Shivkrupa Synthetics Private Limited Vs DCIT (ITAT Mumbai)
Non-Refundable GST Credit Can Be Examined as Business Loss: Mumbai ITAT Restores ₹59.85-Lakh Claim
The assessee, engaged in textile-processing job work, suffered aggregate disallowances of ₹3.39 crore comprising labour charges of ₹76.76 lakh, bad debts of ₹1.21 crore, repairs and maintenance of ₹81.72 lakh, and unrefunded GST input-tax credit of ₹59.85 lakh.
The ITAT found that the labour-charge disallowance was based merely on a comparison between the percentage increase in labour expenses and staff salaries, without identifying any bogus or inflated payment. Similarly, 50% of repair charges had been disallowed on an ad hoc basis without properly examining the invoices and ledgers. Both issues were restored to the CIT(A) for verification.
The bad-debt claim relating to a customer under liquidation was also remanded for examining the debt’s origin, its earlier recognition as income, actual write-off, correspondence with the debtor and liquidation proceedings.
On the principal issue of unrefunded GST input-tax credit, the Tribunal held that its rejection or non-refund under GST law does not automatically make it inadmissible under the Income-tax Act. If the credit has become irrecoverable and has been written off, the claim must be examined according to its real nature and nexus with the business as a possible business loss or expenditure. Mere rejection by GST authorities is not conclusive.
Accordingly, all four issues were restored to the CIT(A) for fresh adjudication after verification of the evidence.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Present appeal filed by assessee arises out of the order passed by NFAC, Delhi [hereinafter referred to as “Ld.CIT(A)”] dated 23/02/2026, for A.Y. 2023-24, on the following ground/s of appeal:-
“1) The learned CIT(A)/NFAC erred on facts and in law in confirming addition of Rs.76,75,657/- being part of Labour Charges.
2) The learned CIT(A)/NFAC erred on facts and in law in confirming disallowance of Rs.1,21,06,298/- being bad debt.
3) The learned CIT(A)/NFAC erred on facts and in law in confirming disallowance of Rs.81,71,900/- being 50 percent adhoc expense of Repairs expense, by making an estimate of disallowable Repairs Expenses, whereas CIT(A) failed in appreciating that the books of account of the appellant were duly audited, unless disallowance should be made without rejection of book results.
4) The Learned CIT(A)/NFAC erred in upholding the disallowance of GST expense of Rs 59,84,531 on the ground of non allowability under GST provisions without appreciating that non refundable input tax credit forms part of business expenditure allowable under the Income Tax Act 1961.
5) The Learned CIT(A)/NFAC erred in confirming the assessed total income of Rs 6,26,40,766 as against returned income of Rs 2,87,02,380 thereby sustaining unjustified additions aggregating to Rs 3,39,38,386. may please be deleted.”
2. Brief facts of the case are as under:-
The assessee is a private limited company engaged in the business of job work of processing of yarn and cloth. For the year under consideration, the assessee filed its return of income on 05/10/2023 declaring total income of Rs.2,87,02,380/-. The accounts of the assessee were audited and the audit report in Form 3CD was furnished along with the return of income. The return was processed u/s 143(1) and subsequently, the case was selected for scrutiny under CASS on the issue of low net profit vis-à-vis the revenue from operations. Notice u/s 143(2) was issued and thereafter notices u/s 142(1) were also issued during the course of assessment proceedings.
2.1. During the course of assessment proceedings, the assessee furnished various details and explanations in response to the statutory notices. A show-cause notice dated 01/03/2025 was thereafter issued proposing, inter alia, additions on account of labour charges, bad debts, repairs and maintenance and GST expenses. The assessee furnished its response on 06/03/2025. The proposed addition on account of difference in sales was dropped by the Ld.AO after considering the reconciliation furnished by the assessee. Likewise, the proposed disallowance on account of depreciation was also not made. However, the Ld. AO proceeded to make the following additions/disallowances:
| Particulars | Amount |
|---|---|
| Labour Charges | Rs.76,75,657/- |
| Bad Debts | Rs.1,21,06,298/- |
| Repairs & Maintenance | Rs.81,71,900/- |
| GST Expenses | Rs.59,84,531/- |
| Total | Rs.3,39,38,386/- |
2.2. Consequently, the total income of the assessee was assessed at Rs.6,26,40,766/- as against the returned income of Rs.2,87,02,380/-.
Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A).
3. Before the Ld.CIT(A), the assessee furnished detailed submissions and various documentary evidences. The Ld.CIT(A) noted that no separate ground-wise written submission was filed during the appellate proceedings and proceeded to consider the Statement of Facts and documents furnished by the assessee. The Ld.CIT(A), however, confirmed all the four additions and dismissed the appeal.
3.1. In respect of labour charges, the Ld.CIT(A) relied, inter alia, upon the alleged absence of supporting invoices, TDS/PF details, bank statements and returns of certain contractors.
3.2. In respect of bad debts, the Ld. CIT(A) held that the assessee had not established sufficient recovery efforts and had not furnished evidence to establish that the debt was taken into account as income in an earlier year.
3.3. With regard to repairs and maintenance, the Ld. CIT(A) held that the assessee had failed to substantiate the labour repair charges of Rs.1,63,43,801/- and accordingly confirmed the 50% disallowance of Rs.81,71,900/-.
3.4. As regards GST expenses, the Ld. CIT(A) confirmed the addition of Rs.59,84,531/- observing that the amount had been rejected by the GST authorities and that the assessee had failed to satisfactorily controvert the findings of the Ld. AO.
Aggrieved by the order passed by Ld.CIT(A), the assessee is in appeal before this Tribunal.
4. The substantive grounds challenge is against the confirmation of addition of:
(i) Rs.76,75,657/- on account of labour charges;
(ii) Rs.1,21,06,298/- on account of bad debts;
(iii) Rs.81,71,900/- being 50% disallowance of repairs and maintenance expenses; and
(iv) Rs.59,84,531/- on account of GST expenses.
5. Ground No. 1 is in respect of adhoc disallowance of Labour Charges of Rs.76,75,657/-
5.1. The Ld.AO however disallowed Rs.76,75,657/- out of the total labour charges of Rs.9,99,30,132/- essentially on the ground that the labour charges had increased by 32.43%, whereas staff salary had increased by 22.26%. The Ld. AO considered the increase corresponding to 22.26% to be genuine and disallowed the balance increase of 10.17%.
5.2. The Ld.AR submitted that, the increase in labour expenditure was commensurate with the increase in business operations. The revenue from operations had increased substantially during the year and the assessee was operating in three shifts to meet the increased demand for job work. The assessee engaged various labour contractors for different departments and furnished contractor-wise details, ledgers and supporting documents. A detailed working of labour charges amounting to Rs.9,99,30,132/- was also furnished before the Ld.AO.
5.3. The Ld.DR, on the other hand, supported the orders of the lower authorities and submitted that the assessee had failed to satisfactorily substantiate the impugned expenditure. It was submitted that the findings recorded by the Ld.AO and confirmed by the Ld.CIT(A) did not call for any interference. The Ld.DR accordingly prayed for dismissal of this ground.
We have perused the submissions advanced by both sides in light of records placed before us.
6. We find that the basis adopted by the Ld. AO is essentially an estimation based upon the percentage increase in staff salary. No specific instance of bogus payment or inflation of expenditure has been brought on record by the Ld.AO. In the ineterst of justice we remit this issue to the Ld.CIT(A), to verify the evidences and to consider the claim in accordance with law.
Accordingly, Ground no.1 raised by the assessee stands allowed for statistical purposes.
7. Ground No.2 raised by the assessee is against disallowances of Bad Debts of Rs.1,21,06,298/-
The Ld.AR submitted that the amount of Rs.1,21,06,298/- represented outstanding dues from Shree Daksh Jyot Silk Mills Private Limited, to whom the assessee had been providing job work services since December, 2008. The assessee followed up for recovery and also issued a reminder dated 18/09/2018, in response to which the debtor acknowledged the dues and expressed its inability to make payment. The debtor thereafter went into liquidation and a liquidator was appointed. The assessee submitted that, in the circumstances, the amount was written off as irrecoverable. It was further explained that the opening receivable of Rs.1,40,38,298/- was adjusted to the extent of Rs.19,32,000/- against sale of old and obsolete stock and the balance amount of Rs.1,21,06,298/- was written off as bad debt.
7.1. It is submitted that the assessee is not a secured creditor before NCLT and therefore any further recovery of the debts cannot be ascertained.
