The learning and Skills Council has said it was barred by the Government from using extra cash to compensate colleges who missed out on capital funding.
In its submission to the judicial review hearing in Leeds last week, lawyers for the former FE funding body said the Treasury and the then Department for Innovation, Universities and Skills only gave it an extra pound;350 million on the condition that it was spent on new projects as a fiscal stimulus.
The LSC was responding to a claim by Grimsby Institute of Further and Higher Education that refusing to compensate colleges, which had been encouraged to apply for increasingly extravagant building projects until funding abruptly ran out, was "an abuse of power".
"In the circumstances, the LSC has given proper and careful consideration to reimbursing all colleges in the position of the claimant. It has carefully considered the financial implications for each college and the consequences of not reimbursing development costs," the LSC's legal team said.
"The decision not to reimburse the claimant its development costs is one that has been properly reached, having regard to all the relevant circumstances, and it certainly cannot be condemned as so conspicuously unfair that it amounts to an abuse of power."
Deciding how to spend the extra money from the Treasury was a "classic policy or political judgment as to the use of limited public funds in a difficult situation", the LSC said.
The funding body said the college needed to prove that it had made a "clear and unambiguous representation" or a "specific undertaking" that the pound;140 million Grimsby project would be approved to show that it had a legitimate expectation of funding.
But it said that the college was only able to rely on "improbably alleged implied representations".
The college said that, while it could not expect automatic approval in detail after receiving approval in principle, it could expect to have its application decided in the normal way and not using a new prioritisation system introduced after the funding scarcity became known.
It also argues that the LSC was not properly financed and organised and had granted large numbers of approvals in principle without any regard as to whether it could pay for them.
The hearing, which came as the coalition Government announced that it was offering an extra pound;50 million for college refurbishments in grants of up to pound;1 million, is due to resume on July 12.