TaxTMI 
TaxTMI 
WHEN THE ASSIGNMENT IS NOT TAXABLE, ITC REVERSAL CANNOT KEEP THE TAX ALIVE
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....HEN THE ASSIGNMENT IS NOT TAXABLE, ITC REVERSAL CANNOT KEEP THE TAX ALIVE<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 5-10-2026<br>The Levy Began with a Misreading of the Transaction GST disputes involving industrial land often arise from an incorrect description of the transaction. An original allotment of land by an industrial development corporation, a long-term lease granted to an industrial unit, and a subsequent assignment of the lessee's rights to another party are legally distinct transactions. Their tax treatment cannot be determined merely by describing them all as transactions involving "leasehold rights." This distinction lies at the heart of M/s. Kor Chems Through Partner Sanjay Rameshchandra Soni Versus Assistant Commissioner, CGST And Central Excise & Anr. - 2026 (9) TMI 1099 - GUJARAT HIGH COURT. The petitioner did not receive the original allotment directly from the Gujarat Industrial Development Corporation [GIDC]. GIDC had allotted the industrial plot at Ankleshwar to M/s Myspace Infracon, which subsequently assigned its leasehold rights to the petitioner. The petitioner entered into the arrangement as a third-party assignee ....
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....and replaced the existing lessee. M/s Myspace Infracon charged GST of Rs.29,25,000 on the assignment, and the petitioner availed the corresponding input tax credit. The Department later treated the credit as blocked under Section 17(5)(d), obtained its reversal with interest, and confirmed an equivalent penalty under Section 74. The Gujarat High Court examined the controversy at its proper starting point: whether the existing lessee's assignment was taxable at all. Once it answered that question against the levy, the ITC reversal, interest, and penalty could no longer survive on their own. Original GIDC Allotment and Subsequent Assignment Have Different GST Consequences The original grant of a long-term lease by GIDC and its subsequent assignment by the existing lessee are two separate transactions. In the first transaction, GIDC grants an industrial unit the right to use and enjoy the plot, ordinarily for a long period. Such an original grant may constitute leasing of immovable property, although the one-time upfront amount may qualify for exemption under Entry No. 41 of Notification No. 12/2017-Central Tax (Rate), subject to fulfilment of its conditions. The later as....
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....signment stands on a different footing. Here, GIDC does not make a fresh allotment to the assignee. The existing lessee transfers its leasehold interest to a third party, who steps into the lessee's position for the remaining lease period. GIDC's approval of the transfer does not convert the consideration paid to the assignor into rent or consideration for a service supplied by GIDC. Any transfer fee charged by GIDC for granting approval must be examined separately from the consideration paid between the assignor and the assignee. 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, the Gujarat High Court explained that leasehold rights are not ordinary contractual rights detached from the land. Section 105 of the Transfer of Property Act, 1882 treats a lease as a transfer of the right to enjoy immovable property, while Sect....
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....ion 108(j) of the aforesaid Transfer of Property Act, 1882 recognises the lessee's right, subject to the contract, to transfer its interest. A leasehold right is therefore a benefit arising from land and forms part of immovable property. The Court also distinguished an assignment from renting, licensing or sub-leasing. In an assignment, the lessee transfers the whole leasehold interest and the assignee replaces the assignor as lessee. Schedule II cannot independently create taxability because it only classifies an activity as a supply of goods or services after the activity first qualifies as a "supply" under Section 7. Consequently, the entries relating to renting or construction could not convert the complete assignment of an immovable property interest into a taxable service. The assignment by the GIDC lessee to a third-party assignee was therefore outside the scope of taxable supply and was not liable to GST under Section 9 of the CGST Act, 2017. The Revenue challenged this ruling before the Supreme Court in The Union Of India & Anr. Versus Gujarat Chamber Of Commerce And Industry & Ors. - 2026 (7) TMI 1434 - SC Order. After condoning the delay, the Supreme Cou....
