NEPTUNE INFRA-BUILD LLP,VADODARA, GUJARAT vs. THE INCOME TAX OFFICER, WARD 1(1)(1), VADODARA, VADODARA, GUJARAT

Brief facts relating to the issue are that the assessee is engaged in the business of Real Estate activities and as per the provisions of GST Act, the builder is required to make reversal of ITC on completion of project as per Rules 42 & 43 of the CGST Rules. As per the P&L account, the assessee has claimed expense amounting to Rs.7,10,07,352/- as ITC reverse. The assessee had recognized Revenue following the percentage of completion method in accordance with the accounting policy. The AO held that the expense relating to ITC reversal needed to be amortized in the ratio of profit of revenue declared. Accordingly, he show caused the assessee as to why the expenses claimed as ITC reverse should not be restricted to the extent of percentage of completion of projects. The assessee submitted reply to the same, considering which, the AO found that the claim of GST reverse was for Project No.1 of Rs.5,28,43,484/- and Project No.2 of Rs.1,81,63,970/-. With respect to the ITC reversal pertaining to Project No.2, he found the claim to be in order. However, with respect to the claim of ITC Reversal of Rs.5.28 Crores with respect to Project No.1, he found same to be not in proportion to the progress of completion of the project. Noting the assessee to have declared profits only on booked units @ 59.65%, accordingly, he restricted the claim of ITC Reversal for Project No.1 @ 59.65%, of Rs.5.28 Crores, which came to Rs.3,15,21,138/-. The excess amount of Rs.2,13,22,346/- was not allowed as expense for the impugned year and directed to be capitalized alongwith capital work in progress. The relevant findings of the AO in this regard are contained at page 34 of his order as under:

“As per records, the assessee declared total revenue from booked units @ 59.65%. The details are as under: Note 4 – At least 10% of total Revenue must be realized via legally enforceable documents Sr. Particulars Project 1 Project – 2 Remarks No. (Block-1) (Block2/3/4) A Receipts from 33,00,42,591 11,00,05,500 Please booked units till refer FY22-23 Annedure- B Total Receipts for 55,33,04,000 16,50,00,000 1C the projects enclosed above % of receipts from 59.65% 66.67% total revenue of booked units (A/B*100) In view of the above, the assessee booked profit from revenue side @59.65% of total project. The claim related to reversal of ITC under the Percentage Completion Method is proportionate to the progress of the project. Vide its reply, the assessee claimed that the project 1 is completed while as per details mentioned above, the assessee declared profit only on booked units @59.65%. Accordingly, the claim of ITC reversal for project 1 amount to Rs. 5,28,43,484/- is restricted @59.65% only which comes to Rs.3,15,21,138/-. Therefore, the excess amount of Rs. 2,13,22,346/-is required to capitalize and not allowed as expenses for AY 2023-24.”

The Ld. CIT(A) confirmed the order of the AO.

Before us, Ld. Counsel for the assessee contended that the authorities below had not properly appreciated the facts relating to the issue. She contended that the assessee had claimed ITC Reversal pertaining to Project No.1 only to the extent of the units completed and booked and had not claimed the entire ITC Reversal as of Rs.5.28 Crores as believed by the AO and the CIT(A). In this regard, she drew our attention to the working of calculation of closing WIP, which was filed to the authorities below and placed before us at paper book page nos.130 & 131 as under:

Ld. DR before us was unable to controvert the above factual contention of the Ld. Counsel for the assessee. He was unable to point out the basis on which the authorities below presumed or believed that the assessee had claimed the benefit of the entire reversal of ITC Credit in relation to Project No.1 of Rs.5.28 Crores. He was also unable to point out where the authorities below had considered the contention of the assessee as above.

In the light of the above, we see no reason to confirm the disallowance of Input Tax Credit Reversal claim of Rs.5.28 Crore, since we find that the assessee suitably demonstrated before us that the assessee’s claim of Input Tax Reversal is in proportion to the percentage of project completed by it and has not claimed the entire Input Credit Reversal as found by the authorities below. In view of the same, the disallowance of Input Credit Reversal of Rs.5.28 Crore is directed to be deleted.

