Raj Jaggi
Different Transactions Cannot Receive the Same GST Treatment
Transactions involving industrial land may appear similar because they concern the same plot. Legally, however, they may be entirely different. First, an industrial development corporation may allot a plot to an industrial unit on a long- term lease. Thereafter, the original lessee may transfer its entire leasehold interest to another person, subject to the development corporation's permission. The first transaction is an original grant of leasehold rights, whereas the second is an assignment of rights already held by the existing lessee. Their GST treatment must be decided separately by examining the true nature of each transaction. They cannot be taxed alike merely because both relate to “leasehold rights.”
This distinction formed the basis of M/S Kor Chems through Partner Sanjay Rameshchandra Soni v. Assistant Commissioner, CGST and Central Excise & Another, 2026- VIL- 1107- GUJ, decided on 03. 09.2026. The Gujarat Industrial Development Corporation [GIDC] had originally allotted an industrial plot at Ankleshwar to M/S Myspace Infracon. Kor Chems did not obtain the plot or leasehold rights directly from GIDC. Instead, M/S Myspace Infracon, as the existing lessee, subsequently assigned its leasehold interest to Kor Chems. The petitioner entered the transaction as a third- party assignee and stepped into the position of the existing lessee for the remaining lease period. GIDC' s role in granting permission for the assignment did not convert the transaction into a fresh allotment by GIDC.
M/S Myspace Infracon treated the assignment as taxable and charged GST of Rs. 29,25,000, which Kor Chems paid as part of the consideration and claimed as input tax credit. The Department later treated this credit as blocked under Section 17(5)(d), secured its reversal with interest, and imposed an equivalent penalty under Section 74. The real controversy, however, could not be resolved merely by examining whether the credit was blocked. The first and more fundamental question was whether GST was legally payable on the assignment itself. Once the assignment by the existing lessee was found to be outside the scope of taxable supply, the entire departmental action lost its foundation. The ITC reversal, interest, and penalty could not survive after the underlying levy itself had failed.
Original Lease and Later Assignment Must Be Examined Separately
The original long-term lease granted by GIDC and the subsequent assignment of that lease by the existing lessee are two legally distinct transactions. In the first transaction, GIDC grants an industrial unit the right to possess and use the plot for a long period, generally subject to payment of premium, rent and other charges. Such a grant is ordinarily treated as a lease of immovable property. However, the one-time upfront amount paid for a long-term lease of an industrial plot may qualify for exemption under Entry No. 41 of Notification No. 12/2017-Central Tax (Rate), subject to fulfilment of the prescribed conditions. In the second transaction, GIDC does not grant a fresh lease to the new party. The existing lessee transfers the leasehold rights it already holds, and the assignee takes the lessee’s place for the remaining lease period. GIDC may charge a separate fee for examining and approving the transfer, but that permission fee is distinct from the consideration paid by the assignee to the existing lessee. The taxability of these two payments must therefore be examined separately.
In Gujarat Chamber of Commerce and Industry & Others v. Union of India & Others, 2025-VIL-21-GUJ, dated 03.01.2025, the Gujarat High Court explained that such an assignment cannot be treated merely as another form of renting. Under Section 105 of the Transfer of Property Act, 1882, a lease transfers the right to enjoy immovable property. Section 108(j) also recognises that, subject to the terms of the lease, a lessee may transfer the whole or part of its interest. Leasehold rights are therefore valuable rights arising directly from land and are treated as benefits arising from immovable property. In an assignment, the existing lessee transfers its entire leasehold interest, and the assignee steps into its position. This is distinct from renting, licensing or sub-leasing, where the original lessee may retain its principal interest and merely permit another person to use the property. The High Court further clarified that Schedule II cannot, by itself, create a taxable supply. It only determines whether an activity that already qualifies as a “supply” under Section 7 should be treated as a supply of goods or services. Consequently, the entries concerning renting or construction could not be used to convert the complete transfer of a leasehold interest into a taxable service. Considering the nature of leasehold rights as benefits arising from land and the treatment of immovable property under the GST framework, the assignment by the existing GIDC lessee to a third-party assignee was held to be outside the taxable field and not liable to GST under Section 9.
