ITC on Acquisition of GIDC Leasehold Rights Not Blocked Under Section 17(5)(d) — Transaction Itself Not Taxable Under GST: Gujarat HC Quashes Demand and Orders Refund of Reversed ITC and Interest

The Gujarat High Court has quashed an order-in-original, a rectification order, and an order-in-appeal confirming a demand under Section 74 of the CGST Act, and directed refund of the ITC and interest already reversed by the petitioner through DRC-03, holding that acquisition of leasehold rights in a GIDC industrial plot does not constitute a taxable supply under Section 7 of the CGST Act and that Section 17(5)(d) — which blocks ITC on goods or services received for construction of immovable property — does not apply where no construction activity has been undertaken. The ruling, by Justice A.S. Supehia and Justice Vaibhavi D. Nanavati in SCA No. 6623 of 2026 (M/s Kor Chems, decided 03.09.2026), follows the court's own earlier decisions in Gujarat Chamber of Commerce & Industry (which declared such transactions non-taxable) and SCA No. 18068 of 2025.

The petitioner, a partnership firm trading in industrial chemicals, had acquired leasehold rights in an industrial plot at Ankleshwar from a transferor for Rs. 1,91,75,000 inclusive of GST of Rs. 29,25,000. The supplier had charged GST treating the assignment as a taxable supply. The petitioner availed ITC under a bona fide belief, but during an inspection under Section 67(1), upon being informed that such ITC might be blocked under Section 17(5)(d), voluntarily reversed the entire ITC of Rs. 29,25,000 along with interest of Rs. 4,44,280 through DRC-03 to avoid further proceedings. The Department nevertheless issued an SCN under Section 74 proposing recovery of the same ITC on the ground of blocked credit under Section 17(5)(d) and imposed a penalty equal to the tax amount.

The court held that since the assignment of leasehold rights in GIDC-allotted land had been judicially declared as a transaction not exigible to GST — it being an assignment of benefits arising out of immovable property falling outside the scope of supply under Section 7(1)(a) read with Schedule II and III — the charging provision itself did not apply. When there is no taxable supply, the question of applying the blocking provision under Section 17(5) does not arise. Section 17(5)(d) presupposes the existence of a taxable inward supply on which tax is lawfully leviable, and in any event applies only to construction-related expenditure. The petitioner had not undertaken any construction activity. The court further held that the question of fraud, suppression, or wilful misstatement did not arise given the bona fide belief and transparent disclosure in GSTR-3B and GSTR-2A, making the invocation of Section 74 unwarranted. All impugned orders were quashed and refund of Rs. 29,25,000 (tax) and Rs. 4,44,280 (interest) was directed within three weeks.

- 2026-juristway.com-2485-HC(Gujarat)-GST  |  High Court of Gujarat  |  SCA No. 6623 of 2026  |  03.09.2026