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....rt found no ground to interfere and dismissed the Special Leave Petitions, also referring to the dismissal of a similar petition on 22.05.2026. Because the Supreme Court's order is brief and does not contain an independent discussion of the legal issues, it is more accurate to say that the Supreme Court declined to interfere and left the Gujarat High Court's ruling undisturbed, rather than describing the order as a detailed affirmation on the merits. Nevertheless, the practical effect is significant: the Gujarat High Court's comprehensive reasoning continues to govern the tax treatment of identical GIDC leasehold assignments. In the Kor Chems case, M/s Myspace Infracon was the existing GIDC lessee and the petitioner was the third-party assignee. The transaction was therefore a subsequent assignment covered by this principle, and not an original allotment made directly by GIDC. Leasehold Interest Is Property, Not a Stand-Alone Taxable Service A leasehold interest is less extensive than absolute ownership, yet it remains a legally enforceable interest in immovable property. It gives the lessee the right to possess, use and enjoy the property for the lease period, su....
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....bject to the lease conditions. When the lessee assigns that interest for consideration, the transaction is the transfer of an existing property interest rather than the provision of an independent service to the assignee. 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, the Gujarat High Court held that Sections 7(1)(a) and 9 of the CGST Act, read with the relevant entries in Schedules II and III, did not subject such an assignment to GST. The Court rejected attempts to bring the transaction within the taxable field merely by treating every lease-related transfer as a supply of service. The legal character of the right transferred and the effect of the assignment had to prevail over the la, and the effect of the assignment, The same principle directly governed Kor Chems. M/s Myspace Infracon was the existing lessee, and Kor Ch....
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....ems was the third-party assignee. The assignment transferred the benefit arising from the industrial plot and placed Kor Chems in the position of the existing lessee. Consequently, the GST charged on the consideration was contrary to the settled legal position. If the transaction did not qualify as a taxable supply under Section 7 and was not chargeable under Section 9, the Department could not preserve the economic burden of that tax through a demand for reversal of ITC. A Non-Taxable Transaction Cannot Be Recast as Blocked Credit The Department treated the matter as an ITC eligibility dispute. Since the petitioner had taken credit for the GST appearing on the supplier's invoice, the authorities examined whether the credit was blocked under Section 17(5)(d). That approach overlooked the more fundamental defect: GST itself was not lawfully leviable on the underlying assignment. A blocked-credit inquiry ordinarily assumes the existence of a taxable inward supply on which tax has been lawfully charged. The question then is whether the recipient is prevented from taking credit because the expenditure falls within one of the exclusions in Section 17(5). Where the underlyin....
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....g transaction is itself outside the charge of GST, the controversy cannot be resolved by treating the tax as valid while the corresponding credit is deemed inadmissible. Such an approach would enable the Department to retain an amount that could not lawfully be imposed in the first place. The petitioner had already borne GST as part of the consideration paid to M/s Myspace Infracon. Denial and recovery of the corresponding credit would have made that burden final, even though the transaction was non-taxable. The High Court therefore looked beyond the mechanical entry in the electronic credit ledger. When the charging provision does not apply, the Department cannot retain the amount directly as tax or indirectly through ITC reversal and interest. A tax without authority of law does not acquire legitimacy merely because it entered the system through an invoice and was later neutralised by denial of credit. Section 17(5)(d) Cannot Travel Beyond Construction Section 17(5)(d) restricts ITC on goods or services received by a taxable person for the construction of immovable property, other than plant and machinery, on the taxable person's own account. The provision targets co....
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....nstruction-related expenditure. Accordingly, its application requires a clear connection between the inward supply and the construction, reconstruction, renovation, addition, alteration or repair of immovable property, to the extent specified by the provision. Kor Chems did not undertake any construction activity. It acquired the existing leasehold rights in the industrial plot as they stood. The Department failed to establish that the disputed expenditure related to the construction of any building or other immovable property by the petitioner. The mere fact that the leasehold rights concerned land could not convert the consideration paid for their assignment into construction expenditure. Reliance was placed on Niket Bipinbhai Patel Through Power of Attorney Holder Bipinbhai Madhavbhai Patel Versus Assistant Commissioner (A.E.) CGST-Central Excise Vadodara-II Commissionerate. - 2026 (2) TMI 1387 - GUJARAT HIGH COURT. That decision confined Section 17(5)(d) to construction-related expenditure and rejected its application where no construction activity had been undertaken. Kor Chems presented an even more basic difficulty for the Department: not only was there no constru....
