GST Reversal Provision Permissible as Business Expenditure in Correct Financial Year Upon Assessing Officer Verification

By | October 26, 2026
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GST Reversal Provision Permissible as Business Expenditure in Correct Financial Year Upon Assessing Officer Verification

Issue

Whether a provision made for GST reversal under rules 42 and 43 of the CGST Rules, 2017 is allowable as business expenditure under section 37(1), and in which specific assessment year (AY 2022-23 vs. AY 2023-24) the deduction should be granted to avoid double deduction?

Facts

  • Assessee Profile: The assessee is an entity engaged in real estate development.
  • Expenditure Claimed: For Assessment Year 2022-23, the assessee claimed a provision of ₹85,59,538 towards GST reversal.
  • Calculation: The claimed provision represented 34.27% of the total GST amount of ₹2,49,76,766 paid on purchases of materials and services for its real estate project.
  • Period of Pertaining Expense: The assessee submitted that the amount related to the reversal of input GST credit availed during Financial Year 2022-23, which is relevant to Assessment Year 2023-24, rather than Assessment Year 2022-23.

Decision

  • Need for AO Verification: The Assessing Officer is required to verify the exact period to which the GST credit reversal pertains.
  • Year of Allowability: The Assessing Officer must examine the claim for Assessment Year 2023-24 and allow the expenditure strictly in the appropriate assessment year.
  • Prevention of Double Deduction: The matter was remanded to ensure the expense is allowed in only one assessment year so that no double benefit is claimed.

Key Takeaways

  • Single Deduction Rule: Statutory GST reversals mandatory under rules 42 and 43 of the CGST Rules are allowable business expenses under section 37(1), but deduction cannot be claimed across multiple assessment years.
  • Year of Accrual Control: The allowability of a provision or actual reversal of Input Tax Credit depends on the exact financial year in which the underlying credit was availed and reversed.
  • Remand for Cross-Year Verification: Where there is an overlap or discrepancy regarding the relevant assessment year, revenue officers must verify tax records of adjacent assessment years before finalizing disallowances.
IN THE ITAT AHMEDABAD BENCH ‘A’
Mahika Infra LLP
v.
Income-tax Officer
Dr. B.R.R. Kumar, Vice President
and Rahul Chaudhary, Judicial Member
ITA No. 1098 (Ahd) of 2026
[Assessment year 2022-23]
SEPTEMBER  23, 2026
S.N. Soparkar, Sr. Adv. and Ms. Urvashi Shodhan, AR for the Appellant. Amit Pratap Singh, Sr. DR for the Respondent.
ORDER
Dr. B.R.R. Kumar, Vice-President.- This appeal has been filed by the assessee against the order dated 19.01.2026 passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as ‘Ld. CIT (A)’ in short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short) for Assessment Year 2022-23.
2. The assessee has raised following grounds of appeal:-
“[1] The Ld. Commissioner of Income Tax (Appeals) have erred in law and on facts in sustaining the addition of Rs. 3,49,70,906/-.
[2] The Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining the addition of Rs.2,64,11,386/- under the head of Reversal of GST, totally on different aspects of GST, without raising the issue in its Show Cause Notice.
[3] The Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining the addition of Rs.2,64,11,386/- under the head of GST Input Tax Credit Reversal on the ground that s. 37(1) only allows deduction when there is actual cash outflow.
[4] The Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining the addition of Rs.2,64,11,386/- under the head of Reversal of GST on the ground that since the ITC was availed in earlier years, the reversal in AY 2022-23 is post facto adjustment and cannot be claimed in this year and further holding that matching principle is not applicable.
[5] The Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts by making addition of Provision of GST Reversal amounting to Rs.85,59,538/ being an amount payable towards GST for expenses incurred after BU permission in AY 2023-24 which cannot be set off and hence a provision for such expense must be created in proportion of ratio between sold units and unsold units at the time of BU permission on various grounds.”