7.2. The Ld.DR, on the other hand, supported the orders of the lower authorities and submitted that the assessee had failed to satisfactorily substantiate the impugned expenditure. It was submitted that the findings recorded by the Ld.AO and confirmed by the Ld.CIT(A) did not call for any interference. The Ld.DR accordingly prayed for dismissal of this ground.
We have perused the submissions advanced by both sides in light of records placed before us.
8. In our considered view, the aforesaid factual aspects require verification before the allowability of the claim can be adjudicated. In particular, the nature and origin of the outstanding receivable, the opening balance, the adjustment of ₹19,32,000/-, the correspondence with the debtor, the subsequent liquidation proceedings and the actual write-off of ₹1,21,06,298/- in the books of account require examination. The assessee shall also place on record the relevant material evidencing the liquidation proceedings and its status therein, to the extent available.
8.1. In these circumstances, and since the aforesaid factual aspects have not been examined in their entirety by the Ld. CIT(A), we deem it appropriate to restore this issue to the file of the Ld.CIT(A) for fresh adjudication. The Ld.CIT(A) shall verify the aforesaid documents and facts and thereafter decide the allowability of the claim in accordance with law, after affording reasonable opportunity of being heard to the assessee. The assessee shall be at liberty to furnish all relevant supporting documents before the Ld.CIT(A).
Accordingly, Ground No.2 raised by the assessee stands allowed for statistical purposes.
9. Ground No. 3raised by the assessee is against ad hoc disallowance of Repairs & Maintenance of Rs.81,71,900/- The assessee claimed total repairs and maintenance expenditure of Rs.2,73,67,471/-.
The expenditure comprised electrical expenses of Rs.8,63,057/-, repairs of Rs.1,63,43,801/- and spare parts and accessories of Rs.1,01,60,613/-. The Ld.AO allowed the electrical expenses and spare parts and accessories in full but considered 50% of the labour repair charges to be excessive and disallowed Rs.81,71,900/-.
9.1. The principal reasoning of the Ld.AO was that the assessee incurred repairs and maintenance expenditure of Rs.1,72,46,683/- in the immediately preceding year and that the labour repair charges of Rs.1,63,43,801/- were excessive in comparison with the expenditure on spare parts and accessories.
9.2. The Ld.AR submitted that the assessee is engaged in textile processing and that the machinery and plant require regular preventive and corrective maintenance. The increase in expenditure was attributable to the substantial increase in revenue and increased utilisation of machinery and factory premises. The assessee also operated in three shifts. It was submitted that the assessee had furnished copies of ledger accounts and invoices relating to repairs and maintenance.
9.3. The Ld.DR on the other hand, supported the orders of the lower authorities and submitted that the assessee had failed to satisfactorily substantiate the impugned expenditure. It was submitted that the findings recorded by the Ld.AO and confirmed by the Ld.CIT(A) did not call for any interference. The Ld.DR accordingly prayed for dismissal of this ground.
We have perused the submissions advanced by both sides in light of records placed before us.
10. We have considered the rival submissions. The Ld.AO disallowed 50% of the labour repair charges primarily on the ground that the expenditure was excessive as compared with the preceding year and the expenditure incurred on spare parts and accessories. The assessee, on the other hand, submitted that the increase was attributable to the nature of its textile-processing business, increased utilisation of machinery and operation in three shifts, and that ledger accounts and invoices had been furnished.
10.1. We find that the supporting details furnished by the assessee have not been examined and verified by the lower authorities. In the absence of such verification, the disallowance of 50% of the expenditure cannot be properly adjudicated. Accordingly, we restore the issue to the file of the Ld. CIT(A) for necessary verification of the ledger accounts, invoices and other supporting documents and for fresh adjudication in accordance with law, after affording reasonable opportunity of being heard to the assessee.
Accordingly, Ground No.3 raised by the assessee stands allowed for statistical purposes.
11. Ground No. 4 raised by the assessee is against disallowance of GST Expenses of Rs.59,84,531/-.
The assessee claimed GST expenses of Rs.59,84,531/-. The record shows that the assessee had accumulated input tax credit of Rs.96,19,065/- as on 31/03/2019 in respect of the inverted duty structure. Out of the said amount, refund of Rs.36,34,534/- was granted, while the balance of Rs.59,84,531/- remained unrefunded/rejected by the GST authorities.
