2026-VIL-185-AAR
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SGST Advance Ruling Authority

GST – Maharashtra AAR - Reversal of Input Tax Credit on goods damaged by flood under Section 17(5)(h) of the CGST Act, 2017, Scope of expression "goods lost" in Section 17(5)(h) - Stock stored in the warehouse was partly damaged by flood water, resulting in broken terminals, corrosion, spoiled packing, loss of supplier warranty and reduction in market value, though the goods remained saleable as batteries and cells at reduced price - Applicant received insurance compensation assessed without considering tax and contended that Input Tax Credit reversal is required only where goods are lost, stolen, destroyed, written off or gifted, and that a mere write-down of value is not covered - Whether the Applicant is obligated to reverse Input Tax Credit on the damaged goods to the extent of reduction in value - HELD - The expression ‘goods lost’ is not defined in the CGST Act and must be understood in its ordinary commercial sense. Goods may be regarded as lost when they suffer damage or impairment such that their intended commercial value and utility are substantially diminished by an unforeseen event such as flood. The provision is not restricted to total annihilation or conversion into scrap; the term written off in commercial and accounting practice covers diminution in value recognised due to damage. This was not a normal market-driven price reduction or obsolescence but a specific identifiable loss for which insurance compensation was claimed and received - Legislative intent behind Section 17(5)(h) intends to deny ITC where goods do not ultimately contribute fully to taxable outward supply due to loss or destruction. Allowing ITC on goods that have lost substantial value due to flood would defeat the legislative intent of linking ITC to effective use in business. Flood is an extraneous and abnormal event, and losses arising therefrom cannot be equated with normal business depreciation or market-driven price reduction – Further, the applicant has effectively recovered the value of damaged goods through insurance. Allowing retention of full ITC would result in unjust enrichment, which is not the intent of GST law - Applicant is required to reverse Input Tax Credit attributable to the damaged goods under Section 17(5)(h) to the extent of reduction in value – Ordered accordingly - Liability to GST on insurance compensation received for damaged stock - Applicant contended that the insurance claim amount is an actionable claim excluded under Entry 6 of Schedule III and is a pure financial transaction of claim settlement - Whether GST is payable on the insurance claim amount received - HELD - Insurance claim settlement represents monetary compensation for loss/damage to goods. The receipt of an insurance claim does not fall under the definition of "supply" as defined in Section 7 of the CGST Act - Quantum and timing of reversal of Input Tax Credit under Section 17(5) of the CGST Act, 2017 - Whether the reversal is to be made in the period of claim settlement or in another period - HELD - The eventuality in clause (h) arises usually after ITC has already been availed, and reversal is required in the return for the month in which the eventuality arises. Where the event happens over a period of time or its time is not known, reversal is required when the event is recognised or becomes known to the taxpayer. Documentation such as a damage assessment report prepared for submission to the insurer establishes that the event is known - ITC attributable to the value of inputs damaged, to the extent of reduction in value, is required to be reversed in the tax period in which such ineligibility arises, being the period in which the event of loss is known or recognised in the books of account, whichever is earlier.
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