Gujarat HC Quashes Demand; ITC Allowed on Insurance for Stock & Premises

Gujarat HC Quashes Demand; ITC Allowed on Insurance for Stock & Premises

Issue

Whether Input Tax Credit (ITC) availed on insurance premiums for stock, plant & machinery, and business premises can be denied by the tax authorities by incorrectly classifying it as “motor vehicle insurance” under the blocked credit provisions of Section 17(5) of the CGST Act.

Facts

• Petitioner: Arraycom (India) Ltd.

• The Claim: The petitioner claimed ITC on insurance services. The policy documents clearly indicated that the coverage was for stock, business premises, and equipment.

• Compliance: The ITC claimed was duly reflected in the petitioner’s GSTR-3B and matched with GSTR-2A, with no discrepancies reported in the returns.

• Department’s Error: The Adjudicating Officer incorrectly assumed that the insurance premium related to motor vehicles. Based on this factual error, the officer invoked Section 17(5) (which blocks credit on motor vehicles and related services) and denied the credit.

• Consequence: A demand order was passed, and recovery proceedings, including bank account attachment, were initiated.

Decision

• The Gujarat High Court ruled in favour of the assessee and quashed the demand order and the recovery proceedings.

• Factual Perversity: The Court held that the Adjudicating Officer’s finding was contradictory to the documentary evidence (insurance policy terms) which clearly covered business assets and not vehicles.

• Scope of Section 17(5): The Court clarified that the blocking provisions under Section 17(5) are specific. They restrict ITC on insurance only when it relates to motor vehicles, vessels, or aircraft.

• General Insurance is Eligible: Insurance on other business assets (fire, theft, burglary for stock/factory) constitutes expenditure incurred in the course or furtherance of business and is fully eligible for ITC under Section 16.

• Lack of Jurisdiction: Since the order was based on a gross misinterpretation of facts and law, it was held to be without jurisdiction.

Key Takeaways

• • Classification of Insurance: It is crucial to distinguish between “General Insurance” (for business assets) and “Motor Insurance.” The former is eligible for ITC, while the latter is generally blocked (unless used for specific eligible purposes like transport business).

  • Evidence overrides Assumptions: Tax authorities cannot disregard clear documentary evidence (policy schedules) to invoke blocking provisions based on assumptions.

• Matching Returns: The fact that GSTR-3B and GSTR-2A matched strengthened the taxpayer’s argument of genuine availment, shifting the burden to the department to prove ineligibility.

• Remedy against Perverse Orders: High Courts will interfere in writ jurisdiction to quash assessment orders that suffer from errors apparent on the face of the record (like misreading a document).