3-4. The brief facts of the case are that the assessee is a Limited Liability Partnership (LLP) engaged in the business of real estate development. For the year under consideration, the assessee was engaged in two projects viz. Sheetal Westpark Residency – a residential project and Sheetal Westpark Imperia – a commercial project. The assessee has been regularly recognizing revenue on the percentage of completion method which has been accepted by the Revenue in earlier years. The residential project received Building Use (BU) Permission from the Ahmedabad Municipal Corporation on 20.11.2021, the current financial year.
5. The assessee filed its return of income for the year under consideration on 26.09.2022 u/s 139(1) of the Act, declaring total income of Rs.1,25,59,430/-. The case was selected for complete scrutiny and assessment was completed u/s 143(3) of the Act vide order dated 26.03.2024, determining the total income at Rs.5,50,78,930/-, after making the following additions:-
(i) Rs.2,64,11,386/- on account of GST reversal,
(ii) Rs.85,59,538/- on account of GST reversal/provision, and
(iii) Rs.75,48,573/- on account of Electricity Connection Charges.
6. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), vide impugned order dated 19.01.2026, confirmed the additions of Rs.2,64,11,386/- on account of GST reversal and Rs.85,59,538/- on account of GST provision, aggregating to Rs.3,49,70,924/-, while allowing the claim of Rs.75,48,573/- towards Electricity Connection Charges for statistical purposes, subject to verification of supporting documents. The relevant observations of the Ld. CIT(A) are reproduced hereunder:-
“7 . I have carefully considered the assessment order, the detailed written submissions of the appellant, the documents on record, including the Statement of Facts, the legal authorities cited, and all material available. The issues for determination are:
1. Whether the GST Input Tax Credit Reversal of Rs. 2,64,11,386/- (Ground No.2) is allowable as business expenditure under section 37(1) of the Act.
2. Whether the GST Input Tax Credit Reversal of Rs. 85,59,538/- (Ground No. 3)is allowable as business expenditure under section 37(1) of the Act.
3. Whether the Electricity Connection Charges of Rs. 75,48,573/- (Ground No. 4) are allowable as business expenditure under section 37(1) of the Act.
Each ground is dealt with separately below.
GROUND NO. 2 – GST REVERSAL OF RS. 2,64,11,386/
7.1 Factual Matrix
• The essential facts are not in dispute. The appellant is a real estate developer engaged in the construction and sale of residential and commercial units. The appellant received Building Use (BU) Permission for its residential project “Sheetal Westpark Residency” on 20/11/2021.
• The appellant had opted for the Old GST Regime (applicable to projects commenced before 01/04/2019), under which GST is charged at 12% on the sale of units with full Input Tax Credit (ITC) benefit.
• Upon receipt of BU Permission, the appellant reversed ITC of Rs. 2,64,11,386/- in the ratio of 34.27% (unsold units to total units) and debited the same to the Profit & Loss Account as “GST Reversal Expense.”
• The AO disallowed the said amount on the ground that the appellant did not demonstrate how GST collected from customers had been accounted for and presumed that GST had not been recognized as income.
7.2 Appellant’s Contentions – Summary
• The appellant contends that the GST reversal is a mandatory statutory cost under Rule 42 of CGST Rules, 2017 read with Notification No. 16/2019 and is deductible under section 37(1) of the Act.
• GST collected from customers is a trust liability payable to the Government, not revenue, and therefore the AO’s reasoning is misconceived.
• The appellant relies on the Matching Principle (section 145 of the Act), submitting that since income has been recognized upon sale of units, the corresponding GST reversal cost should be allowed in the same year.
7.3 Analysis and Findings
7.3.1 Nature of GST Collected from Customers
It is well-settled that GST collected from customers is not income but a statutory liability to be paid to the Government. The assessee acts as a collecting agent. This principle has been upheld in cases such as CIT v. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 (SC)and Sesa Goa Ltd. v. CIT (2020) 424 ITR 497 (SC). Therefore, the AO’s reasoning that GST not shown as income affects allowability is legally incorrect.