Ground of appeal no.2 is accordingly allowed.

Ground of appeal nos.3 & 4 raised by the assessee read as under:

The issue relates to the disallowance of claim of written off of advances amounting to Rs.10,01,514/-.

The facts relating to the issue are that the assessee had written off of advance of Rs.10,01,514/- given to Airro Engineering Co. and claimed the same as a trading loss u/s. 28 of the Act / business expenditure u/s.37 of the Act. The same was, however, disallowed by the authorities below noting that the Infra-Build LLP vs. ITO] A.Y. 2023-24 - 8 – assessee had not discharged its onus of proving its claim to be in accordance with law, since it had filed no evidence establishing the business purpose of the advance nor filed any evidence to prove the irrecoverablity of the advance.

Before us, the Ld. Counsel for the assessee contended that the impugned advances were given in the preceding year i.e. F.Y. 2021-22 to Airro Engineering Co. during the course of normal business, which fact could be confirmed from the bank book and ledger account of the party, which was filed to the authorities below. She drew our attention to the ledger account of the party, which was placed at paper book page no.134. She further contended that the advances were accounted for under the head advance to suppliers and the accounts being audited it clearly established the business nature of the advance. She further contended that since the assessee had written off the advances irrecoverable, it was sufficient to treat the same as irrecoverable and allow the claim of the assessee to the business loss/business expense so incurred by the write off of the advance.

The Ld. DR, however, relied on the orders of the authorities below and contended that the ledger filed by the assessee of the impugned party did not establish the business nature of the advance and, therefore, the amount had been rightly not allowed to the assessee.

Ground no.3 & 4 of the assessee is, therefore, allowed for statistical purposes.

Ground of appeal nos. 5 to 7 raised by the assessee, relate to the disallowance of Rs.31,50,611/- treating it as CSR expenses, the same read as under:

The learned CIT(A) erred in facts and in law in not appreciating that employee welfare and business promotion expenditures were incurred wholly and exclusively for the Infra-Build LLP vs. ITO] A.Y. 2023-24 - 11 – purposes of business and are therefore allowable under section 37 of the Act.”

Before us, Ld. Counsel for the assessee contended that the impugned expenses had never been claimed as CSR expenses, but, were in the nature of welfare expenses. Our attention was drawn to the copy of account pertaining to the said expenses placed before us at paper book page no.121. The account, she contended, was classified as social activity expenses. She further contended that out of the total expense of Rs.31.50 Lakhs so incurred an amount of Rs.6,10,500/- was incurred for training purpose of his staff and in this regard, she drew our attention to the copy of invoice of the same placed at paper book page no.122.

We have gone through the copy of the ledger account of the social activities expenses amounting to Rs.31,50,611/-, which has been disallowed by the authorities below treating them as CSR expenses De hors the fact that the said expenses are CSR expenses or not., We have perused the narration in the ledger account of the social activity expenses where the impugned expenses have been booked and copy of which was placed before us at paper book page no.121. The entire expenses booked therein pertain to charitable activity, Anaj Kit Vitran to Blind People and also includes expenses of Rs.6,10,500/- paid to Shree Parnatap Institute of CNC Programming.

Expenses incurred on charitable activities are not allowable as business expenses. So far as the amount paid to the Institute of CNC Programming is concerned, we have gone through the invoices of the same placed at paper book page no.122 and we find that it relates to training fees of 37 students. The Ld. Counsel for the assessee was unable to demonstrate as to how the impugned expenses had any relation to the business of Real Estate carried out by the assessee. In view of the same, we do not find merit in the contention of the Ld. Counsel for the assessee that expense of Rs.31,50,611/- were allowable to assessee since the said expenses relate to charitable activities and not incurred for business purpose. Ground Nos. 5 to 7 raised by the assessee are accordingly, dismissed.

In the result, appeal of the assessee is partly allowed for statistical purposes.