Correcting Ineligible ITC Claims: Detailed Accounting Treatment and Financial Adjustments for FY 2023-24

Introduction

Fair Limited, a manufacturer of fabric products, faced an issue related to the availing and utilization of Input Tax Credit (ITC) on a car purchased for official use. The car was acquired on 1st April 2023 for Rs. 20,00,000, excluding GST at 18%. The company's statutory audit for FY 2023-24, conducted on 1st July 2024, highlighted discrepancies in ITC claims and the accounting treatment thereof. This article provides a detailed analysis and corrective measures based on the relevant legal provisions and accounting standards.

Scenario Overview

• Purchase Details:

  • Date: 1st April 2023
  • Purchase Price (Excluding GST): Rs. 20,00,000
  • GST on Purchase (18%): Rs. 3,60,000
  • Total Cost with GST: Rs. 23,60,000
  • Estimated Useful Life: 5 years
  • Salvage Value: Rs. 20,000

• ITC Utilized:

  • Amount Availed: Rs. 3,60,000
  • Month of Utilization: October 2023
  • ECL Balance Post Utilization: Nil

• Depreciation Recorded: Rs. 3,96,000 (using a straight-line method based on a cost of Rs. 20,00,000)

Relevant Legal Provisions

1. Section 17(5) of the CGST Act, 2017:

   • ITC is not available for motor vehicles with a seating capacity of up to thirteen persons unless used for specific purposes like further supply, passenger transportation, or driving training.

2. Section 50(3) of the CGST Act, 2017:

   • Interest at 18% is payable on wrongly availed and utilized ITC from the date of utilization until the date of reversal.

3. Ind AS 10 - Events after the Reporting Period:

   • Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. Such events require adjustments in financial statements.

Accounting Treatment

1. Initial Recording of Car Purchase

   Since ITC on the car is not allowable under Section 17(5) of the CGST Act, the GST amount should be added to the car’s cost.

   Journal Entry on Purchase (1st April 2023):

   Particulars	Debit (Rs.)	Credit (Rs.)
   Car A/c	23,60,000
   To Bank A/c		23,60,000

   This entry records the car at its total cost including GST.

2. Depreciation Calculation

   The company initially calculated depreciation based on Rs. 20,00,000, excluding GST. The correct depreciation should be based on the total cost of Rs. 23,60,000.

   Initial Depreciation Calculation: $\text{Depreciation} = \frac{20,00,000 - 20,000}{5} = 3,96,000$

   Correct Depreciation Calculation: $\text{Depreciation} = \frac{23,60,000 - 20,000}{5} = 4,68,000$

   Journal Entry for Depreciation (End of FY 2023-24):

   Particulars	Debit (Rs.)	Credit (Rs.)
   Depreciation A/c	4,68,000
   To Car A/c		4,68,000

3. Reversal of ITC

   Since the ITC was wrongly availed, it needs to be reversed along with interest.

   Journal Entry for ITC Reversal (July 2024):

   Particulars	Debit (Rs.)	Credit (Rs.)
   GST Payable	3,60,000
   To Motor Vehicle (Asset) A/c		3,60,000

4. Interest on Wrongly Availed ITC

   The interest on the wrongly availed ITC is calculated from the date of utilization (October 2023) to the date of reversal (July 2024).

   Interest Calculation:

   Month	No. of Days
   October 2023	31
   November 2023	30
   December 2023	31
   January 2024	31
   February 2024	29
   March 2024	31
   April 2024	30
   May 2024	31
   June 2024	30
   July 2024	20
   Total Days	244

   Interest Calculation: $\text{Interest} = 3,60,000 \times \frac{18}{100} \times \frac{244}{365} = 57,978$

   Journal Entry for Interest:

   Particulars	Debit (Rs.)	Credit (Rs.)
   Interest on GST Reversal A/c	57,978
   To GST Payable		57,978

5. Adjustment of Depreciation

   Due to the increase in the car's cost, additional depreciation needs to be recorded.

   Additional Depreciation Calculation: $\text{Additional Depreciation} = 4,68,000 - 3,96,000 = 72,000$

   Journal Entry for Additional Depreciation (20th July 2024):

   Particulars	Debit (Rs.)	Credit (Rs.)
   Depreciation A/c	72,000
   To Car A/c		72,000

Summary of Financial Impact

• Reversal of ITC: Rs. 3,60,000
• Interest on ITC: Rs. 57,978
• Additional Depreciation: Rs. 72,000

The total reduction in profit for FY 2023-24 due to these adjustments is Rs. 1,29,978 (comprising Rs. 57,978 in interest and Rs. 72,000 in additional depreciation).

Conclusion

The auditor’s contention regarding the ineligible ITC was accurate. The adjustments required include the reversal of the wrongly availed ITC, payment of interest, and recalculation of depreciation. These actions ensure compliance with the CGST Act, 2017, and align with Ind AS 10 requirements, reflecting a true and fair view of the company's financial position.

By following these detailed corrective measures, ABC Limited adheres to legal standards and accounting principles, safeguarding the accuracy of its financial statements.