TaxTMI 
TaxTMI 
2026 (10) TMI 512
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....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 permis....
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....onnection 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. ....
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....Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) and Kedarnath Jute Mfg. Co. Ltd. vs. 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. vs. 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 vs. 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 li....
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....plained 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 2....
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....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 sustai....
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.... & 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 Th....
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....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 Are....
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....dule 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. * real estate projects, Rule 42 ....
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.... 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 ....
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....es 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 a....