorded as recoverable against output service tax liability. |
| The Assessing Officer (AO), however, for the relevant assessment year, disallowed the claim of the appellant on the ground that no evidence in respect of the claim was submitted by the appellant during the course of assessment proceedings. |
| Before the CIT(A), the assessee submitted that subsequent to a service tax audit of the appellant conducted by the service tax department, the CENVAT credit taken by the appellant was not allowed on certain nature of input services. |
| It was further submitted that it had booked the expenses net of service tax amount as the appellant was assuming that it was entitled to avail CENVAT credit. However, had the appellant known earlier that such credits would be denied at a later stage , the appellant may have booked all expenses gross of service tax and would have not taken any credit in the books of account. |
| They further submitted that pursuant to such audit the appellant reconsidered it’s claim of CENVAT credit for the subsequent year and suo motu written off the input credit claimed on such services, to its profit & loss account. According to the assessee, once that decision was taken and a claim to that effect was made that year, it became the year in which such claim was admissible. |
| To support its case, the assessee drew an analogy to the provisions of section 36(1)(vii) of the Act governing deduction of bad debts which under the amended provisions allow deduction in the year in which debt is written off in the books of account. The assessee also buttressed his contention relying on the CBDT Circular No. 12 of 2016 on admissibility of claim of deduction of bad debt under section 36(1)(vii) of the Act. |
| The appellant also relied upon the judgment of the Hon’ble Supreme Court wherein it was held that the claim of bad debts was allowable to the assessee if the same had been written as irrecoverable by the assessee and it was not necessary to establish that the debt had actually became bad. |
| The CIT(A) in view of the submissions of the assessee was pleased to delete the disallowance. |
| The Tribunal from the submission of the assessee made before the CIT(A) observed that the service tax portion was availed by the assessee as service tax recoverable for utilization towards output service tax. This amount was not included in the P&L account and claimed earlier. Rather, took into balance sheet under the head ‘service tax recoverable’. |
| The Tribunal did not agree with the findings of the Assessing Officer that the disallowance was made as the assessee had not produced any evidence. The Tribunal stated that since, the deduction had been claimed for the first time in the relevant year it was allowable. |
Accordingly, the appeal of the Revenue on this ground was dismissed.
4. Judicial Precedents-In case of M/s. NCS Distilleries (P.) Ltd. v. ITO IT Appeal No. 699 (Hyd.) of 2012, dated 16-9-2014
The assessee was engaged in the business of manufacturing and trading of yarn and fibre. The yarn manufactured by the assessee was an excisable item. The assessee was paying excise duty on the raw material purchased i.e. acrylic yarn/fibre and polyester yarn/fibre. In turn, assessee was liable to pay duty on its manufactured items. The rate of excise duty payable on the raw material was higher and the assessee was depositing the excise duty in PLA account which in turn was adjustable against the excise duty payable on the finished products. The excise duty payable on the finished products was on the lower side and consequently over the period of years the assessee had credit of excise duty resulting in accumulation of CENVAT.”
“10. Various tests have been laid down by various High Courts and the Apex Court in relation to the allowability of expenditure under section 37(1) of the Act while computing the income from profits and gains of business or profession. In the facts of the present case, the assessee had paid CENVAT on purchase of raw material which was deposited in its PLA account for claiming the benefit of set off against the excise duty payable on the manufactured items i.e. branded yearn. The assessee was paying higher rate of excise duty on the raw material purchased by it as against the rate of excise duty applicable on the manufactured items, consequently credit of excise duty was available with the assessee. The said excise duty paid from year to year was not claimed as an expenditure but was carried forward from year to year to be adjusted against the excise duty payable by the assessee on its manufactured items. However, during the year under consideration the assessee closed down its manufacturing unit and consequently the benefit of the CENVAT credit remained un- adjusted. Once the manufacturing unit of the assessee is closed down, admittedly the benefit of ITA.No.699/Hyd/2012 M/s. NCS Distilleries P. Ltd., Hyderabad.
CENVAT credit not availed of against the excise duty payable on manufactured items, cannot be utilized by the assessee and the said write off of CENVAT credit, is allowable as an expenditure in the year under consideration on the closure of the business. The write off of CENVAT credit by the assessee in its books of account is thus allowable as business expenditure under the provisions of section 37(1) of the Act relatable to the year, in which the manufacturing activities are closed down by the assessee. Accordingly, we direct the Assessing Officer to allow the claim of the assessee in respect of write off of CENVAT credit of Rs. 35,94,577/-. Ground No.1 raised by the assessee is thus allowed.”
5. Conclusion
Question (a) As to whether writing off the input tax credit under GST law is an allowable expenditure under Income Tax Act?
Answer (a) Treatment under the head of business or profession:
There can be a question that whether writing off the balance of input tax credit is an expenditure or loss. If analogy of section 36(1)(vii) of the Income Tax Act is followed then it should be treated as an expense and, hence, it should be examined in the light of section 37(1) of Income Tax Act.
Even if it is argued that input tax credit is recognized in preceding financial year it will not be tenable under the law by following the analogy to the provisions of section 36(1)(vii) of the Act governing deduction of bad debts which under the amended provisions allow deduction in the year in which debt is written off in the books of account.
And if it is treated as loss then as per the Apex Court in case of Badri Das Daga (supra) that the deduction of loss can be claimed on the basis of ordinary commercial principles though there may not be any specific provision in the Act for allowability of such deductions.
Question (b) Can it be written off partly or fully as per the choice of assessee?
Answer (b) – Yes, it is upto the discretion of the assessee whether he wish to write off the input tax credit. If assessee does not wish to carry forward the input tax credit (partly or fully), he may write off the same. But he has to declare the same in a prescribed manner.
Question (c) If so, how shall it be declared in GST law?
Answer (c)
| Writing off the input tax credit under GST law means the registered person has written off the credit under the GST law. |
| It signifies that registered person has reversed the credit by way of GSTR 3B [table 4(B)(2)] or DRC-03. |
| For the sake of convenience, we are giving you the table: |
4. Eligible ITC
| Details | Integrated Tax | Central Tax | State/UT Tax | Cess | |
|---|---|---|---|---|---|
| 1 | 2 | 3 | 4 | 5 | |
| (A) ITC Available (whether in full or part) | |||||
| (1) | Import of goods | ||||
| (2) | Import of services | ||||
| (3) | Inward supplies liable to reverse charge (other than 1 & 2 above) | ||||
| (4) | Inward supplies from ISD | ||||
| (5) | All other ITC | ||||
| (B) ITC Reversed | |||||
| (1) | As per rules 42 & 43 of CGST Rules | ||||
| (2) | Others | ||||
| (C) Net ITC Available (A) – (B) | |||||
| (D) Ineligible ITC | |||||
| (1) | As per section 17(5) | ||||
| (2) | Others | ||||
(c) Treatment in Financial Books:
Assessee has to pass the journal entry
| (a) | ITC written off A/c Dr |
| To CGST ITC/SGST ITC/IGST ITC | |
| (b) | Profit and Loss A/c Dr |
| To ITC written off A/c Dr |
Disclaimer:
This note shall not be construed as law. Note maker shall not be liable to any consequence for any decision taken based on this opinion.