Gujarat High Court Quashes ₹98 Lakh GST SCN, Says Construction ITC Bar Not Applicable To Leasehold Rights Transfer

The Gujarat High Court has held that Section 17(5)(d) of the Central Goods and Services Tax Act, 2017, which blocks input tax credit on goods or services used for construction of immovable property on one's own account, did not apply in a case where the taxpayer had only transferred leasehold rights and had undertaken no construction activity.

A Division Bench of Justice A.S. Supehia and Justice Pranav Trivedi quashed a show cause notice issued under Section 74(1) of the Act and directed the department to unblock Rs. 98,11,678 lying in the electronic credit ledger of a Non Resident Indian engaged in trasnfer of leasehold rights.

It observed, “Thus, the legislative intent is clear that the bar on credit applied exclusively to construction related expenditure and the apportionment of credit and blocked credits relating to such business. The respondent has not established that the petitioner has undertaken any construction activity whatsoever and apart from transferring the leasehold rights in GIDC Plot, is also accordingly, undertaking the construction activities. Thus, the provision of Section 17(5)(d) of the GST Act would not even remotely apply to the petitioner. Hence, the allegation of availing block credit by resorting to the provision of Section 17(5)(d) of the GST Act, is uncalled for and there is a complete non-application of mind on behalf of the respondent.”

Section 17(5)(d) specifically denies input tax credit on goods or services received for construction of an immovable property, even if used in the course of business. The dispute was whether the transfer of leasehold rights in an industrial plot could fall within this restriction.

The petitioner, a non-resident Indian residing in the United States, had acquired leasehold rights in an industrial plot from the Gujarat Industrial Development Corporation. His activity was limited to sub-plotting and transferring leasehold rights to purchasers. He obtained GST registration in March 2022 solely to discharge GST on such transfers.

During financial year 2022-23, he sold two subplots. He paid GST of Rs. 3.60 crore in July 2022 and Rs. 2.97 crore in September 2022. He availed input tax credit of Rs. 98,11,678 on GST charged by GIDC on various charges such as sub divisional fees and transfer charges.

The department alleged that this credit was barred under Section 17(5)(d). It issued a notice under Section 74(1), which applies where tax has allegedly not been paid or credit has been wrongly availed by reason of fraud, willful misstatement, or suppression of facts. The credit was also blocked in the electronic ledger.

The record showed that Rs. 38,60,608 was inadvertently utilised in July 2022. The amount was later reversed through Form DRC-03 dated April 11, 2023. The entire output GST liability was paid in cash.

Before the Court, the petitioner argued that he had not undertaken any construction activity. He submitted that Section 17(5)(d) applies only to construction-related expenditure. He also contended that the conditions for invoking Section 74(1) were not satisfied.

The court found no material to show any construction activity and therefore directed the unblocking of credit

On the invocation of Section 74(1), the Bench further held, “Thus, we do not find that in the instant case, there is any fraud or wilful mis-statement or any suppression of facts at the end of the petitioner in availing the ITC or the same is wrongly availed.”

Holding that the statutory preconditions were absent, the court quashed the notice and directed the authorities to unblock the credit within three weeks.