ITC reversals requirement:, Goods and Services Tax - GST

[Anurag Chopra]

ITC reversals requirement:

During the year, Company XYZ had some losses/ inventory written off in the books of accounts. Post audit, it was established that such losses/ write offs were booked due to technical glitch in the SAP.

The said inventory was found physically available during the year end physical inventory count, but the issue is some of it is obsolete and some of it outdated (would be sold at much lower prices).

The issue here is that GST department is asking for reversals/ interest from the time inventory was written off in books.

Our point of view is that first inventory was inadvertently written off in books (via SAP glitch) and later was found available physically. Also, the inventory is being sold at written down value now as scrap etc. so the conditions of written off never arises in our case, therefore, no requirement of ITC reversal.

Is there any requirement for ITC reversal in above scenario. Also, any case law etc. which might help us in above case.

Posts / Replies

[Sadanand Bulbule]

Section 17[5][h] of the CGST Act governing the blocked credits reads as under;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

So even if such obsolete goods are sold as scrap, you need to pay tax on its invoice value. Consequently the question of reversing ITC on such goods does not arise. However you have to justify the mistake of accounting for such goods as written off earlier due to SAP technical glitch and it should be bonafide.

[YAGAY andSUN]

In the given case, where inventory was erroneously written off in the books due to a technical glitch in SAP but was later physically verified during the year-end stock count, the condition for Input Tax Credit (ITC) reversal under Rule 42/43 or Section 17(5)(h) of the CGST Act does not strictly apply. The said provision mandates reversal of ITC in cases where goods are written off, lost, stolen, or disposed of by way of gift or free samples. However, here, since the inventory was neither actually written off nor disposed of, and remained physically available, albeit obsolete or outdated, the premise for ITC reversal is absent. The accounting error does not override the factual availability of stock. Moreover, if the inventory is now being sold, even at a lower or scrap value, the intention to make taxable supplies remains intact, which further supports the claim that ITC is legitimately admissible.

In similar situations, tribunals and courts have upheld that mere book entries or write-offs without actual loss or destruction of goods do not warrant ITC reversal. While there may not be a directly reported GST ruling specific to technical glitches, reference may be drawn from past VAT and excise regime rulings (e.g., CCE v. Tata Advanced Materials Ltd., where physical availability was given precedence over accounting treatment). Therefore, based on factual stock availability and eventual sale, the department’s demand for reversal or interest may not sustain. Proper documentation of physical verification reports and audit notes substantiating the SAP error would be crucial in defending this position.