ITC on Transfer of Leasehold Rights Without Construction, Not Barred Under Section 17(5)(d)

The Hon'ble Gujarat High Court in the case of Niket Bipinbhai Patel v. Assistant Commissioner (A.E.) CGST-Central Excise, Vadodara-II Commissionerate [R/Special Civil Application No. 18068 of 2025, order dated February 10, 2026] held that Input Tax Credit (ITC) availed on charges paid to Gujarat Industrial Development Corporation (GIDC) for sub-division and transfer of leasehold rights in plots cannot be treated as blocked credit under Section 17(5)(d) of the CGST Act when no construction activity is undertaken, and consequently quashed the show cause notice issued under Section 74 of the CGST Act and directed unblocking of ITC of ₹98,11,678 lying in the electronic credit ledger.

Facts:

Niket Bipinbhai Patel ("the Petitioner") is an individual who acquired leasehold rights over a Gujarat Industrial Development Corporation (GIDC), Ankleshwar plot from Syngenta India Limited and is engaged in the business of undertaking sub-plotting activities and thereafter transferring the leasehold rights of such sub-plots to purchasers. The Petitioner is a Non-Resident Indian residing in the USA and obtained GST registration with effect from March 14, 2022 solely for discharging GST liability on the transfer of leasehold rights of GIDC sub-plots.

For transferring leasehold rights in sub-plots, the Petitioner paid various charges to GIDC such as sub-divisional charges, NU penalty, administrative charges, transfer fees and other statutory dues on which GST was levied by GIDC, and accordingly availed ITC on these expenses as they were directly linked to the business activity of transferring leasehold rights.

During FY 2022-23, the Petitioner sold sub-plots to M/s SML Limited and received consideration of ₹20 crores in July 2022 and ₹16.51 crores in September 2022. GST liability of ₹3.60 crores and ₹2.97 crores respectively was discharged. While discharging GST for July 2022, the Petitioner inadvertently utilised ITC of ₹38,60,608, which was subsequently reversed through Form DRC-03 dated April 11, 2023.

Assistant Commissioner (A.E.), CGST ("the Respondent") alleged that the Petitioner had availed ITC on invoices issued by GIDC which was in the nature of blocked credit under Section 17(5)(d) of the CGST Act. The department conducted a spot visit, recorded statements, and thereafter issued an intimation in Form DRC-01A dated October 13, 2025 and subsequently a show cause notice dated October 28, 2025 under Section 74(1) demanding ₹98,11,678 with interest and penalty, alleging wrongful availment and utilisation of ITC.

The Petitioner contended that Section 17(5)(d) is applicable only when goods or services are used for construction of immovable property and that the Petitioner had not undertaken any construction activity whatsoever; the activity undertaken was only transfer of leasehold rights in GIDC sub-plots. It was further submitted that the ITC had never been utilised for payment of output GST and remained lying unutilised in the electronic credit ledger and even the inadvertently utilised credit had been reversed through DRC-03.

The Respondent contended that the Petitioner had violated Section 17(5)(d) by wrongly availing ITC and that the show cause notice was issued only to seek explanation as to why the wrongly availed ITC should not be recovered, and the correctness of the proposed view could only be examined during adjudication; therefore, entertaining a writ petition would pre-empt statutory proceedings.

The Petitioner therefore approached the Gujarat High Court by way of a writ petition under Article 226 of the Constitution seeking quashing of the show cause notice issued under Section 74(1) of the CGST Act and a direction to unblock the ITC amounting to ₹98,11,678 lying in the electronic credit ledger.

Issue:

Whether Input Tax Credit availed on charges paid to GIDC for sub-division and transfer of leasehold rights in plots is barred under Section 17(5)(d) of the CGST Act when no construction activity is undertaken, and whether invocation of proceedings under Section 74 of the CGST Act was justified?

Held:

The Hon'ble Gujarat High Court in R/Special Civil Application No. 18068 of 2025 held as under:

• Observed that, the Respondent had not disputed that the Petitioner's business activity consisted only of acquiring leasehold rights in GIDC plots, undertaking sub-plotting and transferring leasehold rights of such sub-plots to purchasers.
• Observed that, a plain reading of Section 17(5)(d) shows that the restriction on ITC applies to goods or services received for construction of immovable property.
• Noted that, the legislative intent behind Section 17(5)(d) is that "the bar on credit applied exclusively to construction related expenditure and the apportionment of credit and blocked credits relating to such business."
• Observed that, the Respondent had not established that the Petitioner had undertaken any construction activity whatsoever apart from transferring leasehold rights in the GIDC plot.
• Held that, therefore Section 17(5)(d) would not even remotely apply to the Petitioner and the allegation of availing blocked credit reflected a complete non-application of mind by the Respondent authority.
• Noted that, Section 74 of the CGST Act can be invoked only where tax has not been paid or ITC has been wrongly availed by reason of fraud, wilful misstatement or suppression of facts.
• Observed that, the Respondent had not established any fraud, wilful misstatement or suppression of facts on the part of the Petitioner; on the contrary, the Petitioner had reversed the inadvertently utilised ITC through Form DRC-03 and had discharged the entire GST liability in cash.
• Consequently, the Court quashed and set aside the show cause notice dated October 28, 2025 issued under Section 74(1) of the CGST Act and directed the Respondent to unblock the ITC amounting to ₹98,11,678 lying in the electronic credit ledger within three weeks.

Our Comments:

The judgment interprets the scope of Section 17(5)(d) of the CGST Act, which blocks ITC on goods or services used for construction of immovable property. The Court has emphasised that the provision applies exclusively to construction-related expenditure, and where the taxpayer merely transfers leasehold rights in plots without undertaking construction, the bar on ITC cannot be invoked. The Court also analysed Section 74 of the CGST Act, noting that proceedings under the provision require the existence of fraud, wilful misstatement or suppression of facts. Since the department itself acknowledged that the Petitioner had reversed the inadvertently utilised credit through Form DRC-03 and discharged output GST liability in cash, the statutory pre-conditions for invoking Section 74 were not satisfied.

Relevant Provisions:

Section 17(5)(d) of the CGST Act, 2017

"17. Apportionment of credit and blocked credits

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation 1.—For the purposes of clauses (c) and (d), the expression ‘construction' includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property."

Section 74(1) of the CGST Act, 2017

"74. Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful- misstatement or suppression of facts.-

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice."

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED