Gujarat High Court Holds Section 17(5)(d) of GST Act Blocked Credit Provisions Inapplicable to Transfer of Leasehold Rights Absent Construction Activity

Background and Context
The petitioner, a Non-Resident Indian residing in the USA, acquired leasehold rights over a Gujarat Industrial Development Corporation (GIDC) plot and engaged in sub-plotting and transfer of leasehold rights to various purchasers. The petitioner obtained GST registration solely for discharging GST liability on such transfers. In the course of business, the petitioner paid various charges to GIDC, on which GST was levied, and availed corresponding Input Tax Credit (ITC).

During the financial year 2022-23, the petitioner sold two sub-plots and discharged GST liability in cash. An inadvertent utilization of ITC in July 2022 was subsequently reversed. The respondent authorities alleged that the petitioner availed ITC on invoices issued by GIDC, which they claimed constituted blocked credit under Section 17(5)(d) of the GST Act, and issued a show cause notice under Section 74(1) of the Act demanding recovery of ITC along with interest and penalty.

Submissions and Issues
The petitioner challenged the jurisdiction of the show cause notice, arguing that the transfer of leasehold rights does not attract Section 17(5)(d) as there was no construction activity involved. It was further submitted that the ITC in question remained unutilised, and any GST liability was discharged in cash. The respondent contended that the petitioner had violated Section 17(5)(d) and that the show cause notice was merely to seek an explanation, with the merits to be adjudicated in due course.

Court’s Reasoning and Legal Principle
The Gujarat High Court examined Section 17(5)(d) of the GST Act, which blocks ITC for goods or services received for construction of immovable property (other than plant and machinery) on one’s own account. The Court emphasized that the legislative intent behind this provision is to bar credit only for construction-related expenditure. The respondent failed to establish that the petitioner undertook any construction activity; the petitioner’s business was limited to transfer of leasehold rights.

The Court further analyzed Section 74 of the GST Act, which permits issuance of a show cause notice only in cases involving fraud, wilful misstatement, or suppression of facts. The Court found no evidence of fraud, misstatement, or suppression by the petitioner. It was undisputed that any inadvertently utilized ITC had been reversed and all GST liabilities were paid in cash.

Decision and Outcome
Concluding that both the invocation of Section 17(5)(d) and Section 74 were without jurisdiction and based on a misinterpretation of the statutory provisions, the Court quashed the impugned show cause notice. The respondent was directed to unblock the ITC amounting to Rs. 98,11,678/- in the petitioner’s electronic credit ledger within three weeks. The writ petition was allowed, and the rule made absolute with no order as to costs.

This decision clarifies that the blocked credit provisions under Section 17(5)(d) of the GST Act do not apply to transactions involving mere transfer of leasehold rights in immovable property where no construction activity is undertaken.