ITC is not available in relation to construction of immovable property which is further let out for commercial purpose

The West Bengal Appellate Authority for Advance Ruling has ruled that Input Tax Credit (ITC) is not available for the construction of immovable property intended for commercial letting. This decision clarifies that such expenses fall under 'blocked credit' as per Section 17 of the CGST Act. The ruling applies even if the property is used in the course of business, such as renting out a warehouse.

The Hon'ble West Bengal Appellate Authority for Advance Ruling in the case of In Re. Bathula Mahesh Babu [Appeal No. 04/WBAAAR/Appeal/2023 dated January 24, 2024] allowed the appeal filed by the Revenue Department, thereby holding that no ITC is allowed on Input Goods or Services in relation to construction of immovable property which is further let out for commercial purposes.

Facts

M/s. Mindrill Systems and Solutions Private Limited ("the Respondent") constructed a warehouse and let it out to a Company for commercial purpose, the GST was paid on the said supply of service. The Respondent filed an application for Advance Ruling before the West Bengal Authority for Advance Ruling ("WBAAR") on whether Input Tax Credit ("ITC") can be availed with respect to capital expenses incurred on construction of warehouse which would be further utilized to pay tax on outward supplies of services by way of renting the warehouse. 

WBAAR vide Advance Ruling dated June 26, 2023 ("the Impugned Ruling") held that, the Respondent is not eligible to claim ITC with respect to expenses incurred on construction of warehouse which is capitalized in the book of account. However, in case where the expenses are not capitalized in the books of account, the claim of ITC is admissible. 

Aggrieved by the Impugned Ruling, the Bathula Mahesh Babu ("the Appellant"), on behalf of the Revenue Department filed an appeal against the Impugned Ruling.

Issue

Whether ITC is available in relation to construction of immovable property which is further let out for commercial purpose?

Held

The West Bengal Appellate Authority for Advance Ruling in the case of Appeal No. 04/WBAAAR/Appeal/2023 held as under:

• Observed that, clauses (c) and (d) of sub-section (5) of Section 17 of the Central Goods and Services Act, 2017 ("the CGST Act") that ITC is not available with respect to works contract services or goods or services or both received for the construction of immovable property and, therefore would fall within the purview of blocked credit.  
• Further observed that, the explanation stated in clause (d) of Section 17 of the CGST Act, the credit is also blocked with respect to reconstruction, renovation, addition, alterations or repairs which are capitalized in the books of accounts. 
• Noted that, the condition of capitalization in the books of accounts, is only applicable with respect to reconstruction, renovation, additions, alterations or repairs to the immovable property. 
• Opined that, the ITC is blocked with respect to construction in all situations. 
• Held that, no ITC is available in relation to the construction of the warehouse which is further let out by the Applicant.  

Our Comment

The case of Chief Commissioner of Central Goods and Services Tax and Others v. M/s Safari Retreats Private Limited and Others [SLP(C) 26696/2019] which is pending before the Hon'ble Supreme Court, is at its final legs as the Department has filed an appeal against the judgement passed by Hon'ble Orissa High Court in the case of Safari Retreats Private Limited and Others v. Chief Commissioner, Central Goods and Services Tax and Others [W.P. (C) 20463 of 2018 dated April 17, 2019] wherein the Hon'ble High Court allowed the availment of ITC on material input/services used for construction of immovable property which is to be used in the course or furtherance of business i.e. being further let out to various tenant/lessees.