7.3.2 Nature of GST Reversal
Section 37(1) allows deduction for expenditures wholly and exclusively for business purposes, subject to certain restrictions. The term “expenditure” requires an actual outgoing or payment. In CIT v. Chari Automobiles (2008) 306 ITR 62 (Mad), the court held that an amount must involve actual payment to qualify as expenditure.
In the present case, the GST reversal does not constitute a cash outflow. It is simply a reversal of ITC availed in prior years and does not result in an actual payment. The appellant’s claim that it is a “mandatory statutory cost” is therefore not tenable as an allowable deduction.
7.3.3 Timing of Deduction
Even if the reversal were treated as expenditure, it relates to ITC availed in AY 2020-21, AY 2021-22, and AY 2022-23. The appellant set off this credit against GST liability in earlier years, deriving economic benefit at that time. The reversal in AY 2022-23 is a post-facto adjustment and cannot be claimed fully in this year.
This aligns with the principle that income and expenditure must be recognized in the year in which they accrue or are incurred, as per section 145 of the Act and judicial precedents such as CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC).
7.3.4 Matching Principle
The appellant’s reliance on the Matching Principle is not applicable because:
• GST reversal is not a cost of earning income in AY 2022-23; it relates to inputs used in earlier years.
• Matching Principle applies to direct costs of earning revenue, whereas GST reversal is a post-facto statutory adjustment.
• Recognition of income in AY 2022-23 does not automatically permit deduction of past costs.
7.3.5 Judicial Precedents
• Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC): Nexus between income/expenditure and business operations is decisive. GST reversal lacks nexus with AY 2022-23 operations.
• CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC): Interest linked to operational cash flow is different from post-facto GST reversal.
7.3.6 Lack of Documentary Evidence
The appellant did not furnish complete GST ledgers and reconciliations for all relevant periods. Summary reconciliations alone are insufficient. The burden of proof lies on the assessee (CIT v. Walchand & Co. [1967] 65 ITR 381 (SC)).
7.4 Conclusion on Ground No. 2
• The GST reversal of Rs. 2,64,11,386/- is not expenditure under section 37(1) and does not result in an actual outgoing.
• Even if considered expenditure, it should be recognized in the years the ITC was availed (AY 2020-21 and AY 2021-22), not AY 2022-23.
• The Matching Principle does not apply; the GST reversal is not a direct cost of earning income in AY 2022-23.
• The appellant has failed to provide sufficient documentary evidence.
Accordingly, Ground No. 2 is dismissed, and the addition of Rs. 2,64,11,386/-made by the AO is confirmed.
GROUND NO. 3: GST REVERSAL OF RS. 85,59,538/
7.4 Factual Matrix
7.4.1 The AO issued a Show Cause Notice (SCN) dated 09/03/2024 proposing disallowance of Rs. 11,76,00,000/- claimed as “Provision for Future Expenses.” The appellant was requested to provide a list of Top 25 High Value bills and to explain the nature of the provision.
7.4.2 In response, the appellant filed a ledger account titled “Provision for Pending Expenses – Sheetal Westpark Residency” showing various expenses that were provided for in FY 2021-22 (AY 2022-23) but were actually incurred/paid in FY 2022-23 (AY 2023-24).
7.4.3 On perusal of the said ledger, the AO noticed that an amount of Rs. 85,59,538/- was debited under the head “GST Reversal Expense.” The AO observed that in view of the disallowance made in Ground No. 2, this amount too should be disallowed.
7.4.4 The appellant contends that this addition pertains to GST reversal on input GST credit availed during FY 2022-23 (i.e., AY 2023-24) and not the year under consideration (AY 2022-23). The appellant submits that this amount was picked up by the AO from the ledger without confronting or verifying the same with the appellant.
7.5 Appellant’s Contentions – Summary
7.5.1 The appellant’s principal contention is that the addition of Rs. 85,59,538/- is bad in law on two counts:
(a) Pertains to AY 2023-24: The GST reversal entry was passed in FY 202223 (AY 2023-24) and not in FY 2021-22 (AY 2022-23). Therefore, this addition cannot be made in the assessment order for AY 2022-23.
