Can ITC be availed in case of construction of immovable property intended for letting out for rent?
The recent Supreme Court ruling provides a sigh of relief to real estate sector engaged in construction of immovable properties intended for letting out on lease or rent. The Honorable Supreme Court of India on 3rd October, 2024, ruled out that Input Tax Credit on construction of an immovable property meant for renting purpose can be claimed.
Section 17(5)(d) of The Central Goods and Service Tax, 2017 states that input tax credit shall not be available in respect of goods or services, or both received by taxable person for construction of immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. In the case of Safari Retreats Private Limited Vs. Chief Commissioner of GST, High Court of Orissa held that if the assessee is required to pay GST on the rental income arising out of the investment on which he has already paid GST, it is allowed to claim Input Tax Credit. The Court observed that “the narrow construction of interpretation put forward by the Department frustrates the very objective of the Act, wherein the assessee has to pay huge amount of tax without any basis. The assessee would have been liable to pay GST if it disposed of the property after receipt of certificate of completion or if the property was sold prior to receipt of certificate of completion he would have not been liable to pay GST. In the given case, he is retaining the property on which he is taxable under GST.” It further held that, “the narrow restriction imposed by Section 17(5)(d) is not to be accepted keeping in mind the language used. 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 investment on which he has paid GST, then it is required to have the input credit on the GST.”
A contrary view was taken by The Authority for Advance Rulings (Goods and Service Tax), Tamil Nadu on 19th December, 2023, in the case of Suswani Foundations Private Limited. The AAR held that “the applicant had himself built the godown for which he had received various goods as inputs and services as input services. The applicant is proposing to rent out to large companies for storing their stock for future sale that is furtherance of his own business. The input tax paid on goods or services received for construction of an immovable property on one’s own account is unavailable. There is legislative intent that input tax credit may not be always allowed partially or fully. As the suitability and requirement of taxpayers varies from person to person, the rule or Act cannot be changed or amended, and it is mandatory for the taxpayers to adhere to the restrictions prescribed in the Act or Rules”. Thus, the AAR ruled that no Input Tax Credit is available on inputs to the applicant when the godown constructed by him is meant for renting it out for commercial purpose to registered dealer.
This ambiguity was put to rest by the Apex Court of India by upholding the decision of Orissa High Court in the case of Safari Retreats Vs. Chief Commissioner of Central Goods and Service Tax. The Honorable Court ruled out, “if the construction of building is essential for the activity of supplying services like renting or leasing as covered under Schedule II: Activities or transactions considered as supply of goods or services under The Central Goods and Services Tax Act, 2017; then the building may be considered as a plant. The question whether a mall, warehouse, or any building other than a hotel or a cinema theatre can be classified as plant within the meaning of the expression “plant or machinery” used in Section 17 (5) (d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that the building plays in the said business. Functionality test will have to be applied to decide whether a building is a plant”.
It further observed, “the phrase ‘on his own account’ should be deemed to mean when construction is done for personal use and not for services i.e., credit should be denied only when goods or services are utilized for construction of immovable property for personal use like an office building or factory building. In such a case no further GST on sale of such a building occurs and therefore a chain of taxability breaks. However, when such immovable property is not being used by the assessee itself but is used for other supplies such as renting of the property or supply of hotel accommodation service, then the same shall not be covered by the expression ‘on his own account’.”
Honorable Supreme Court earlier also in landmark judgements had held that functionality test needs to be applied in determining if the immovable asset could be treated as a plant. To illustrate some of them are as follows:
In the case of CIT, Andhra Pradesh Vs. Taj Mahal Hotel, Secunderabad, it was observed, “the word “plant” means land, building, machinery, apparatus and fixtures employed in carrying on trade and other industrial business. Functionality or essentiality test must be applied to decide what a plant is. Ultimately, a plant is an apparatus used by a businessman for carrying on his business. It does not include his stock in trade but does include all goods and property whether movable or immovable. A building or warehouse must be considered as plant if it serves as an essential tool of trade with which the business is carried on. However, if it merely serves as a setting in which business is carried on it will not qualify as a plant”.
In the case of CIT, Trivandrum Vs. Anand Theatres, wherein it was held that when a building is specially designed and constructed with some special features to attract the customers, the building could be treated as plant.
Similarly, in the case of Commissioner of Income Tax, Karnataka Vs. Karnataka Power Corporation, the Apex Court held that an electricity power generating station building would have to be treated as plant as it would satisfy the functional test or the test of essentiality.
Applying the test of functionality in the case of Commissioner of Income Tax Vs. Victory Aqua Farm Ltd, Honorable Supreme Court ruled, ponds specially designed for doing business of aquaculture of prawns should be treated as plant for the purpose of Income Tax.
In view of the above judgements, it can be inferred that any immovable asset which is essential to provide further supply of service will be covered under the meaning of plant. In awake of this background, the Supreme Court judgement is a positive move encouraging investment in commercial real estate as rental cost will be reduced and Input Tax credit will no longer be financial stress on the pockets of the developers.
