ITC of leasehold rights and the shed standing upon it

[Narayan Pujar]

A humble request to the members to guide me on the following issue –

One of my clients is going to procure lease rights of a land under an ‘Agreement of assignment’ on ‘as is basis’ from one supplier [original grantor is MIDC] and an ‘Industrial shed’ standing upon it on ‘as is where is basis’ owned by another supplier vide a separate transfer agreement.

Will there be any issue while claiming ITC, particularly in terms of Section 17(5)(d)? I am of the view that credit is admissible. I found rulings denying ITC on assignment of lease rights, however, there the underlying reason being that lease rights are for construction of immovable property. And in the instant case of my client, there is no construction of immovable property, per se. So, will buying lease rights of land and industrial shed on the land on as is where is basis amount to ‘for construction of immovable property’?

[Shilpi Jain]

In my view credit should be eligible as there is no construction activity involved using these rights.

[Narayan Pujar]

Thank you for the quick response. Extending the scenario, if some changes made to the existing structure in order to accomodate production facilities, will such changes amount to saying that 'lease rights and industrial shed' are meant for 'construction of immovable property'?

[Shilpi Jain]

In my view any leasehold rights cannot be regarded as being used FOR construction. It can be a pre-requisite for construction.

So credit should be eligible. 

Your case can be stronger in case you do not capitalise the expense in which case it can be stated that the activity does not get covered under the def of construction as defined in s 17(5).

[Narayan Pujar]

Thank you Ma'am. 

[KASTURI SETHI]

You also need to know the difference between  the accounting terms, namely, 'Capital Expenditure' and 'Revenue Expenditure'.

I agree with the views of Madam Shilpi Jain.

[KASTURI SETHI]

In simple terms, expenditure incurred on construction of shed should be reflected in Profit and Loss Statement based on  books of account.

[Sadanand Bulbule]

Dear Sir

I too agree with the clear opinions of experts.

[K.lakshmipati rao]

The opening remark of issue reveals that “client is going to procure lease rights of a land, and an ‘Industrial shed’ standing upon it on ‘as is where is basis’, however, it is required to be clarified as to whether the subject Lease is

1. 1. For Long Term OR Short Term – No. of Years,
   2. What is the life of Asset [‘Industrial shed’]- enduring benefit of asset –Future period of [No. of Years] the Asset can be used,
   3. Lease Amount – does upfront payment made?
   4. If so, is it acquisition of Leasehold Building[‘Industrial shed’ with Land] OR
   5. Monthly rentals are payable as per Agreement

Perhaps, we need to analyse all these individually to decide whether the transaction would be treated as 'Capital Expenditure' OR 'Revenue Expenditure', basis which, entitlement to take the credit of the ITC would depend.

Further, it is understood that the above Lease transaction covered under the provisions of 2(a) of Schedule-II read with Section 7(1A) of CGST Act, 2017.

[KASTURI SETHI]

Yes, Sir. These crucial aspects cannot be ignored. These are determinant factors. 

[Narayan Pujar]

Thank you everybody for you comments till now. I would like to clarify on some facts if it helps in analysing the issue better.

The leaserights were originally procured by the supplier from MIDC and later transferred to us vide 'Agreement to Assign Leasehold Rights' and SAC 997212

Next, the Industrial Shed on the leasehold land was owned by a different supplier before it was sold to us under HSN 9406 [Pre-fabricated Building] vide a 'Sale Agreement'.

Both the transactions have been executed separately and also have been capitalised under different heads in books of accounts.

AI Summary

Client Seeks Guidance on ITC Eligibility for Leasing Land and Shed; Focus on Section 17(5)(d) of GST. A client is acquiring lease rights to land and an industrial shed, both on an 'as is where is' basis, and seeks guidance on claiming Input Tax Credit (ITC) under GST, particularly concerning Section 17(5)(d). The primary concern is whether these acquisitions are considered for the construction of immovable property, which could affect ITC eligibility. Responses suggest that since no construction is involved, ITC should be admissible. The discussion also touches on the distinction between capital and revenue expenditure and how these classifications impact ITC claims. Further analysis is suggested to determine the nature of the expenditure and its treatment under GST provisions.