(b) Same principle as Ground No. 2: The same legal and factual matrix as explained in Ground No. 2 applies to this addition. The reversal is mandatory under GST law and is allowable as business expenditure.
7.5.2 The appellant submits that during FY 2022-23, it paid GST of Rs. 2,49,76,766/- on the purchase of materials and services for the Sheetal Westpark Residency project. As per the mandatory reversal ratio of 34.27%, the appellant was required to reverse Rs. 85,59,538/- (being 34.27% of Rs. 2,49,76,766/-).
7.5.3 Without prejudice, the appellant submits that it has already claimed this expenditure in AY 2023-24, and the assessment for AY 2023-24 has been completed vide order dated 21/03/2025 under section 143(3) r.w.s. 144B, wherein the said expenditure has been accepted by the AO.
7.6 Analysis and Findings
7.6.1 I have carefully examined the submissions of the appellant and the material on record.
7.6.2 Whether the addition pertains to AY 2022-23 or AY 2023-24?
The appellant contends that the GST reversal of Rs. 85,59,538/- pertains to FY 2022-23 (AY 2023-24) and not FY 2021-22 (AY 2022-23). The appellant submits that the reversal entry was passed in FY 2022-23 and therefore cannot be added in AY 2022-23.
This contention requires careful examination. The ledger account furnished by the appellant is titled “Provision for Pending Expenses – Sheetal Westpark Residency” and pertains to FY 2021-22 (AY 2022-23). The ledger shows various expenses that were provided for in FY 2021-22 but were actually incurred/paid in FY 2022-23.
The appellant has claimed a provision of Rs. 11,76,00,000/- in FY 2021-22 (AY 2022-23) for future expenses. The AO issued an SCN proposing disallowance of this provision. In response, the appellant furnished the ledger showing that the provision was reversed in FY 2022-23 when the actual expenses were incurred.
The ledger shows that one of the items in the provision was “GST Reversal Expense” of Rs. 85,59,538/-. This indicates that the appellant had provided for this GST reversal in FY 2021-22 (AY 2022-23) itself, even though the actual reversal entry was passed in FY 2022-23 (AY 2023-24).
In other words, the appellant has claimed the GST reversal expense in AY 2022-23 by way of provision. The fact that the actual reversal entry was passed in AY 2023-24 is irrelevant. What is relevant is that the appellant has claimed the deduction in AY 2022-23.
Therefore, the appellant’s contention that the addition pertains to AY 202324 is not acceptable. The addition pertains to AY 2022-23 as the appellant has claimed the deduction in that year by way of provision.
7.6.3 Whether the provision for GST reversal is allowable?
The next issue is whether the provision for GST reversal of Rs. 85,59,538/- is allowable as business expenditure in AY 2022-23.
As discussed in detail in Ground No. 2, GST reversal is not an “expenditure” within the meaning of section 37(1) of the Act. It is merely a reversal of credit availed in earlier years and does not result in any actual outgoing or payment.
Moreover, a provision for future expenditure is generally not allowable as deduction unless the liability has crystallized and the amount can be determined with reasonable accuracy. In Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC), the Hon’ble Supreme Court held that a provision for warranty expenses is allowable only if the liability has crystallized and the amount can be estimated with reasonable accuracy.
In the present case, the appellant has made a provision for GST reversal in FY 2021- 22 (AY 2022-23) for GST credit that will be availed in FY 2022-23 (AY 2023-24). This is clearly a provision for future expenditure which has not crystallized in AY 2022-23.
The appellant cannot claim a provision for GST reversal in AY 2022-23 for credit that will be availed in AY 2023-24. This is contrary to the basic principles of accounting and taxation.
7.6.4 Matching Principle
The appellant has relied upon the Matching Principle, submitting that since 100% income has been recognized in AY 2022-23, the provision for future expenses (including GST reversal) must be allowed in the same year.
