TaxTMI 
TaxTMI 
The Goods and Services Tax (GST) law seeks to tax the supply of goods and services while excluding transactions involving the transfer of immovable property, except in specifically identified situations. However, disputes have frequently arisen regarding the taxability of leasehold rights, particularly when such rights are assigned by an existing lessee to a third party. A recent decision of the 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 has provided significant clarity by holding that the assignment of leasehold rights in land allotted by the Maharashtra Industrial Development Corporation (MIDC) does not constitute a taxable supply under the Central Goods and Services Tax Act, 2017 (CGST Act).
The judgment reaffirms the principle that the transfer of rights arising from immovable property is distinct from the supply of services and therefore falls outside the scope of GST.
Background of the Case
The petitioner had acquired leasehold rights in an industrial plot allotted by the Maharashtra Industrial Development Corporation (MIDC). Subsequently, the petitioner assigned these leasehold rights to another person in accordance with the applicable terms and conditions governing the lease.
The GST authorities initiated proceedings under Section 73 of the CGST Act and passed an order under Section 73(5), demanding GST on the consideration received for the assignment of the leasehold rights.
According to the department, the transaction constituted a supply of services under Section 7(1) of the CGST Act read with Clause 2(b) of Schedule II, which treats certain transactions relating to land and buildings, including leases, tenancies, easements, licences, and similar arrangements, as supplies of services.
The petitioner challenged the demand before the Bombay High Court, contending that the assignment represented the transfer of an existing interest in immovable property and could not be equated with the grant of a lease or the provision of a service.
Legal Issue
The principal issue before the Court was whether the assignment of leasehold rights by an existing lessee in respect of MIDC land constitutes a 'supply' liable to GST under Section 7 of the CGST Act.
The answer depended upon whether the transaction amounted to the transfer of an immovable property interest or whether it could be characterized as a taxable supply of services under Schedule II.
Statutory Framework
Section 7 of the CGST Act defines the expression 'supply' and specifies the transactions that are chargeable to GST.
Schedule II of the Act classifies certain activities either as supplies of goods or supplies of services. Clause 2(b) provides that the grant of rights to occupy land, including leases, tenancies, easements, licences, or similar arrangements, shall be treated as a supply of services.
The controversy often arises because while the grant of a lease by the lessor is specifically treated as a service, the Act does not expressly provide that the assignment or transfer of an already existing leasehold interest by the lessee should also be treated as a supply of services.
Therefore, the distinction between the creation of lease rights and the transfer of an existing proprietary interest becomes crucial.
Findings of the Bombay High Court
The Bombay High Court rejected the stand taken by the GST authorities.
The Court relied upon the earlier judgment of 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, wherein it had been held that the assignment or transfer of leasehold rights arising out of immovable property does not amount to a taxable supply under the GST law.
Following the principles laid down in that decision, the Bombay High Court observed that the petitioner was not granting a fresh lease to the transferee. Instead, the petitioner was assigning or transferring its existing rights and benefits arising from the leasehold interest in the immovable property.
Such a transfer represents the conveyance of an interest in immovable property rather than the provision of any service.
The Court held that Clause 2(b) of Schedule II applies to the original grant of lease or similar rights by the owner or lessor. It cannot be extended to cover every subsequent assignment of those rights by the lessee unless the statute expressly provides so.
Accordingly, the Court concluded that the assignment of leasehold rights in MIDC land could not be subjected to GST.
The impugned order passed under Section 73 demanding tax was therefore quashed, and the writ petition was allowed.
Significance of the Judgment
The judgment is significant because it draws a clear distinction between the creation of leasehold rights and the transfer of an existing leasehold interest.
The grant of a lease by the owner of the property creates a legal right in favour of the lessee and is specifically recognized under Schedule II as a supply of services. However, once such rights have been created, their subsequent assignment by the lessee is essentially the transfer of an interest in immovable property.
By recognizing this distinction, the Court has prevented an unduly expansive interpretation of the GST provisions.
The ruling is particularly important for industrial estates developed by statutory authorities such as MIDC, where transfers of leasehold rights frequently occur with the approval of the development authority. Businesses involved in acquisitions, restructuring, mergers, or relocation within industrial estates often rely on assignments of leasehold rights rather than fresh leases. The judgment provides welcome certainty for such transactions.
Further, by following the Gujarat High Court's decision, the Bombay High Court has contributed to greater consistency in judicial interpretation of GST law across jurisdictions.
Conclusion
The decision 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 reinforces the settled legal principle that GST is attracted only when there is a taxable supply as defined under the CGST Act. The assignment of an existing leasehold interest in immovable property is fundamentally different from the grant of a lease and cannot automatically be classified as a supply of services under Section 7 read with Schedule II.
By quashing the tax demand, the Bombay High Court has clarified that the transfer of leasehold rights in MIDC land represents the assignment of benefits arising from immovable property rather than the provision of a taxable service. The judgment offers significant relief to businesses engaged in industrial property transactions and provides valuable guidance on the interpretation of Schedule II of the CGST Act.
As disputes concerning the taxability of property-related transactions continue to arise under the GST regime, this ruling serves as an important precedent affirming that statutory provisions must be interpreted in accordance with their true legal character and not through an expansive reading that brings non-taxable transactions within the GST net.
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