Project cost treatment of ITC reversal allowed, while advance write-off and CSR expense claims failed on business nexus grounds.

Project-related ITC reversal was allowed as part of project cost where the assessee showed it was accounted for under the percentage completion method and apportioned between cost of sales and closing work in progress, so the disallowance was deleted. The write-off of advances was not accepted on the existing record because the assessee had not adequately shown that the advance arose in the course of business or had become irrecoverable; the matter was remanded for fresh consideration with an opportunity to adduce evidence. CSR or social activity expenditure was disallowed because the assessee failed to establish a nexus with its real-estate business or that the outlay was wholly and exclusively for business purposes.

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Issues: (i) Whether the disallowance of Input Tax Credit reversal claimed as an expense for the project was justified; (ii) whether the write-off of advances was allowable as a business loss or business expenditure; and (iii) whether the expenditure treated as CSR / social activity expense was allowable as a business deduction.

Issue (i): Whether the disallowance of Input Tax Credit reversal claimed as an expense for the project was justified.

Analysis: The assessee demonstrated that the ITC reversal relating to the project was accounted for in accordance with the percentage completion method and was not claimed in full as assumed by the lower authorities. The amount formed part of the project cost and was apportioned between cost of sales and closing work in progress. The factual foundation for the disallowance was therefore not made out.

Conclusion: The disallowance of the ITC reversal claim was deleted, in favour of the assessee.

Issue (ii): Whether the write-off of advances was allowable as a business loss or business expenditure.

Analysis: The assessee had to establish both the business nature of the advance and its irrecoverability. Apart from a ledger extract, no material was produced to show that the advance was given in the course of business or that it had become bad. At the same time, the assessee was not afforded an opportunity to adduce further evidence on the issue.

Conclusion: The issue was remanded to the Assessing Officer for fresh adjudication after giving the assessee due opportunity, and the assessee obtained only a statistical allowance.

Issue (iii): Whether the expenditure treated as CSR / social activity expense was allowable as a business deduction.

Analysis: The ledger reflected charitable activity and training-related expenditure, and the assessee failed to show any nexus between the expenditure and its real-estate business. Expenditure incurred on charitable activities was not shown to be laid out wholly and exclusively for business purposes.

Conclusion: The disallowance of the social activity / CSR-related expenditure was sustained, against the assessee.

Final Conclusion: The appeal succeeded only on the ITC reversal issue, the advance write-off issue was sent back for reconsideration, and the balance disallowance was upheld.

Ratio Decidendi: A disallowance cannot stand where the assessee shows that project-related tax reversal was already embedded in project cost and apportioned under the percentage completion method, but a write-off or expenditure claim requires proof of business nexus and, where necessary, irrecoverability.

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