Facts of the Case:

In this case, the petitioner a partnership firm engaged in trading industrial chemicals, acquired leasehold rights in an industrial plot at Ankleshwar from M/s. Myspace Infracon for a consideration of ₹1,91,75,000, including GST of ₹29,25,000. The supplier issued a tax invoice dated 17.02.2022 charging CGST and SGST of ₹14,62,500 each. Believing the GST charged on the transaction to be eligible for ITC, the petitioner availed the corresponding credit in its February 2022 GSTR-3B, which was duly reflected in its books and GST returns.

During an inspection under Section 67(1) on 16.01.2023, the petitioner admitted availment of ITC but explained that it had been taken under a bona fide belief that the credit was admissible. The petitioner subsequently voluntarily reversed the entire ITC of ₹29,25,000 through DRC-03 dated 21.01.2023 and paid interest of ₹4,44,280 through DRC-03 dated 22.12.2023.

Thereafter, the Department issued an SCN under Section 74(1) proposing recovery of the ITC, interest and penalty on the ground that the credit represented blocked ITC under Section 17(5)(d). The adjudicating authority confirmed ITC demand of ₹29,25,000, interest of ₹4,44,280 and an equivalent penalty of ₹29,25,000 under Section 74(1), while appropriating the tax and interest already paid through DRC-03. The appellate authority subsequently upheld the demand.

Issue:

Whether ITC availed on GST charged in respect of acquisition/assignment of leasehold rights in a GIDC industrial plot could be treated as blocked credit under Section 17(5)(d), and whether Section 74(1) could be invoked on the allegation of fraud, wilful misstatement or suppression of facts?

Held that:

The Court relied upon its earlier decision in Gujarat Chamber of Commerce and Industry & Ors., wherein it had held that assignment/sale/transfer of leasehold rights in a GIDC plot constitutes transfer of benefits arising out of immovable property and is not covered by Section 7(1)(a) read with the relevant provisions of Schedule II/Schedule III so as to attract GST. Consequently, the transaction was not subject to GST under Section 9.

Applying that principle, the Court held that the GST charged by the supplier and paid by the petitioner on the leasehold-rights transaction was contrary to law. Since the charging provision itself did not apply, any amount collected or retained by the Department, whether directly as tax or indirectly through reversal of ITC and payment of interest, had no legal sanctity. Consequently, the reversal of ITC and payment of interest, both of which were premised on the assumption that GST was leviable on the underlying transaction, could not survive.

The Court further examined Section 17(5)(d). It observed that this provision presupposes the existence of a taxable inward supply on which tax is lawfully leviable and paid. In the present case, the transaction itself did not qualify as a taxable supply under Section 7 and was not chargeable to tax under Section 9. Therefore, the question of applying the blocking provision under Section 17(5)(d) did not arise at all.

The Court also relied upon its earlier decision in SCA No. 18068 of 2025 dated 10.02.2026, where it had interpreted Section 17(5)(d) as relating to goods or services received for construction of an immovable property. Since the taxpayer in the present case had not undertaken any construction activity and had merely acquired leasehold rights in the GIDC plot, Section 17(5)(d) was held to be inapplicable. The demand founded on the alleged blocked credit was therefore held unsustainable.

On the invocation of Section 74(1), the Court found that the circumstances did not disclose fraud, wilful misstatement or suppression of facts. The ITC had been openly reflected in the books and GST returns, and the petitioner had voluntarily reversed the credit and paid interest even before issuance of the SCN. The Court accordingly held that the allegation of fraud, suppression or wilful misstatement could not be sustained.

Case Name: M/S.KOR CHEMS THROUGH PARTNER SANJAY RAMESHCHANDRA SONI Versus ASSISTANT COMMISSIONER, CGST AND CENTRAL EXCISE & ANR. dated 03.09.2026

Citation No. 2026 Taxo.online 2850