Court allows Input Tax Credit for properties intended for letting out, Section 17(5)(d) read down.

The court held that Section 17(5)(d) of the CGST Act should be read down to exclude properties intended for letting out from the denial of Input Tax Credit (ITC). The court emphasized that denying ITC for such properties would lead to double taxation, making them uncompetitive. While not declaring the provision ultra vires, the court granted the petitioners' prayer to allow ITC for properties intended for letting out, aligning with the objective of preventing the cascading effect of taxes and reducing the cost burden on consumers.

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Issues Involved:

1. Applicability of Section 17(5)(d) of the CGST Act.
2. Entitlement to Input Tax Credit (ITC) for construction of immovable property intended for letting out.
3. Interpretation of provisions under the CGST Act and OGST Act.
4. Constitutional validity of Section 17(5)(d) under Articles 14 and 19(1)(g) of the Constitution of India.

Issue-wise Detailed Analysis:

1. Applicability of Section 17(5)(d) of the CGST Act:

The petitioners challenged the denial of ITC based on Section 17(5)(d) of the CGST Act, which states that ITC is not available for goods and services received for the construction of an immovable property on one's own account. The petitioners argued that this provision should not apply to properties intended for letting out, as it leads to double taxation and breaks the tax chain, which is contrary to the objectives of the GST regime.

2. Entitlement to Input Tax Credit (ITC) for Construction of Immovable Property Intended for Letting Out:

The petitioners, engaged in constructing shopping malls for letting out, accumulated significant ITC on inputs used for construction. They contended that denying ITC on such inputs while taxing the rental income from the property is arbitrary and unjust. The denial of ITC would increase the cost of construction, making the property uncompetitive and violating the principle of preventing the cascading effect of taxes, which is a core objective of the GST system.

3. Interpretation of Provisions under the CGST Act and OGST Act:

The petitioners argued that Section 17(5)(d) should be interpreted to apply only to properties intended for sale after completion, not to properties intended for letting out. They supported their argument with the principle that tax statutes should avoid double taxation and the interpretation should align with the legislative intent to prevent the cascading effect of taxes. They cited various judicial precedents and government circulars to support their interpretation.

4. Constitutional Validity of Section 17(5)(d) under Articles 14 and 19(1)(g) of the Constitution of India:

The petitioners contended that the denial of ITC under Section 17(5)(d) violates their fundamental rights under Articles 14 and 19(1)(g) of the Constitution. They argued that the provision creates an unreasonable classification between builders who sell units and those who let them out, despite both having a continuous business without a break in the tax chain. This arbitrary classification results in unequal treatment and imposes an unreasonable restriction on their right to carry on business.

Court's Decision:

The court held that the narrow interpretation of Section 17(5)(d) by the revenue authorities frustrates the objective of the GST Act. It noted that the provision should be read down to exclude properties intended for letting out from its ambit. The court emphasized that the purpose of ITC is to prevent the cascading effect of taxes and to reduce the cost burden on the final consumer. Denying ITC in this case would lead to double taxation and make the property uncompetitive.

The court granted the petitioners' prayer to the extent of reading down Section 17(5)(d) to allow ITC for properties intended for letting out. However, it did not declare the provision ultra vires. The writ petition was allowed to this extent.

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