ITC Cannot Be Denied for Stock and business premises Insurance; GST Department reprimanded for wrong interpretation of Section 17(5)

The GST department mistakenly categorised Arraycom’s stock and premises insurance as motor vehicle insurance and wrongly denied ITC. The High Court found this error, cancelled the demand and recovery notice, and ruled in favour of the company.

The case has been filed by a company named Arraycom (India) Limited in the Gujarat High Court against the State of Gujarat and Others. The petition was filed because the GST department had wrongly denied ITC (Input Tax Credit) to them and even attached their bank account to recover the amount.

The company had taken out an insurance policy for its stock-in-trade and business locations. The GST officer mistakenly treated this as motor vehicle insurance, which is not eligible for ITC under Section 17(5) of the GST Act. An intimation dated October 25, 2024, in Form DRC-01A under section 73(3) of the GGST ACT, 2017, read with the CGST ACT 2017, was issued by the department.

Subsequently, adjudication was initiated and a show cause notice (SCN) dated November 13, 2024, in Form DRC-01 under section 73(1). In response to the SCN, the company submitted a detailed reply on November 22, 2024, along with the insurance policy and invoices in Form DRC-06.  It was mentioned that the insurance was taken for their stock and business premises, not for any motor vehicle. Hence, they had correctly availed of ITC on it. Additionally, flagged that there were no discrepancies in the details of GSTR-3B and GSTR-2A returns, with no over-claim or mismatch between returns filed and invoices.

However, the GST officer did not accept the reply of the company and passed its final order dated February 07, 2025, under Section 73 of the CGST Act, raising a demand of Rs. 1.72 lakh on the company. The order was uploaded on the GST portal in Form DRC-07, disallowing the claimed ITC.

The company could not file a timely reply to the order because their concerned officer was on leave due to some urgent work. Hence, they did not file an appeal before the lower authorities; instead, they directly filed a writ petition in the High Court. The Court examined the insurance policies and confirmed that they clearly covered stock, premises and equipment, not any vehicle.

Since Section 17(5) applies only to motor vehicle insurance, the Court held that the GST officer acted wrongly in disallowing ITC. Therefore, the High Court quashed the impugned Rs. 1.72 lakh GST demand order dated February 07, 2025, and the bank recovery notice. The High Court stated that the department had no authority to deny ITC in such a situation and acted on incorrect facts.