11.1. The Ld.AO disallowed the amount on the premise that, since the GST authorities rejected the claim, the amount could not be treated as expenditure in the Profit & Loss Account.
11.2. The Ld.CIT(A) substantially affirmed the same reasoning.
11.3. The Ld.AR submitted that the assessee accumulated input tax credit of Rs.96,19,065/- as on 31/03/2019 in respect of the inverted duty structure. Against the said amount, refund of Rs.36,34,534/- was granted by the GST authorities, whereas the balance amount of Rs.59,84,531/- was not refunded. The assessee had accordingly claimed the said amount as expenditure.
11.4. The Ld.AR filed Paper Book containing an explanatory note on the GST refund, a tabular statement showing the status of the refund application and copies of the refund orders. It was submitted that the statutory scheme governing refund u/s 54 of the CGST Act prescribes a period of two years from the relevant date for making a claim for refund. Particular emphasis was placed on relevant proviso and Explanation (e), which defines relevant date, in the case of refund of unutilised input tax credit under clause (ii) of the first proviso to section 54(3), with reference to the due date for furnishing the return u/s 39 for the period in which such claim for refund arises.
11.5. The Ld.AR submitted that the amount which was not refundable under the GST law effectively becomes cost/loss to the assessee and that there was no provision under the Income-tax Act which prohibited the allowability of such amount as business expenditure. The Ld.AR accordingly prayed for deletion of the addition.
11.6. The Ld.DR, on the other hand, supported the orders of the lower authorities and submitted that the assessee failed to satisfactorily substantiate the impugned expenditure. It was submitted that the findings recorded by the Ld.AO and confirmed by the Ld.CIT(A) did not call for any interference. The Ld.DR accordingly prayed for dismissal of the ground.
We have perused the submissions advanced by both sides in light of the record placed before us.
12. In the paper book filed before u/s. we have gone thorugh the statutory scheme governing refund under the CGST Act. The Ld.AR drew our attention to the limitation of two years from the relevant date for claiming refund. It is submitted that, in the case of refund of unutilised input tax credit under clause (ii) of the first proviso to section 54(3), Explanation (e) specifies the relevant date with reference to the due date for furnishing the return u/s 39 for the period in which such claim for refund arises.
12.1. It is submitted that the significance of the aforesaid provisions is that the entitlement to refund is governed by the statutory mechanism and the statutory period prescribed therein. It is further submitted that the amount which is not refundable under the GST law cannot thereafter be treated as an amount recoverable by the assessee merely because the corresponding input tax credit had originally arisen in its books.
12.2. Based on the above the question before us is not whether the amount of Rs.59,84,531/- is refundable under the GST law. That aspect stands governed by the GST authorities and the statutory provisions applicable thereto. The question before us is whether, once the amount of input tax credit has ceased to be recoverable/refundable under the applicable GST mechanism and the same has been charged off by the assessee, the corresponding business loss/expenditure is allowable while computing income under the Income-tax Act.
12.3. We find that the assessee had not claimed deduction of any GST liability collected from its customers. Rather, the claim pertains to the balance input tax credit arising on inward supplies under the inverted duty structure, in respect of which refund was not granted. The assessee has placed documentary evidence concerning the refund application and the orders passed thereon.
12.4. Further, the amount has not been shown to represent any expenditure incurred for a purpose prohibited by law. The claim is in respect of a business-related amount which, according to the material placed before us, could not be recovered through the GST refund mechanism.
It is noted that the authorities below has not examined the claim from this perspective. The reasoning that the amount cannot be claimed as expenditure merely because it was rejected by the GST authorities does not, by itself, establish that the amount is not deductible under the Income-tax Act.
12.5. In these circumstances, the mere rejection/non-refund of the input tax credit under the GST law cannot be a conclusive ground for denying its treatment as a business loss/expenditure under the Income-tax Act. The issue has to be examined on the basis of the real nature of the loss and its connection with the assessee’s business. We thus remit this issue to the file of the Ld.CIT(A), for necessary verification in accordance with law.
Accordingly, Ground No.4 raised by the assessee stands allowed for statistical purposes.
13. Ground No.5 is a General Ground and do not require any adjudication.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 21/08/2026.