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....ction, but the assignment itself was not a taxable supply. Consequently, the allegation of blocked credit failed at both levels. Full Disclosure Left No Foundation for Section 74 Section 74, as applicable to the relevant financial year, could be invoked where tax had not been paid, had been short-paid or erroneously refunded, or ITC had been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts with intent to evade tax. These are not decorative expressions. They are jurisdictional conditions that distinguish an ordinary tax dispute from a case involving deliberate concealment or deception. The transaction in the present case was recorded through a tax invoice dated 17.02.2022. The GST charged by the supplier appeared in the petitioner's GSTR-2A, while the credit was disclosed in GSTR-3B and recorded in the books of account. The petitioner explained that the credit had been taken under a bona fide belief after GST was charged by the supplier. Nothing material concerning the transaction or the credit was concealed from the Department. A dispute concerning the correct legal character of a disclosed transaction cannot automatically ....
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....be converted into fraud or suppression. Incorrect availment of credit, even if assumed, does not by itself establish the deliberate conduct required by Section 74. The petitioner had also reversed the credit and paid interest during the inquiry, demonstrating compliance rather than an attempt to conceal the transaction. In the absence of fraud, wilful misstatement or suppression with intent to evade tax, the extended machinery of Section 74 and the equivalent penalty of Rs.29,25,000 lacked the necessary statutory foundation. Payment Through DRC-03 Did Not Validate an Unlawful Levy During the inquiry, the petitioner reversed ITC of Rs.29,25,000 through Form DRC-03 dated 21.01.2023 and paid interest of Rs.4,44,280 through Form DRC-03 dated 22.12.2023. The Department relied upon the partners' statements and the payments to support the proceedings. However, a payment made during an investigation, particularly to avoid continuing litigation, does not determine whether the levy was legally sustainable. Tax liability arises from the statute and not from a taxpayer's concession, mistaken understanding or decision to make payment during an inquiry. Neither a statement nor a....
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.... DRC-03 payment can confer taxability upon a transaction that falls outside the charging provision. Similarly, reversal of credit cannot validate the application of Section 17(5)(d) where no construction activity exists. Once the legal foundation of the demand disappears, retention of the amount becomes impermissible. The Order-in-Original, DRC-07, rectification order, Order-in-Appeal and APL-04 were accordingly quashed. The Department was directed to refund Rs.29,25,000 paid through DRC-03, together with interest of Rs.4,44,280, within three weeks. This relief was not based merely on a technical defect in adjudication. It followed from the substantive conclusion that the assignment was not taxable, the blocked-credit provision did not apply, and Section 74 could not be invoked. Taxability Must Be Decided Before Credit Eligibility The decision establishes the correct order of inquiry in disputes concerning tax on the transfer of property-related rights. The first question is whether the underlying transaction constitutes a taxable supply. Only after that question is answered in the affirmative does it become necessary to examine whether the recipient satisfies the conditio....
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....ns for ITC and whether any restriction under Section 17(5) applies. Beginning with blocked credit, while assuming the validity of the levy, reverses the statutory sequence. The judgment also gives practical effect to the distinction between an original allotment by GIDC and a subsequent assignment by its lessee. The latter transfers the existing lessee's benefit arising from immovable property to a third-party assignee who takes the lessee's place. It cannot be treated as a taxable service merely because the transaction is documented as an assignment and consideration is paid. Kor Chems therefore embodies a principle that extends beyond the immediate refund. The Department cannot sustain a tax burden through the credit mechanism after the underlying levy has failed. Nor can a fully disclosed legal dispute be escalated into Section 74 proceedings without evidence of fraud or deliberate suppression. When the assignment itself is outside GST, ITC reversal cannot be used to keep that tax alive. *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....