Gujarat High Court Quashes GST Demand, Holds ITC Cannot Be Denied On Non-Taxable Transaction

The Gujarat High Court has held that tax authorities cannot deny input tax credit on a transaction that was not taxable in the first place.

A bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati made the ruling while quashing a GST demand against Kor Chems over credit claimed on the acquisition of leasehold rights in a GIDC industrial plot.

The court held that the ITC reversal and interest could not survive after finding that GST was not leviable on the transfer of the leasehold rights.

“Section 17(5)(d) of the CGST Act, presupposes the existence of a taxable inward supply, on which, tax is lawfully leviable and paid,” the bench observed. “When there is no taxable supply, the question of applying blocking provision under section 17(5) of the CGST Act does not arise at all.”

The dispute concerned ₹29.25 lakh in ITC claimed by Kor Chems on GST charged for the assignment of leasehold rights in an industrial plot at Ankleshwar. The firm had acquired the rights in February 2022 and claimed the GST charged on the transaction as ITC.

During a departmental inspection, a partner of the firm stated that the ITC had been claimed under a bona fide belief that it was admissible. The firm subsequently reversed the ₹29.25 lakh through DRC-03 and paid ₹4.44 lakh as interest.

The tax department later treated the credit as blocked under Section 17(5)(d) of the CGST Act and invoked Section 74(1) to recover the amount with interest and penalty. Kor Chems maintained that the transaction had been disclosed in its GST returns and books and that there was no fraud, suppression of facts, or wilful misstatement.

The adjudicating authority confirmed the ITC demand of ₹29.25 lakh, interest of ₹4.44 lakh and an equivalent penalty. The appellate authority subsequently upheld the demand.

The high court relied on its earlier ruling concerning assignment of leasehold rights in GIDC plots. It had held that assignment or transfer of such rights amounts to transfer of benefits arising from immovable property and is not covered by the relevant provisions defining a taxable supply. GST was therefore not leviable on such a transaction.

The bench held that this finding was central to the ITC dispute. Since GST was not leviable on the underlying transaction, the reversal of ITC and interest, which were based on the assumption that GST was payable, could not survive.

The court also relied on an earlier ruling in which it had examined the scope of Section 17(5)(d). It held that the restriction concerns goods or services received for construction of an immovable property and noted that the provision did not apply where the taxpayer had not undertaken construction activity.

In Kor Chems' case too, the court noted that no construction activity had been undertaken. It therefore held that the allegation of blocked credit under Section 17(5)(d) was misconceived and that the resulting demand was unsustainable.

The court also found no fraud, wilful misstatement, or suppression of facts by Kor Chems. It consequently held that Section 74(1), which applies to wrong availment or utilisation of ITC on account of such conduct, could not be invoked.

The bench quashed the orders confirming the demand and directed the authorities to refund ₹29.25 lakh paid through DRC-03 as tax and ₹4.44 lakh paid as interest. The refund was ordered to be made within three weeks from receipt of the judgment.

For Petitioner: Hardik V. Vora

For Respondents: Deepak N. Khanchandani, Senior Standing Counsel