2019 (5) TMI 1278 - HC - GST

Scope of Section 17(5)(d) - construction of immovable property (shopping malls) intending for letting out for rent - input tax credit from construction against output GST on rental income - it was alleged that the opposite parties without considering the provisions u/s 17 (5)(d) of the CGST Act held that the provisions regarding input credit of the CGST Act is not applicable - purpose of letting out he is earning out commercial rent income and he has to pay 18% GST on that - HELD THAT - The very purpose of the Act is to make the uniform provision for levy collection of tax, intra state supply of goods and services both central or State and to prevent multi taxation. Therefore, the contention which has been raised by the learned counsel for the petitioners keeping in mind the provisions of Section 16 (1)(2) where restriction has been put forward by the legislation for claiming eligibility for input credit has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2). While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put-forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST, but still he has to pay huge amount of GST, to which he is not liable. In that view of the matter, in our considered opinion the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, inasmuch as keeping in mind the language used in EICHER MOTORS LTD. VERSUS UNION OF INDIA 1999 (1) TMI 34 - SUPREME COURT , the very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act. In that view of the matter, prayer (a) is required to be granted. However, we are not inclined to hold it to be ultra vires. Prayer (b) is not accepted. The writ petition is allowed to the aforesaid extent.

Summary

Issues Involved:

1. Applicability of Section 17(5)(d) of the CGST Act.
2. Entitlement to Input Tax Credit (ITC) for construction of immovable property intended for letting out.
3. Interpretation of provisions under the CGST Act and OGST Act.
4. Constitutional validity of Section 17(5)(d) under Articles 14 and 19(1)(g) of the Constitution of India.

Issue-wise Detailed Analysis:

1. Applicability of Section 17(5)(d) of the CGST Act:

The petitioners challenged the denial of ITC based on Section 17(5)(d) of the CGST Act, which states that ITC is not available for goods and services received for the construction of an immovable property on one's own account. The petitioners argued that this provision should not apply to properties intended for letting out, as it leads to double taxation and breaks the tax chain, which is contrary to the objectives of the GST regime.

2. Entitlement to Input Tax Credit (ITC) for Construction of Immovable Property Intended for Letting Out:

The petitioners, engaged in constructing shopping malls for letting out, accumulated significant ITC on inputs used for construction. They contended that denying ITC on such inputs while taxing the rental income from the property is arbitrary and unjust. The denial of ITC would increase the cost of construction, making the property uncompetitive and violating the principle of preventing the cascading effect of taxes, which is a core objective of the GST system.

3. Interpretation of Provisions under the CGST Act and OGST Act:

The petitioners argued that Section 17(5)(d) should be interpreted to apply only to properties intended for sale after completion, not to properties intended for letting out. They supported their argument with the principle that tax statutes should avoid double taxation and the interpretation should align with the legislative intent to prevent the cascading effect of taxes. They cited various judicial precedents and government circulars to support their interpretation.

4. Constitutional Validity of Section 17(5)(d) under Articles 14 and 19(1)(g) of the Constitution of India:

The petitioners contended that the denial of ITC under Section 17(5)(d) violates their fundamental rights under Articles 14 and 19(1)(g) of the Constitution. They argued that the provision creates an unreasonable classification between builders who sell units and those who let them out, despite both having a continuous business without a break in the tax chain. This arbitrary classification results in unequal treatment and imposes an unreasonable restriction on their right to carry on business.

Court's Decision:

The court held that the narrow interpretation of Section 17(5)(d) by the revenue authorities frustrates the objective of the GST Act. It noted that the provision should be read down to exclude properties intended for letting out from its ambit. The court emphasized that the purpose of ITC is to prevent the cascading effect of taxes and to reduce the cost burden on the final consumer. Denying ITC in this case would lead to double taxation and make the property uncompetitive.

The court granted the petitioners' prayer to the extent of reading down Section 17(5)(d) to allow ITC for properties intended for letting out. However, it did not declare the provision ultra vires. The writ petition was allowed to this extent.