The Revenue challenged the Gujarat High Court’s decision before the Supreme Court in Union of India v. Gujarat Chamber of Commerce and Industry, 2026-VIL-68-SC, dated 21.07.2026. After condoning the delay, the Supreme Court found no grounds to interfere and dismissed the Revenue’s Special Leave Petitions. It also referred to the dismissal of a similar Special Leave Petition on 22.05.2026. Since the Supreme Court passed a brief dismissal order without separate reasons on the merits, it is legally more precise to state that the Gujarat High Court’s ruling was left undisturbed, rather than describing the Supreme Court order as an independent, detailed affirmation of every part of the High Court’s reasoning. Nevertheless, the dismissal gives considerable finality and practical authority to the principle laid down by the Gujarat High Court. Applying that principle to Kor Chems, M/s Myspace Infracon was the existing GIDC lessee, while Kor Chems was the third-party assignee. The transaction was therefore a subsequent transfer of an existing leasehold interest, not a fresh allotment or an original lease granted directly by GIDC.
Leasehold Interest Is Property, Not a Stand-Alone Taxable Service
A leasehold interest is less extensive than absolute ownership, yet it remains a legally enforceable interest in immovable property. It gives the lessee the right to possess, use and enjoy the property for the lease period, subject to the lease conditions. When the lessee assigns that interest for consideration, the transaction is the transfer of an existing property interest rather than the provision of an independent service to the assignee.
In Gujarat Chamber of Commerce and Industry & Others v. Union of India & Others, 2025-VIL-21-GUJ, dated 03.01.2025, the Gujarat High Court held that Sections 7(1)(a) and 9 of the CGST Act, read with the relevant entries in Schedules II and III, did not subject such an assignment to GST. The Court rejected attempts to bring the transaction within the taxable field merely by treating every lease-related transfer as a supply of service. The legal character of the right transferred and the effect of the assignment had to prevail over the la, and the effect of the assignment,
The same principle directly governed Kor Chems. M/s Myspace Infracon was the existing lessee, and Kor Chems was the third-party assignee. The assignment transferred the benefit arising from the industrial plot and placed Kor Chems in the position of the existing lessee. Consequently, the GST charged on the consideration was contrary to the settled legal position. If the transaction did not qualify as a taxable supply under Section 7 and was not chargeable under Section 9, the Department could not preserve the economic burden of that tax through a demand for reversal of ITC.
A Non-Taxable Transaction Cannot Be Recast as Blocked Credit
The Department treated the matter as an ITC eligibility dispute. Since the petitioner had taken credit for the GST appearing on the supplier’s invoice, the authorities examined whether the credit was blocked under Section 17(5)(d). That approach overlooked the more fundamental defect: GST itself was not lawfully leviable on the underlying assignment.
A blocked-credit inquiry ordinarily assumes the existence of a taxable inward supply on which tax has been lawfully charged. The question then is whether the recipient is prevented from taking credit because the expenditure falls within one of the exclusions in Section 17(5). Where the underlying transaction is itself outside the charge of GST, the controversy cannot be resolved by treating the tax as valid while the corresponding credit is deemed inadmissible. Such an approach would enable the Department to retain an amount that could not lawfully be imposed in the first place.
The petitioner had already borne GST as part of the consideration paid to M/s Myspace Infracon. Denial and recovery of the corresponding credit would have made that burden final, even though the transaction was non-taxable. The High Court therefore looked beyond the mechanical entry in the electronic credit ledger. When the charging provision does not apply, the Department cannot retain the amount directly as tax or indirectly through ITC reversal and interest. A tax without authority of law does not acquire legitimacy merely because it entered the system through an invoice and was later neutralised by denial of credit.
Section 17(5)(d) Cannot Travel Beyond Construction
Section 17(5)(d) restricts ITC on goods or services received by a taxable person for the construction of immovable property, other than plant and machinery, on the taxable person’s own account. The provision targets construction-related expenditure. Accordingly, its application requires a clear connection between the inward supply and the construction, reconstruction, renovation, addition, alteration or repair of immovable property, to the extent specified by the provision.
Kor Chems did not undertake any construction activity. It acquired the existing leasehold rights in the industrial plot as they stood. The Department failed to establish that the disputed expenditure related to the construction of any building or other immovable property by the petitioner. The mere fact that the leasehold rights concerned land could not convert the consideration paid for their assignment into construction expenditure.
