The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the mere rejection of an Input Tax Credit (ITC) refund claim under the GST framework cannot, by itself, be a decisive ground for denying deduction of the amount as business expenditure or business loss under the Income Tax Act.
The bench of Beena Pillai (Judicial Member) and Ratna Dasgupta (Accountant Member) has observed that the assessee had not sought deduction of GST collected from customers. Instead, the claim pertained to unrecovered ITC on inward supplies, which could not be realised through the GST refund mechanism. The assessee had also produced documentary evidence regarding refund applications and orders passed by GST authorities.
The central issue before the Tribunal related to the treatment of ₹59.84 lakh representing unrefunded Input Tax Credit accumulated due to an inverted duty structure. The assessee had accumulated ITC amounting to ₹96.19 lakh as of March 31, 2019. Out of this, GST authorities sanctioned a refund of ₹36.34 lakh, while the remaining ₹59.84 lakh was either rejected or remained unrefunded. The company consequently claimed this amount as a business expense in its books.
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The Assessing Officer disallowed the claim on the ground that once GST authorities had rejected the refund, the amount could not be recognised as an expenditure under the Income Tax Act. This view was upheld by the CIT(A).
The ITAT examined the statutory framework governing refunds under Section 54 of the CGST Act, particularly the provisions relating to refund of unutilised ITC arising from an inverted duty structure. The Tribunal observed that entitlement to refund is governed exclusively by the GST law and the limitation period prescribed therein.
However, the Tribunal clarified that the issue before the income tax authorities was entirely different. The relevant question was whether an amount that had become irrecoverable under GST law, and had been written off in the books, could qualify as business loss or expenditure under the Income Tax Act.
The Tribunal observed that the amount did not represent any expenditure incurred for a purpose prohibited by law and was directly connected with business operations. Therefore, rejection of refund under GST law alone could not conclusively determine its deductibility under income tax provisions.
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