This contention has already been dealt with in Ground No. 2. The Matching Principle does not entitle the appellant to claim a provision for future expenditure that has not crystallized.
The appellant’s reliance on the Matching Principle is misplaced. The Matching Principle requires that costs incurred for earning revenue should be matched with such revenue in the same year. It does not permit the appellant to claim a provision for future costs that have not been incurred.
7.6.5 Whether the addition is sustainable in view of acceptance in AY 202324?
The appellant has submitted that it has already claimed the GST reversal of Rs. 85,59,538/- in AY 2023-24, and the assessment for AY 2023-24 has been completed vide order dated 21/03/2025 under section 143(3) r.w.s. 144B, wherein the said expenditure has been accepted by the AO.
This submission is not relevant for the following reasons:
(a) Each assessment year is independent: The fact that the AO has accepted the claim in AY 2023-24 does not mean that the same claim should be allowed in AY 2022-23. Each assessment year is independent, and the allowability of expenditure must be determined based on the facts and circumstances of that year.
(b) No double deduction: If the appellant has claimed the GST reversal in AY 2022-23 by way of provision and has also claimed the same in AY 2023-24 when the actual reversal was made, then the appellant is claiming double deduction for the same expenditure. This is not permissible.
(c) Appellant’s own admission: The appellant has admitted that the GST reversal pertains to FY 2022-23 (AY 2023-24). Therefore, the appellant cannot claim the same in AY 2022-23.
7.6.6 Conclusion on Ground No. 3
In view of the above discussion, I hold that:
(a) The GST reversal of Rs. 85,59,538/- pertains to AY 2022-23 as the appellant has claimed the deduction in that year by way of provision.
(b) The provision for GST reversal is not allowable as the liability has not crystallized in AY 2022-23. The GST credit to which this reversal relates was availed in FY 2022-23 (AY 2023-24).
(c) The Matching Principle does not entitle the appellant to claim a provision for future expenditure that has not crystallized.
(d) The fact that the AO has accepted the claim in AY 2023-24 does not mean that the same claim should be allowed in AY 2022-23.
Accordingly, Ground No. 3 is dismissed, and the addition of Rs. 85,59,538/-made by the AO is confirmed.”
7. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal.
Ground Nos. 2 to 4 – GST reversal of Rs.2,64,11,386/-
8. Since Ground Nos. 2 to 4 arise from the same issue, they are being adjudicated together.
8.1 The relevant facts of the issue are that the assessee had debited an amount of Rs.2,64,11,386/- to the Profit & Loss Account towards GST reversal. Out of the said amount, Rs.2,25,49,614/- represented reversal of GST credit on the date of BU Permission, i.e. 20.11.2021, pertaining to the period from 01.04.2019 to 19.11.2021, while Rs.38,61,772/- represented GST reversal for the period from 20.11.2021 to 31.03.2022. The assessee explained that the project was covered by the old GST regime applicable to projects commenced prior to 01.04.2019. According to the assessee, under the applicable GST provisions, input tax credit was available in respect of inputs and input services. Upon receipt of BU Permission, the assessee was required to reverse Input Tax Credit (ITC) attributable to the unsold units, since the subsequent sale of such units would not attract GST. The assessee determined the ratio of sold units to unsold units at 65.73% : 34.27% and accordingly reversed the ITC attributable to the unsold portion.
8.2 The assessee submitted that the reversal was a mandatory consequence under the GST law and that the liability to reverse the credit arose in the year in which BU Permission was received. It was accordingly claimed as business expenditure under section 37(1) of the Act.
8.3 The Ld. AR submitted that Building Use Permission (“BU Permission”) in respect of Sheetal Westpark Residency was received on 20.11.2021. On receipt of BU Permission, the project reached the statutory completion stage relevant for GST purposes. Apartments which remained unbooked / unsold at such stage would thereafter be transferred as completed immovable property and no output GST would be payable on such post-completion sale. For the limited purpose of apportionment of ITC, the CGST Act specifically brings such sale of building within the ambit of exempt supply. Consequently, the common ITC earlier validly availed during construction could not be retained to the extent attributable to the carpet area of apartments remaining unsold at completion. The reversal was required under Section 17(2) read with Section 17(3) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) and the machinery prescribed by Rules 42 and 43 of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”), as applicable.