Reliance was placed on Niket Bipinbhai Patel through Power of Attorney Holder Bipinbhai Madhavbhai Patel v. Assistant Commissioner (A.E.), CGST-Central Excise, Vadodara-II Commissionerate, decided on 10.02.2026, reported as 2026-VIL-189-GUJ. That decision confined Section 17(5)(d) to construction-related expenditure and rejected its application where no construction activity had been undertaken. Kor Chems presented an even more basic difficulty for the Department: not only was there no construction, but the assignment itself was not a taxable supply. Consequently, the allegation of blocked credit failed at both levels.
Full Disclosure Left No Foundation for Section 74
Section 74, as applicable to the relevant financial year, could be invoked where tax had not been paid, had been short-paid or erroneously refunded, or ITC had been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts with intent to evade tax. These are not decorative expressions. They are jurisdictional conditions that distinguish an ordinary tax dispute from a case involving deliberate concealment or deception.
The transaction in the present case was recorded through a tax invoice dated 17.02.2022. The GST charged by the supplier appeared in the petitioner’s GSTR-2A, while the credit was disclosed in GSTR-3B and recorded in the books of account. The petitioner explained that the credit had been taken under a bona fide belief after GST was charged by the supplier. Nothing material concerning the transaction or the credit was concealed from the Department.
A dispute concerning the correct legal character of a disclosed transaction cannot automatically be converted into fraud or suppression. Incorrect availment of credit, even if assumed, does not by itself establish the deliberate conduct required by Section 74. The petitioner had also reversed the credit and paid interest during the inquiry, demonstrating compliance rather than an attempt to conceal the transaction. In the absence of fraud, wilful misstatement or suppression with intent to evade tax, the extended machinery of Section 74 and the equivalent penalty of Rs.29,25,000 lacked the necessary statutory foundation.
Payment Through DRC-03 Did Not Validate an Unlawful Levy
During the inquiry, the petitioner reversed ITC of Rs.29,25,000 through Form DRC-03 dated 21.01.2023 and paid interest of Rs.4,44,280 through Form DRC-03 dated 22.12.2023. The Department relied upon the partners’ statements and the payments to support the proceedings. However, a payment made during an investigation, particularly to avoid continuing litigation, does not determine whether the levy was legally sustainable.
Tax liability arises from the statute and not from a taxpayer’s concession, mistaken understanding or decision to make payment during an inquiry. Neither a statement nor a DRC-03 payment can confer taxability upon a transaction that falls outside the charging provision. Similarly, reversal of credit cannot validate the application of Section 17(5)(d) where no construction activity exists. Once the legal foundation of the demand disappears, retention of the amount becomes impermissible.
The Order-in-Original, DRC-07, rectification order, Order-in-Appeal and APL-04 were accordingly quashed. The Department was directed to refund Rs.29,25,000 paid through DRC-03, together with interest of Rs.4,44,280, within three weeks. This relief was not based merely on a technical defect in adjudication. It followed from the substantive conclusion that the assignment was not taxable, the blocked-credit provision did not apply, and Section 74 could not be invoked.
First Decide Taxability, Then Examine ITC
The correct starting point is to determine whether the underlying transaction is liable to GST. Only if the transaction constitutes a taxable supply does the question of the recipient’s entitlement to ITC arise. The conditions for claiming credit and the restrictions under Section 17(5) apply at the second stage. The Department cannot assume that GST was validly charged and begin the inquiry by treating the credit as blocked.
The distinction was decisive in Kor Chems. GIDC had originally allotted the plot to M/s Myspace Infracon, which later assigned its leasehold interest to the petitioner. Through that assignment, the petitioner replaced the lessee and acquired a benefit arising from immovable property. The transaction could not be treated as a taxable service merely because it was described as an “assignment” and consideration was paid.
The principle extends beyond the refund granted in this case. Once the underlying assignment was found to be outside GST, the Department could not preserve the tax burden by demanding reversal of ITC with interest. Similarly, a fully disclosed dispute concerning the correct legal treatment of a transaction could not justify proceedings under Section 74 without evidence of fraud, wilful misstatement or suppression of facts. Where the transaction itself is not taxable, ITC reversal cannot be used as an indirect means of retaining the tax.
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