In a recent judgment the Allahabad High Court held that ‘Inputs’ are meant for day-to-day business operations not required to be capitalized in books of accounts under the Central Goods and Service Tax Act, 2017 ( CGST Act ). The Petitioner filed for the refund of the unutilised ITC of CGST, SGST, and IGST paid on various inputs and input services, for the period of July – September, 2019 amounting to Rs.7,46,52,231/- and October – December, 2019 amounting to Rs.8,20,59,875/-.

Against the aforesaid refund applications, deficiency memos under FORM GST-RFD-03 and later show cause notices were issued by the Department proposing to reject the refund for the aforesaid periods. The counsel for the petitioner contended that the Department has travelled beyond the scope of show cause notices.

The show cause notices and the refund rejection orders had rejected the refund on the ground that the specific goods are not consumed in the process of provision of output service and hence cannot be treated as inputs. However, it was argued that the petitioner followed the capitalisation method based on use of goods and given that specific items became redundant after completion and validation of software and were discarded thereafter, the said goods were not capitalised in the books and accordingly, the Petitioner availed ITC on such goods by treating them as inputs. Therefore, the Petitioner has clearly treated the specific goods as ‘inputs’.

The Additional Chief Standing Counsel appearing on behalf of the respondents contended that it is clear that the Petitioner while preparing its financial statements has not adhered to the Accounting Standards. Specific goods have not been capitalised by the Petitioner in accordance with Accounting Standard 10.

A Single Bench of Justice Shekhar B. Saraf observed that “When facts and circumstances in a subsequent assessment year are the same, no authority, whether quasi-judicial or judicial can generally be allowed to take a contrary view. The arbitrary withholding of refund claims for specific periods, despite past precedents and the absence of any material change in circumstances, is contrary to the principles of fairness and equity. Capital goods, are intended for long-term use and are typically subject to capitalization. However, inputs, are goods used in the day-to-day operations of the business and are not subject to capitalization.”