2025 (4) TMI 548 - HC - GST

Karnataka HC rules solatium compensation for land acquisition by State/KIADB exempt from GST under Schedule III Entry 5

Karnataka HC held that compensation paid as solatium for land acquisition by State/KIADB is not liable to GST under CGST/KGST Act. The court ruled that ... Levy of GST - compensation paid in favour of the petitioners towards acquisition of their lands by the State/KIADB under the Head ‘Solatium’ - HELD THAT:- Compensation paid in favour of the petitioners by the KIADB under the Head “Solatium” is not exigible / amenable to levy of GST under the provisions of CGST / KGST Act and the impugned notices, orders etc., issued / passed by the respondents are illegal, arbitrary and without jurisdiction or authority of law and the same deserve to be quashed. Even if Entry 5 of Schedule III were not there, sale of land and building cannot be brought under GST as they are covered under the State List II and there is no intention to tax sale/ acquisition immovable property per se under the GST legislations. It is also significant to note that this position is clarified by the aforesaid Circular No. 177/09/2022-TRU dated 03.08.2022 which clearly states that Sale of land either as it is or after some development is covered by Entry No.5 of Schedule III of the CGST/KGST Act and accordingly, does not attract GST; in other words, even if the said entries were not present in the said schedule, there was still no intention to tax stamp duty transactions of the nature which could be subsumed under the GST and consequently, not only sale of land or completed building, even compulsory acquisitions of such land cannot be the subject matter of a GST levy. Learned Senior Counsel is also right in contending that after the retrospective amendment in Section 7 to exclude 7(1)(d) and include Section 7(1A), Schedule II is merely a classification schedule; Entry 5 (e) of Schedule treats 'agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act' as a supply of service and would only be a classification entry and the need to prove that an activity or transaction is a supply stems from Section 7(1). It is relevant to state that “conditions to a contract” are different from “consideration to a contract”; so also, “conditions” contained in the contract cannot be seen in the light of “consideration” for the contract and merely because the service recipient has to fulfill such conditions would not mean that this value would form part of the value of the taxable services that are provided; to put it differently, when amount is paid for an obligation to do an act, it is only then Entry 5 (e) of Schedule II is attracted and not otherwise, thereby indicating that the terms and conditions of the agreements, documents etc., executed between the petitioners and KIADB are merely conditions to the contract and not obligations undertaken for a consideration as required under Entry 5 (e) of Schedule II which will have no application nor cover the solatium received by the petitioners. The agreements entered into between the petitioners and KIADB may contain several conditions, but the same do not amount to an obligation coupled with consideration and payment of solatium to the petitioners cannot be construed or treated as supply of services under Entry 5 (e) of Schedule II; the subject matter of the agreements is not an obligation to do or tolerate an act; rather, it is simply acquisition of lands by the Government and the conditions are incidental to the acquisition of land and to ensure that there is finality to the same as regards both the parties and in the absence of an agreement for an obligation to do or refrain from any act coupled with consideration for the same, it cannot be said that solatium received by the petitioners is exigible/amenable to levy of GST as contended by the respondents whose contentions cannot be accepted on this ground also. Conclusion - The compensation paid in favour of the petitioners towards acquisition of their lands by the State/KIADB under the Head ‘Solatium’ is not exigible/ amenable to levy of GST under the provisions of CGST/KGST Act, 2017. Petition allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in these petitions are:(i) Whether the compensation paid to the petitioners towards the acquisition of their lands by the State/KIADB under the head 'Solatium' is subject to the levy of GST under the provisions of the CGST/KGST Act, 2017Rs.(ii) Whether the impugned show cause notices and orders issued by the respondents are valid and enforceable under the lawRs.ISSUE-WISE DETAILED ANALYSIS(i) GST on SolatiumRelevant Legal Framework and Precedents: The relevant legal framework includes the CGST Act, 2017, KGST Act, 2017, and the definitions and provisions therein regarding the supply of goods and services. The court also considered various circulars issued by the tax authorities, including Circular No. 177/09/2022-GST and Circular No. 178/10/2022-GST, which provide guidance on the interpretation of the GST provisions. The court referred to several precedents, including the judgments in Union of India vs. Tarsem Singh and Panna Lal Ghosh vs. Land Acquisition Collector, which discuss the nature of solatium.Court's Interpretation and Reasoning: The court concluded that solatium, as part of the compensation for compulsory acquisition, is not subject to GST. The court reasoned that solatium is a statutory compensation for the compulsory nature of land acquisition and does not constitute a supply of goods or services under the GST framework. The court emphasized that the transaction is essentially a transfer of land, which is exempt from GST under Entry 5 of Schedule III of the CGST/KGST Act.Key Evidence and Findings: The court examined the agreements and documents executed between the petitioners and KIADB, which indicated that the compensation, including solatium, was paid as part of the acquisition process. The court found that there was no separate agreement to tolerate an act or refrain from an act in exchange for the solatium.Application of Law to Facts: The court applied the provisions of the CGST/KGST Act and the relevant circulars to the facts of the case, concluding that the solatium paid to the petitioners does not fall within the scope of taxable supply under GST.Treatment of Competing Arguments: The court rejected the respondents' argument that the solatium constituted a supply of services under Entry 5(e) of Schedule II of the CGST/KGST Act. The court clarified that the solatium is not paid for tolerating an act but is part of the statutory compensation for land acquisition.Conclusions: The court concluded that the solatium paid to the petitioners is not subject to GST, and the impugned notices and orders demanding GST on solatium are without legal basis and must be quashed.SIGNIFICANT HOLDINGSThe court held that:(i) 'The compensation paid in favour of the petitioners towards acquisition of their lands by the State/KIADB under the Head 'Solatium' is not exigible/amenable to levy of GST under the provisions of CGST/KGST Act, 2017.'(ii) The court emphasized that solatium is a statutory compensation for the compulsory nature of land acquisition and does not constitute a supply of goods or services under the GST framework.(iii) The court quashed the impugned notices and orders issued by the respondents, declaring them illegal, arbitrary, and without jurisdiction or authority of law.The court's decision establishes the principle that solatium, as part of the compensation for compulsory land acquisition, is not subject to GST, reinforcing the interpretation that such compensation is exempt from GST under the relevant statutory framework.