Court holds that acquisition of leasehold rights is not a "supply" under CGST Act, quashes penalty for wrong Input Tax Credit claim, and directs refund of Rs. 29.25 lakh tax and Rs. 4.44 lakh interest
In a landmark judgment delivered on September 3, 2026, the Gujarat High Court (Division Bench comprising Justices A.S. Supehia and Vaibhavi D. Nanavati) held that the acquisition of leasehold rights in industrial plots does not qualify as a "supply" under Section 7(1)(a) of the Central Goods and Services Tax Act, 2017 (CGST Act). Consequently, such transactions are not subject to Goods and Services Tax (GST) under Section 9 of the CGST Act. The Court further ruled that Input Tax Credit (ITC) availed on such leasehold rights under a bona fide belief cannot be treated as "blocked credit" under Section 17(5)(d) of the CGST Act.
The case arose from a petition filed by M/s. Kor Chems, a partnership firm engaged in trading industrial chemicals, who had acquired leasehold rights of an industrial plot in Ankleshwar from M/s. Myspace Infracon for Rs. 1.91 crore, inclusive of GST of Rs. 29.25 lakh. The supplier had charged GST on the transaction, and the petitioner availed ITC on this GST amount, believing it was admissible.
During a departmental inspection under Section 67(1) of the CGST Act, the petitioner admitted to availing ITC on the GST paid for leasehold rights but stated it was done under a bona fide belief without knowledge that the credit might be blocked. Upon realization of the legal position, the petitioner voluntarily reversed the ITC and paid the applicable interest to avoid litigation.
Despite these steps, the tax authorities issued show-cause notices and orders demanding reversal of ITC along with interest and penalty under Section 74(1) of the CGST Act, alleging that the ITC availed was inadmissible blocked credit and that there was suppression or willful misstatement. The petitioner challenged these orders before the Gujarat High Court.
The Court extensively referred to its earlier ruling in Special Civil Application No.18068 of 2025 and the decision in Gujarat Chamber of Commerce and Industry & Ors., which clarified that assignment or transfer of leasehold rights in industrial plots allotted by Gujarat Industrial Development Corporation (GIDC) is a transfer of benefits arising out of immovable property and does not constitute a "supply" attracting GST.
Key observations made by the Court include:
1. Non-Applicability of GST: The leasehold rights transaction does not attract GST as it is not a supply under Section 7(1)(a) of the CGST Act.
2. Blocked Credit under Section 17(5)(d): The blocking of ITC applies exclusively to goods or services received for construction of immovable property. Since the petitioner did not undertake any construction but only acquired leasehold rights, Section 17(5)(d) is not applicable.
3. No Fraud or Suppression: The petitioner availed ITC under bona fide belief, with the GST duly charged by the supplier and transparently declared in GST returns. There was no fraudulent intent or suppression of facts to evade tax.
4. Refund Directed: The Court ordered the respondents to refund Rs. 29.25 lakh tax and Rs. 4.44 lakh interest paid by the petitioner within three weeks.
The judgment quashed the orders-in-original and appeal passed by the tax authorities, holding that the demand and penalties were without legal basis. The Court emphasized that when the charging provision of GST itself does not apply, any amounts collected or retained by the department, directly as tax or indirectly by way of ITC reversal and interest, lack legal sanctity.
This ruling provides clarity on the GST treatment of leasehold rights in industrial plots, relieving businesses from unwarranted tax demands and penalties in such transactions. It also reiterates the principle that ITC availed under a bona fide belief, in absence of fraud or suppression, should not attract penal consequences.
Bottom Line:
GST - Input Tax Credit (ITC) availed on leasehold rights of industrial plots - Held, acquisition of leasehold rights does not qualify as "supply" under Section 7(1)(a) of the CGST Act and is not subject to GST under Section 9 - ITC availed under bona fide belief cannot be treated as "blocked credit" under Section 17(5)(d) of the CGST Act.
Statutory provision(s):
Central Goods and Services Tax Act, 2017 Sections 7(1)(a), 9, 17(5)(d), 50, 67(1), 70, and 74(1)
