Assignment of leasehold rights in government industrial property not taxable under GST, partnership transfer exempt

Gujarat HC held that assignment of leasehold rights in immovable property allotted by government industrial development corporation does not constitute taxable supply under GST. Following precedent in Gujarat Chamber of Commerce case, the court ruled that such assignments are not subject to GST. Additionally, transfer from partnership to sole proprietorship was deemed internal reorganization exempt from GST. Orders demanding GST, interest, and penalty were quashed and set aside. Petition allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these petitions are:

• Whether the assignment or transfer of leasehold rights in immovable property, specifically land allotted by a government industrial development corporation, constitutes a "supply" under Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act) and is therefore subject to Goods and Services Tax (GST).
• Whether the transaction in question is analogous to a sale of land, which is specifically excluded from the ambit of GST under Entry No. 5 of Schedule III of the CGST Act.
• Whether the transfer of leasehold rights from a partnership firm to a sole proprietorship bearing the same trade name constitutes a distinct taxable supply or merely an internal reorganization exempt from GST.
• Whether GST liability, if any, can be levied on the entire consideration amount or only on the proportionate share transferred.
• The validity and legality of the impugned order passed under Section 74 of the CGST Act demanding tax, interest, and penalty on the alleged transaction.
• The applicability and retrospective effect of Notification 28/2019 dated 31.12.2019 amending Entry No. 41 of Notification 12/2017 dated 28.06.2017, which exempts subsequent leases from GST.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the assignment of leasehold rights constitutes a taxable supply under Section 7 of the CGST Act

Legal Framework and Precedents: Section 7(1)(a) of the CGST Act defines "supply" to include all forms of supply of goods or services made for consideration. Entry No. 2(a) of Schedule II classifies lease, tenancy, or license to occupy land as a supply of service. Conversely, Section 7(2)(a) read with Entry No. 5 of Schedule III excludes sale of land from the ambit of supply and thus from GST.

The Court relied heavily on the recent precedent established by the Gujarat High Court in Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors., which held that assignment by sale and transfer of leasehold rights of land allotted by GIDC to a third party-assignee does not attract GST as it is a transfer of immovable property benefits and is excluded under the relevant provisions.

Court's Interpretation and Reasoning: The Court interpreted the assignment of leasehold rights as a transfer of benefits arising out of immovable property rather than a supply of service or goods. It emphasized that such assignment is not a fresh lease or tenancy but a transfer of existing rights and thus falls outside the taxable scope under Section 7(1)(a) when read with Schedule II and III.

Application of Law to Facts: The petitioner's transaction involved transfer of leasehold rights from a partnership firm to a sole proprietorship bearing the same trade name. The Court found this to be analogous to the facts in Gujarat Chamber of Commerce, where the assignment was held not to be a taxable supply.

Treatment of Competing Arguments: The Respondents did not effectively controvert the submissions that the transaction was excluded from GST. The Petitioner's argument that the transaction was akin to sale of land and thus exempt was accepted.

Conclusion: The assignment of leasehold rights in this case does not constitute a taxable supply under the CGST Act and is not liable to GST.

Issue 2: Whether the transfer from partnership to sole proprietorship constitutes a taxable transaction or internal reorganization

Legal Framework and Precedents: The GST law excludes transactions that are mere internal reorganizations without transfer to a third party from the levy of GST. The Court referenced the nature of the transaction and ownership continuity to assess the applicability of GST.

Court's Interpretation and Reasoning: The Court observed that the transfer was from a partnership firm to a sole proprietorship owned by one of the partners, both operating under the same trade name. This was characterized as an internal restructuring rather than a supply to a distinct legal entity.

Application of Law to Facts: Since the petitioner already held a 60% stake in the partnership and post-transfer effectively held 100%, the transaction was not a supply to a third party but a reorganization of ownership within the same economic entity.

Treatment of Competing Arguments: The Petitioner's contention that such transfer was not subject to GST was accepted; the Respondents did not provide contrary legal basis to treat it as a taxable supply.

Conclusion: The transfer from the partnership to the sole proprietorship was an internal reorganization and not subject to GST.

Issue 3: Whether GST, if applicable, can be levied on the entire consideration or only on the transferred share

Legal Framework: GST liability arises only on the value of supply made to a distinct person. When a partner's share increases due to dissolution, only the transferred share's value is relevant for GST.

Court's Reasoning: The Court noted the Petitioner's submission that she already held 60% share and only the remaining 40% share was transferred. Therefore, GST, if at all leviable, could only be on the 40% share.

Application to Facts: This issue became moot as the Court held that the transaction was not liable to GST at all, but the reasoning was accepted as correct in principle.

Issue 4: Legality of the impugned order passed under Section 74 of the CGST Act

Legal Framework: Section 74 of the CGST Act deals with determination of tax not paid or short paid or erroneously refunded. The validity of such orders depends on the correctness of the underlying tax demand.

Court's Interpretation and Reasoning: Since the Court held that the transaction was not liable to GST, the order demanding tax, interest, and penalty under Section 74 was without jurisdiction and illegal.

Key Findings: The Petitioner was unaware of the show cause notice and could not respond, further vitiating the order's validity.

Conclusion: The impugned order dated 07.11.2024 under Section 74 was quashed and set aside.

Issue 5: Applicability and retrospective effect of Notification 28/2019 dated 31.12.2019

Legal Framework: Notification 28/2019 amended Entry No. 41 of Notification 12/2017 to exempt subsequent leases from GST. The Petitioner contended that this amendment is clarificatory and applies retrospectively.

Court's Reasoning: Though not extensively elaborated in the judgment, the Court accepted the Petitioner's contention that the amendment exempts subsequent leases and is clarificatory in nature.

Conclusion: The exemption notification applies retrospectively and supports the Petitioner's claim of non-liability to GST.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning is encapsulated in the following verbatim excerpt from the Gujarat Chamber of Commerce precedent, which the Court applied:

"Assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC to the lessee in favour of third party-assignee for a consideration shall be assignment/sale/ transfer of benefits arising out of 'immovable property' by the lessee-assignor in favour of third party-assignee who would become lessee of GIDC in place of original allottee-lessee. In such circumstances, provisions of section 7 (1) (a) of the GST Act providing for scope of supply read with clause 5(b) of Schedule II and Clause 5 of Schedule III would not be applicable to such transaction of assignment of leasehold rights of land and building and same would not be subject to levy of GST as provided under section 9 of the GST Act."

Core principles established include:

• The assignment or transfer of leasehold rights in immovable property allotted by a government authority is not a taxable supply under GST.
• The sale of land is expressly excluded from GST, and this exclusion extends to assignments of leasehold rights that amount to transfer of immovable property benefits.
• Internal restructuring or transfer within related entities or persons does not constitute a taxable supply.
• Tax demands under Section 74 of the CGST Act based on such transactions are without jurisdiction and liable to be quashed.
• Clarificatory amendments exempting subsequent leases apply retrospectively and support non-levy of GST.

Final determinations on each issue are:

• The assignment of leasehold rights in the facts of these petitions is not subject to GST.
• The transfer from partnership to sole proprietorship is an internal reorganization exempt from GST.
• The impugned orders demanding GST, interest, and penalty are quashed and set aside.
• The exemption notification applies retrospectively.

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