The Gujarat High Court has clarified that tax authorities cannot block input tax credits on leasehold rights transactions that are not taxable, setting a significant precedent in GST jurisprudence.
The Gujarat High Court has ruled that tax officials cannot deny input tax credit on a transaction that was never taxable in the first place, giving relief to Kor Chems in a dispute over leasehold rights in an industrial plot at Ankleshwar. A bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati held that the GST department had no basis to treat the credit as blocked once it had concluded that no tax was payable on the underlying transfer.
According to the court, the assignment of leasehold rights in a GIDC plot is a transfer of benefits linked to immovable property and does not amount to a taxable supply under the GST framework. That finding was central to the case, because Kor Chems had claimed ₹29.25 lakh as input tax credit after paying GST on the acquisition of the rights in February 2022. During a departmental inspection, the company reversed the credit through DRC-03 and also paid ₹4.44 lakh in interest, saying the claim had been made under a bona fide belief that it was allowable.
The tax department later invoked section 17(5)(d) of the Central Goods and Services Tax Act, which blocks credit on certain construction-related expenses, and section 74(1), which covers cases involving fraud, suppression or wilful misstatement. But the court said the blocking provision presupposes a taxable inward supply on which tax has been lawfully levied and paid. Because the transfer of leasehold rights was held not to be taxable, the reversal of credit and the interest demand could not stand. The bench also found no evidence of fraud or concealment, making section 74(1) inapplicable.
The court directed the authorities to set aside the demand orders and refund the amount already paid, including the credit reversal and interest, within three weeks of receiving the judgment. It also followed an earlier Gujarat High Court view that section 17(5)(d) is aimed at construction activity and does not extend to a transaction involving leasehold rights where no construction was carried out. The ruling adds to a growing body of GST jurisprudence on when credit can be denied and when a tax demand collapses because the underlying supply itself falls outside the levy.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