8.4 . The Ld. DR, on the other hand, submitted that in the present case, the GST reversal does not constitute a cash outflow. It is simply a reversal of ITC availed in prior years and does not result in an actual payment. The appellant’s claim that it is a “mandatory statutory cost” is therefore not tenable as an allowable deduction. The Ld. DR further contended that even if the reversal were treated as expenditure, it relates to ITC availed in AY 2020-21, AY 2021-22, and AY 2022-23. The appellant set off this credit against GST liability in earlier years, deriving economic benefit at that time. The reversal in AY 2022-23 is a post-facto adjustment and cannot be claimed fully in this year. He relied on the principle that income and expenditure must be recognized in the year in which they accrue or are incurred and argued that as per section 145 of the Act and judicial precedents such as CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) the deduction is not allowable. The Ld. DR argued that the assessee did not furnish complete GST ledgers and reconciliations for all relevant periods. Summary reconciliations alone are insufficient. The burden of proof lies on the assessee (CIT v. Walchand & Co. [1967] 65 ITR 381 (SC)).
8.5 The Ld. DR concluded his arguments submitting that the GST reversal of Rs. 2,64,11,386/- is not expenditure u/s 37(1) and does not result in an actual outgoing. He held that even if considered expenditure, it should be recognized in the years the ITC was availed (AY 2020-21 and AY 2021-22), not AY 2022-23. He also held that the Matching Principle does not apply in this case, the GST reversal is not a direct cost of earning income in AY 2022-23 and the assessee has failed to provide sufficient documentary evidence.
9. Heard the arguments of both the parties and perused the material available on record.
9.1 Assessee is engaged in the business of real estate development. As per the GST law, option was available with the assessee to choose between the two sets of regime for residential as well as commercial project. Assessee has taken that option and preferred to take the credit of all inputs with relation to purchase and all other expenses and then set off against liability of 12% GST, which is on collection.
9.2 It is an undisputable legal position the GST credit could not be availed after obtaining the Building Use permission (BU). On the date of BU Permission, the project-wise carpet area position was as under:
Particulars Carpet Area (Sq. Yards) Ratio
Carpet area sold /booked before BU Permission 23,737.90 65.73%
Carpet area remaining unsold at BU Permission 12,374.82 34.27%
Total carpet area 36,112.72 100.00%

 

9.3 Against the common GST credit of Rs.6,57,99,865/- for the relevant period prior to BU Permission, the reversal attributable to 34.27% worked out to Rs.2,25,49,614/-. Together with the non-creditable / reversed GST relating to expenditure incurred after BU Permission during the year, the total amount claimed under the head GST reversal was Rs.2,64,11,386/-. Consequently, the ITC attributable to the 34.27% unsold carpet area became inadmissible and had to be reversed. It is not in dispute that the GST collected from customers is not the assessee’s income but a statutory amount payable to the Government. The primary reason for the addition by the Ld. CIT(A) was that the reversal of ITC did not occasion a fresh cash outflow in the current year, the reversal was therefore a post-facto adjustment as the credit belongs to the earlier years.
9.4 In this backdrop, we have gone through the provisions of the GST Scheme to determine whether the reversal was mandatory and allowable.
Section 17(2) restricts ITC to the portion attributable to taxable supplies
• Section 17(2) of the CGST Act applies where goods or services are used partly for effecting taxable supplies, including zero-rated supplies, and partly for effecting exempt supplies. In such a case, the credit is restricted to so much of the input tax as is attributable to the taxable supplies. Thus, common ITC is not an unconditional or permanent asset; its ultimate availability depends upon statutory attribution between taxable and exempt supplies.
• This principle is directly attracted to a real estate project where common construction inputs and input services contribute both to apartments supplied as taxable construction services before completion and to apartments which remain unsold at completion and are thereafter disposed of as completed immovable property without output GST.
Section 17(3) expressly brings sale of building into the exempt-supply computation
• Section 17(3) is of particular importance. For the purpose of the apportionment required by Section 17(2), the value of exempt supply includes sale of land and, subject to paragraph 5(b) of Schedule II, sale of building. Therefore, although a post-completion sale of a building is treated under the GST law as a transaction outside the levy as a supply, the statute expressly requires the value of such sale to be considered for the purpose of restricting common ITC under Section 17(2).
• Paragraph 5(b) of Schedule II treats construction of a complex, building, civil structure or part thereof intended for sale as a supply of service except where the entire consideration is received after issuance of the completion certificate by the competent authority or after first occupation, whichever is earlier. Correspondingly, a completed apartment sold after the relevant completion event does not bear output GST. This is precisely why the common ITC attributable to apartments remaining unsold at that stage cannot be retained.
Rule 42 prescribes the machinery for reversal of common credit on inputs and input services
• Section 17(2) lays down the substantive restriction and Rule 42 of the CGST Rules provides the machinery for determining the portion of common ITC on inputs and input services attributable to exempt supplies.
• For real estate projects, Rule 42 was specifically adapted by the Central Goods and Services Tax (Second Amendment) Rules, 2019, notified vide Notification No.16/2019-Central Tax dated 29.03.2019. The rule requires project-wise attribution and, instead of the ordinary turnover formula, uses the carpet-area ratio for a real estate project.
• In substance, the special real-estate formula determines the exempt proportion by reference to E/F, where E represents the aggregate carpet area attributable to exempt / post-completion apartments and F represents the aggregate carpet area of all apartments in the real estate project. In the tax period in which completion certificate / first occupation takes place, E is required to include the carpet area of apartments which have not been booked up to the relevant completion date.
• Rule 42 further contemplates a final project-wise determination for the entire relevant project period at the stage of completion / first occupation. Thus, the GST law itself treats completion as the point at which the final extent of inadmissible common credit attributable to unbooked apartments crystallises.
• The assessee’s use of the 34.27% carpet-area ratio was therefore not an arbitrary accounting allocation. It reflected the statutory method of attribution applicable to a real estate project at completion. The 34.27% represented the carpet area remaining unsold out of the aggregate carpet area of the project on receipt of BU Permission.
Rule 43 embodies the corresponding principle for common capital goods.
• Rule 43 of the CGST Rules provides the corresponding mechanism for attribution of ITC on common capital goods used for taxable as well as exempt supplies. For a real estate project, the rule likewise incorporates project-specific attribution with reference to the carpet area and contemplates final adjustment at completion / first occupation.
• The principal amount in dispute has been explained by the Appellant as arising from GST on construction materials and input services and is therefore principally governed by Rule 42. Rule 43 is relevant to the extent any common capital-goods ITC forms part of the project credit. In either case, the governing statutory principle is the same: ITC attributable to the completed unsold portion cannot be retained.
Application of Sections 17(2) and 17(3) read with Rules 42 and 43 to the Appellant
• Until the project reached BU Permission, the Appellant had validly availed eligible ITC on construction inputs and input services under the tax regime chosen for the ongoing project. That availment was not erroneous when made.
• On 20.11.2021, however, the statutory completion event occurred. At that point 34.27% of the project carpet area remained unsold. Apartments comprised in that area would thereafter be transferred as completed immovable property without output GST. Section 17(2), read with Section 17(3) and Rule 42, therefore required the corresponding proportion of the common ITC to be reversed.
9.5 Hence, it can be held that the reversal was thus not a voluntary write-off, a commercial concession, or an accounting preference but a statutory consequence of the project reaching completion while part of the project remained unsold, hence, once the credit becomes irrecoverable, the GST becomes part of the project cost. Owing to the GST provisions, it can be said that the GST unutilized, becomes irrecoverable cost. To the extent of the existing credit, the assessee no longer possessed any recoverable ITC corresponding to the GST already borne on the supplier invoices. That portion, therefore, became an irrecoverable component of the cost of the construction inputs and input services consumed in the project.
