GST Credit Irrecoverable Business Cost Deductible: ITAT 2026

What Happened?

In October 2026, the Income Tax Appellate Tribunal (ITAT) Ahmedabad bench delivered an important ruling allowing a taxpayer to claim ₹2.64 crore as a deductible business expense. This amount represented GST that became irrecoverable upon project completion. However, the Tribunal also directed verification of a separate ₹85.60 lakh GST claim to prevent double deduction and ensure compliance with Income Tax Act 2025 provisions.

This ruling clarifies a long-standing grey area: when GST paid on project-related expenses cannot be recovered as input tax credit (ITC), can it be claimed as a business deduction under the Income Tax Act 2025?

Background & Legal Context

The GST-Income Tax Overlap Issue

Under the Goods and Services Tax Act, registered businesses can claim Input Tax Credit (ITC) on GST paid on purchases. However, there are situations where ITC cannot be claimed:

• Supplies exempt from GST
• Personal consumption items
• Blocked items (like motor vehicles below ₹10 lakh, certain food items)
• When project completion occurs and client relationship ends without full ITC recovery

Income Tax Act 2025 Perspective

Under Section 37 of the Income Tax Act 2025 (which retained the provisions from the 1961 Act), any expenditure incurred wholly and exclusively for business purposes is deductible. The question courts have grappled with: if GST cannot be claimed as ITC, should it be allowed as a business deduction under Section 37?

The ITAT's Reasoning

The Ahmedabad Tribunal held that once GST credit becomes irrecoverable, the GST amount transforms from a recoverable tax input into an actual business expense. Since the taxpayer has borne this cost for business purposes, it qualifies as a deductible business expenditure under Section 37, Income Tax Act 2025.

This is consistent with the principle that GST is a tax on consumption, and if the business cannot pass it on to the customer, it becomes part of the business cost.

Conditions & Safeguards

The Tribunal's approval came with an important condition: the Authority must verify the ₹85.60 lakh claim to ensure there is no double deduction. Double deduction occurs when:

• The same GST is claimed as both ITC and business deduction
• GST paid is claimed as deduction after claiming partial ITC
• The same expense is claimed twice in different assessment years

What Does This Mean for You?

For Project-Based Businesses

If you operate a construction, engineering, IT services, or consulting business where GST credit cannot be fully recovered on project completion, this ruling is favorable. You now have a clear legal basis to claim irrecoverable GST as a business expense under Section 37 for AY 2025-26 onwards.

For Assessment Year 2025-26 & Beyond

Businesses in India must now evaluate their project-wise GST position. If you have:

• Completed projects where ITC remained unrecovered
• Exempted supply projects
• Blocked GST items used for projects

You may claim these amounts as deductible expenses under Section 37, Income Tax Act 2025, subject to proper documentation.

The Double Deduction Risk

The Tribunal's direction regarding verification of the ₹85.60 lakh highlights a critical risk. If the Income Tax Department suspects you have claimed the same GST as both ITC (in GST returns) and as business deduction (in Income Tax returns), they can add back the amount. This can attract penalties under Section 271(1)(c) of the Income Tax Act 2025 and interest under Section 234A.

Documentation Becomes Critical

To support your claim, you must maintain:

• Detailed project-wise GST records
• Proof that ITC was not claimed on specific items
• Correspondence showing why GST became irrecoverable
• Details of blocked GST under GST Act
• Reconciliation between GST returns and Income Tax deduction claims

Practical Impact

For a ₹100 crore turnover business in construction or services, this ruling could mean potential deductions ranging from ₹50 lakh to ₹1 crore annually, depending on the project mix and GST blocked items used. At 30% tax rate, this translates to tax savings of ₹15 lakh to ₹30 lakh per year.

What Should You Do Now?

Step 1: Audit Your GST-Income Tax Records

Review all GST returns filed for AY 2024-25 and AY 2025-26. Identify:

• Which projects had blocked GST items
• Which supplies were exempt
• Total unrecovered GST per project

Step 2: Reconcile ITC Claims

Cross-check your GST ITC records with your Income Tax deductions. Ensure no overlap. Create a reconciliation statement showing:

• Total GST paid
• GST claimed as ITC
• GST that became irrecoverable (with reasons)

Step 3: Document Irrecoverability

Prepare written evidence for each claim of irrecoverable GST:

• Email trails with clients explaining why GST cannot be recovered
• Project completion certificates
• GST exemption certificates
• Blocked item invoices with tax code explanations

Step 4: File Amended Returns if Needed

If you have already filed Income Tax returns for AY 2024-25 or AY 2025-26 without claiming this deduction, consider filing an amended return under Section 139(5), Income Tax Act 2025, before the Department raises any query.

Step 5: Maintain Contemporaneous Records

Going forward, maintain a GST-to-Income Tax reconciliation template for each project. This will help during any audit or assessment.

Key Takeaways

• Major Ruling: ITAT Ahmedabad (October 2026) allows irrecoverable GST to be claimed as business deduction under Section 37, Income Tax Act 2025, when GST credit cannot be recovered.
• Relief Amount: The taxpayer received ₹2.64 crore deduction approval, with ₹85.60 lakh directed for verification to prevent double deduction.
• Critical Condition: The deduction is allowed only if GST was not claimed as Input Tax Credit. Double deduction is strictly prohibited and can invite penalties.
• For AY 2025-26: Project-based businesses must reconcile their GST returns with Income Tax returns to identify irrecoverable GST and support such claims with documentation.
• Action Required: Maintain separate records of GST paid, GST claimed as ITC, and GST that became irrecoverable, with reasons, to withstand any Income Tax Department scrutiny.

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