Bombay HC Quashes GST Demand on Assignment of Leasehold Rights as it falls Outside GST Net

Bombay HC Quashes GST Demand on Assignment of Leasehold Rights as it falls Outside GST Net

Aerocom Cushions Private Limited was allotted an industrial plot by MIDC, Hingna, Nagpur, under a long-term lease of 95 years. In accordance with the lease terms, the petitioner assigned its leasehold rights in the plot, along with the factory building constructed thereon, to M/s Rishita Industries after obtaining prior consent of MIDC and on payment of the prescribed additional premium.

The Assistant Commissioner (Anti-Evasion), CGST & Central Excise, issued a show cause notice dated 20.12.2024 under Section 74(1) of the CGST Act, 2017, alleging suppression of facts and proposing recovery of GST amounting to ₹27,00,000 on the consideration received for assignment of leasehold rights. The department treated the transaction as supply of services under Section 7(1) read with Schedule II of the CGST Act and classified it as “other miscellaneous services” taxable at 18%. Aggrieved, the petitioner approached the Bombay High Court challenging the validity of the show cause notice.

Issue Before Court: Whether assignment of long-term leasehold rights in an industrial plot, with prior consent of MIDC, constitutes a “supply of services” liable to GST under Section 7 of the CGST Act, 2017.

HC’s Decision: The Bombay High Court held that the transaction in question was an assignment of leasehold rights amounting to transfer of benefits arising out of immovable property and not a lease or sub-lease. The Court noted that even the show cause notice admitted that the petitioner’s rights stood extinguished upon assignment and that the transaction did not amount to a sub-lease.

The Court rejected the department’s attempt to classify the transaction as “other miscellaneous services”, holding that such a classification could not be stretched to cover assignment of leasehold rights in immovable property. It further observed that the transaction had no nexus with the petitioner’s business activity and therefore failed the essential requirement of “supply in the course or furtherance of business”.

Placing reliance on the Gujarat High Court decision in Gujarat Chamber of Commerce and Industry v. Union of India, the Court held that assignment of leasehold rights of land and building allotted by an industrial development corporation constitutes transfer of immovable property benefits and does not fall within the scope of supply under Section 7 of the GST Act. The Court also held that the Gujarat High Court ruling was binding on authorities within Maharashtra in the absence of a contrary decision.

Accordingly, the show cause notice issued under Section 74 of the CGST Act was quashed and set aside, and the writ petition was allowed.

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