9.6 The Ld. CIT(A) proceeded on the premise that since the act of reversing ITC in the current year did not itself involve a fresh payment of cash, the amount could not constitute allowable expenditure. The reasoning conflates the original payment of GST with the later statutory extinction of the right to recover that GST. The cash outflow had already occurred when the assessee paid the suppliers. In the earlier period, the corresponding amount stood represented by a legally available ITC asset. In the current year, that asset was mandatorily extinguished to the extent attributable to the completed unsold portion.
9.7 In simpler words, if construction material of Rs. 100/-is purchased with GST of Rs.18/-, the assessee suffers an aggregate outflow of Rs.118/-. If the entire Rs. 18/- is available as ITC, the effective construction cost remains Rs.100/-. Till obtaining BU, the assessee can avail the credit of Rs.18/-. In case the assessee could avail input credit of Rs.12/-, till BU the remaining Rs.6/-becomes defunct to claim any input credit after the BU permission. Hence, Rs.6/- becomes the expense which can be claimed in P&L. It is not a notional loss and it represents GST actually borne on project inputs, either to not claimed which ceased to be existing by operation of law, to be recoverable as ITC and hence allowed to be claimed as expenses.
9.8 The second reason appealed to the Ld. CIT(A) is that the ITC had been availed in earlier years and its reversal in A.Y. 2022-23 was therefore a post-facto adjustment which could not be claimed in the current year. This reasoning overlooks the very operation of Section 17(2) and Rule 42. In the earlier years, the project was under construction, the assessee was validly entitled to eligible ITC under the regime adopted by it and the final extent of apartments which would remain unbooked at completion had not crystallized. Therefore, there was no legal basis to treat the validly available ITC as irrecoverable expenditure in those earlier years. Rule 42 itself contemplates final project-wise attribution at completion/first occupation by reference to the carpet area which remains unbooked at that stage. Thus, the completion event does not merely disclose an earlier error; it creates the statutory occasion for the final restriction and reversal.
To conclude, we hold that,
• the assessee obtained the Building Use (BU) permission in November 2021. Upon obtaining the BU permission, the sale of the units became exempt from GST and, consequently, no GST was required to be collected from the customers on such sales. As a result, the input GST credit accumulated by the assessee, to the extent it could no longer be utilized against the output GST liability, ceased to be recoverable and became chargeable to the Profit & Loss Account as expenditure.
• It is an undisputed fact that the input GST had been paid by the assessee in the earlier years. However, since the corresponding output supplies became exempt after the grant of BU permission, the accumulated input tax credit could not be set off against any output GST liability.
• During the year under consideration, the assessee reversed the accumulated GST input tax credit amounting to Rs. 2,64,11,386/- and transferred the same to direct expenses, as reflected in the financial statements at page 34 of the paper book.
• Out of the above amount, GST reversal of Rs. 2,25,49,614/- was made on the date of obtaining the BU permission. The details of such reversal are available at page 103 of the paper book and are also referred to at page 8 of the assessment order.
Accordingly, the assessee claimed a deduction of Rs. 2,64,11,386/- in the Profit & Loss Account on the ground that the accumulated input GST credit had become incapable of being set off against the output GST liability and, therefore, represented a business expenditure incurred during the year.
In view of the above, the grounds of appeal Nos. 2 to 4 raised by the assessee are accordingly allowed.
Ground No. 5 – GST reversal of Rs.85,59,538/-
10. The next issue relates to the addition of Rs.85,59,538/-. In this regard, the assessee submitted that the said amount represents 34.27% of GST of Rs.2,49,76,766/- pertaining to purchases of materials and services. The same would be allowed as per the ratio laid down. The Assessing Officer shall examine the claim of the assessee for the AY 2023-24 and allow the expense in only one year so that no double deduction is claimed by the assessee.
This ground of appeal of the assessee is allowed for statistical purposes.
11. In the result, the appeal of the assessee is allowed.