1. Sec.  17(5) of the Central Goods & Services Tax (“CGST”) Act, 2017 provides for certain restrictions on claim of input tax credit (“ITC”). Clause (c) & (d) of Sec. 17(5) along with Explanation is relevant for our discussion and hence reproduced below: 

17. Apportionment of credit and blocked credits. —

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely :— 

(c)works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; 

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Explanation. — For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;” 

2. Above referred Explanation clearly provides, amongst other things, that ITC of GST on repairs to immovable property shall be restricted only if such repairs are capitalized. In other words if the repairs are treated as revenue expense in the books of accounts, the ITC in respect of the same can be claimed. Capitalisation is defined by Cambridge Dictionary as recognizing a cost as part of the cost of an asset.

3. With above background take a case where XYZ Ltd. (registered as a normal supplier under GST) prepares books of accounts in accordance with the provisions of Companies Act, 2013 read with applicable Accounting Standards. Said company treats a major expense in respect of office building as a revenue expense after satisfying the relevant criteria (mainly that the benefit will not accrue for more than one year) under the Accounting Standards. Hence the said company claims ITC on such revenue expense.

4. GST officer wants to question such treatment in the books and opines that such expenditure should have been capitalized and hence ITC of the same is restricted u/s 17(5)(c)/(d) read with the Explanation. Can he question such accounting treatment is the issue for the present article ?

5. A controversy of a similar nature arose before the Apex Court under the Income Tax Act, 1961 in the case Apollo Tyres Ltd. v. Commissioner of Income-tax [2002] 122 TAXMAN 562 (SC). One of the issue involved in the case was with respect to calculation of book profits for the purpose of MAT liability u/s 115J of the Income Tax Act, 1961 as applicable during the relevant time. Appellant had provided for arrears of depreciation in its profit and loss account while determining its net profit as per the provisions of the Companies Act, 1956. Assessing officer took a view that such arrears of depreciation cannot be claimed in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 and hence added the same and recomputed the book profit. Issue thus before the Court was whether assessing officer has the power to question the correctness of the financial statements and recompute the profit when the said financial statements have been certified by the auditor and have also been accepted by the general meeting of the Shareholders as well as Registrar of Companies (“ROC”). The relevant part of section 115J read as follows:

“115J. Special provisions relating to certain companies.— 

(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).”

6. Court relying on the Budget Speech of the then Finance Minister of India made in the Parliament while introducing the said section observed that since income-tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax a provision was made to bring such companies to tax by computing their liability on book profits. Court allowing the appeal on the issue held as under:

“For the said purpose, section 115J makes the income reflected in the companies’ books of account as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words ‘in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act’ was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinise the accounts and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income- tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of the Income-tax Act both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company’s income, then it would have stated in section 115J that ‘income of the company as accepted by the Assessing Officer’. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.”

7. Applying the ratio of the above decision we submit that the GST officer cannot challenge the accounting treatment given in the audited books of accounts due to following reasons:

a) Explanation (supra) provided u/s 17(5) of the CGST Act, 2017 only provides that repairs to the extent of capitalization shall be treated as “construction” for applying clause (c) & (d) of the said provision. Hence the treatment given in the books shall be a base for deciding the admissibility of ITC and officer cannot question the books duly audited and accepted by the shareholders in the AGM as well as ROC as held in the case (supra).

b) If GST officer is allowed to challenge the accounting treatment it shall result in two different financial results under the GST Laws and under the Income Tax Laws. Same cannot be accepted as held in the case (supra).

c) If legislator had intended that GST officer can challenge such accounting treatment, then it would have provided in the Explanation that “capitalisation as accepted by the proper officer” can be regarded as “construction”. In absence of such words, GST officer is not allowed to challenge the accounting treatment.

8. Hence we are of the view that GST officer cannot challenge the accounting treatment of a Company whose books are maintained in accordance with the provisions of Companies Act, 2013 and are duly audited and accepted by the ROC.

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3 Comments

  1. Hema says:

    Dear Sir,
    Greetings of the day!!
    We have a pvt. ltd. company. as we considered ITC in GSTR3B of capitalized goods (on construction items) in the f.y. 2018-19 but we never utilized or used that ITC benefit. now we want to reverse it.
    please let us know if any type charges and penalty applicable on claimed Gst and safest path to save penalty or charges.

    Thanks

  2. CA. GODIL MUBASSIR MAQSOOD says:

    Dear Sir

    In the article you have comprehensively discussed thoroughly the provisions in respect of companies.

    However we would like your opinion on the same subject if the tax payer is a partnership firm or a sole proprietor.

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