Assignment of Leasehold Rights as Transfer of Immovable Property Not Liable to GST

The Hon’ble Bombay High Court in the case of M/s. Hindustan Equipment Craft Versus Assistant Commissioner of State Tax, Nagpur, Maharashtra, State of Maharashtra through The Commissioner of State Tax, Maharashtra. - 2026 (3) TMI 194 - BOMBAY HIGH COURT held that assignment of leasehold rights to a third party constitutes transfer of benefits arising out of immovable property and does not qualify as a “supply of services” under the GST regime, thereby not liable to GST.

Facts:

M/s. Hindustan Equipment Craft (“the Petitioner”) held leasehold rights in a plot allotted by MIDC for a period of 95 years and had constructed a factory building thereon. The Petitioner assigned its leasehold rights in the said plot, along with the building, to a third party, M/s. Kothari Belting Company, for consideration, with prior consent of MIDC.

The Assistant Commissioner of State Tax and the State of Maharashtra (“the Respondent”) issued a show cause notice alleging that the Petitioner had concealed a taxable transaction and proposed to levy GST under Section 73 of the Maharashtra Goods and Services Tax Act, 2017 on the assignment of leasehold rights, treating it as supply of services under Section 7 read with Schedule II.

The Petitioner contended that the transaction amounted to transfer of leasehold rights, resulting in extinguishment of its rights, and therefore constituted transfer of immovable property, not liable to GST.

The Respondent contended that the assignment of leasehold rights amounts to supply of services, classifiable under “other miscellaneous services” taxable at 18% under Notification No. 11/2017-CT (Rate) dated June 28, 2017, and falls within the scope of Section 7 read with Schedule II of the Act.

Aggrieved by the order confirming demand of GST and the show cause notice, the Petitioner approached the Hon’ble High Court by way of a writ petition challenging the legality of the demand under the MGST Act, 2017.

Issue:

Whether assignment of leasehold rights in an immovable property to a third party constitutes a “supply of services” liable to GST under Section 7 read with Schedule II of the GST Act?

Held:

The Hon’ble Bombay High Court in M/s. Hindustan Equipment Craft Versus Assistant Commissioner of State Tax, Nagpur, Maharashtra, State of Maharashtra through The Commissioner of State Tax, Maharashtra. - 2026 (3) TMI 194 - BOMBAY HIGH COURT held as under:

• Observed that, the transaction in question is assignment of leasehold rights and not a lease or sub-lease, as the Petitioner’s rights stood extinguished upon transfer.
• Noted that, the Respondent itself had recognized that the transaction did not amount to sub-lease and involved transfer of rights for consideration.
• Noted that, the Petitioner held a long-term lease of 95 years with transferable rights under the lease deed and had assigned such rights with prior approval of MIDC.
• Observed that, the transaction constitutes transfer of immovable property, being transfer of benefits arising out of immovable property.
• Held that, the transaction has no nexus with the business of the Petitioner and the essential element of “supply in the course or furtherance of business” is absent.
• Noted that, the Gujarat High Court in Gujarat Chamber Of Commerce And Industry & Ors., M/s. Multi Thread Fastners, M/s. Imperial Engineers, Lucid Colloids Ltd., M/s. Metal Plast Engineers Versus Union Of India & Ors., Chief Commissioner of Central Tax, State of Gujarat, Special Commissioner of State Tax, State Tax Officer (1), Assistant Commissioner of State Tax (2), State Tax Officer (EOW). - 2025 (1) TMI 516 - GUJARAT HIGH COURT held that assignment of leasehold rights amounts to transfer of benefits arising from immovable property and is not liable to GST.
• Observed that, such assignment falls outside the scope of Section 7 read with Schedule II and Schedule III of the GST Act. Therefore, the show cause notice and order demanding GST are unsustainable in law.
• Directed that, the impugned order dated December 30, 2025 and the show cause notice are quashed and set aside, and the writ petition is allowed.

Our Comments:

In the case of Gujarat Chamber Of Commerce And Industry & Ors., M/s. Multi Thread Fastners, M/s. Imperial Engineers, Lucid Colloids Ltd., M/s. Metal Plast Engineers Versus Union Of India & Ors., Chief Commissioner of Central Tax, State of Gujarat, Special Commissioner of State Tax, State Tax Officer (1), Assistant Commissioner of State Tax (2), State Tax Officer (EOW). - 2025 (1) TMI 516 - GUJARAT HIGH COURT, the Hon’ble Gujarat High Court held that assignment of leasehold rights constitutes transfer of benefits arising from immovable property and is outside the ambit of “supply” under Section 7 of the GST Act. It analyzed the interplay of Section 7, Schedule II, and Schedule III along with provisions of the Transfer of Property Act, 1882 and General Clauses Act, concluding that leasehold rights are “benefits arising out of immovable property” and their transfer is akin to transfer of immovable property itself, thereby not exigible to GST.

The present judgment aligns with the reasoning of the Gujarat High Court and reiterates that the essential condition of “in the course or furtherance of business” is absent in such transactions. It also clarifies that Schedule II cannot artificially expand the scope of “supply” to include transactions which are fundamentally transfers of immovable property.

Relevant Provisions:

Section 7(1) of the CGST Act, 2017

“7. Scope of supply.-

(1) For the purposes of this Act, the expression – “supply” includes-

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation .-For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

(b) import of services for a consideration whether or not in the course or furtherance of business; and

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;”

Schedule II of the CGST Act, 2017

Activities to be treated as Supply of Goods or Services

“2. Land and Building

(a) any lease, tenancy, easement, licence to occupy land is a supply of services;

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.”

Notification No. 11/2017-CT (Rate) dated June 28, 2017

“Entry 35. Heading 9997 - Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified).  – 9 %”

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