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Ineligible ITC availed and later reversed under wrong head.

ITC / Input 523 views 2 replies

Meghana J Vishwas

3 Points Joined February 2022

Suppose ineligible ITC (IGST) has been availed and utilized for paying the outward tax liability of CGST and SGST.

Further , the ineligible ITC (IGST) was reversed through the filing of Form GST DRC-03. However, the reversal was made under the wrong head, i.e., CGST and SGST, instead of IGST.

In this scenario, if the adjudicating authority (department) does not accept or appropriate the ITC reversed under the incorrect head and demands the reversal of IGST itself.

Apart from raising contentions related to revenue neutrality /no loss to revenue,

can we also contend that, since the ineligible ITC of IGST was utilized to pay the outward tax liability of CGST and SGST, the reversal under CGST and SGST should still be considered valid?

Any logical or legal base are welcome to the above contention.

Replies (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

8883 Points Joined December 2011

Your contention is based on the principle of "substance over form." You're arguing that despite the technical error in reversing the ineligible ITC under the wrong head (CGST and SGST instead of IGST), the reversal itself is valid since it was utilized to pay the outward tax liability.

Logical and Legal Bases

1. *Section 49(3) of the CGST Act*: This section allows for the transfer of excess input tax credit from one head to another. Although this section doesn't directly apply to your scenario, it demonstrates the legislative intent to allow for flexibility in the utilization of input tax credit.

2. *Principle of Revenue Neutrality*: As you mentioned, since the ineligible ITC was utilized to pay the outward tax liability, there is no loss to revenue. This principle can be used to argue that the reversal under the wrong head should not result in a demand for reversal of IGST.

3. *Substance over Form*: This principle emphasizes that the true nature of a transaction should be considered over its mere form. In this case, the reversal of ineligible ITC was made, albeit under the wrong head. The substance of the transaction (reversal of ineligible ITC) should take precedence over the form (wrong head).

4. *Section 84 of the CGST Act*: This section provides for the reduction of penalty or fine in cases where the taxpayer has made a genuine effort to comply with the provisions of the Act.

Although not directly applicable, this section demonstrates the legislative intent to encourage compliance and reduce penalties for genuine errors. Contentions

1. *Genuine Error*: Argue that the reversal under the wrong head was a genuine error, and the taxpayer had no intention to evade tax or claim ineligible ITC.

2. *Substance over Form*: Emphasize that the reversal of ineligible ITC was made, and the substance of the transaction should take precedence over the form.

3. *Revenue Neutrality*: Highlight that there is no loss to revenue, as the ineligible ITC was utilized to pay the outward tax liability.

4. *Proportionality*: Argue that demanding the reversal of IGST would be disproportionate to the error committed, especially considering the taxpayer's genuine effort to comply with the provisions of the Act. By raising these contentions and relying on the logical and legal bases mentioned above, you can make a strong argument for considering the reversal of ineligible ITC under the wrong head as valid.

Meghana J Vishwas

3 Points Joined February 2022

Thank you for your valuable insights, Sir!

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