An analysis of Gujarat High Court Decision in the case of Gujarat Chamber of Commerce and Industry v. Union of India

In a recent decision [(2025) (1) TMI 51], Gujarat High Court ruled that assignment of leasehold rights in a plot allotted by Gujarat Industrial Development Corporation (GIDC) is outside the levy of GST as it would be equivalent to transfer of immovable property and covered under clause 5 of Schedule III (Activities or transactions which shall be treated neither as a supply of goods nor a supply of services).
Recently, a number of notices were issued regarding taxability of transfer of leasehold rights and this ruling may prove to be a valuable precedent for such taxpayers facing litigation on this account.

Brief Facts:

GIDC is established under Gujarat Industrial Development Act, 1962 for growth and development of industries in the State of Gujarat by establishing and managing the industrial estate and develop such industrial area. In exercise of such powers, GIDC enters into lease agreement of 99 years for allotment of land for industrial purpose in the industrial estate developed by it. The ownership of the plot of land allotted by GIDC remains with it and only the right of possession and occupation are transferred by way of leasehold rights in favour of allottee lessee. As per the terms of lease deed, the lessee is entitled to transfer the leasehold land in favour of third party on permission by GIDC and on payment of certain transfer fees. The Revenue Authorities issued summons / show cause notices to levy GST at the rate of 18% on such subsequent assignment of lease by lessee-assignor as a supply of service.

With this background, the issue under consideration was whether the assignment of leasehold rights of the land along with the building thereon would be covered within the ambit of "supply" of goods or services and therefore, liable to GST.
High Court's Observations:

  1. Meaning of the term "immovable property" vis-a-vis other enactments -

o   Since the term "immovable property" is not defined under the GST law, reference was made to other enactments being General Clauses Act, 1897, Transfer of Property Act, 1882 and the Registration Act, 1908. Citing the provisions of the General Clauses Act and the Registration Act, which define immovable property to include "benefits to arise out of land", the contention of the petitioners that leasehold rights are nothing but interest in immovable property was accepted.

o   Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Sri Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co. and others [(1979) 3 Supreme Court Cases 106]..

o   Further, as per the provisions of Transfer of Property Act, immovable property would either be tangible or intangible right, which relates to plot of land as sale is an absolute transfer by assignment along with whatever interest, lessee-assignor has on the land and building

o   Where lease is more than 98 years, the provisions of Gujarat Stamp Act which prescribes same duty as is leviable for conveyance, was also considered..

 

  1. Scope of the term "property" -

    o   It was the contention of the petitioners that leasehold rights transferred by the lessee is in relation to the property which has been defined and construed in various ways. 

    o  It was submitted that "Property" refers to both the actual physical object and the various incorporeal ownership rights in the object, such as the rights to possess, to enjoy the income from, to alienate, or to recover ownership from one who has improperly obtained title to the object.

    o   Considering the petitioner's submission, the Court held that property is nothing but a "bundle of sticks", i.e. collection of individual rights which, in certain combinations, constitute property and law determines only which sticks are in bundle of a person as held in the case of Schweihs v. Chase Home Finance LLC [(2015) IL App (1st) 140683] and therefore, immovable property includes in addition to right of ownership, aggregate rights that are guaranteed and protected by the further agreement or contract between the owner and the lessee.
     

  2. Lease as a supply of service vs. Assignment -

    o   The argument of the respondents that right to occupy the land when transferred by GIDC in favour of lessee is to be treated as supply of service and any further transfer which is the same right will continue to be a supply of service was struck down.

    o   The Court observed that, given the facts of the case, there are two transactions -

    i)          Leasing as a supply of service

    When GIDC allots plot along with right to occupy, right to possess and right to construct, it is a supply of service as the right of ownership continues to remain with GIDC and will revert on expiry of lease period.

    ii)        Assignment

    Transaction of sale and transfer of leasehold rights by lessee-assignor in favour of assignee divests lessee-assignor of all the absolute rights in the property. Therefore, interest in the immovable property in the form of leasehold rights cannot be different than immovable property itself.

    Further, the building constructed on the plot of land is also transferred by the lessee-assignor which constitutes a profit a pendre (benefits arising out of land) which is also an immovable property. Therefore, it would not be subject to tax under GST law.

    o   The Court also referred to the decision of Hon'ble Apex Court in the case of Byramjee Jeejeebhoy (P) Ltd v. State Of Maharashtra [(1965) AIR Supreme Court 590] to distinguish between lease and assignment and observed that while assignment conveys the whole interest in the property which passes to the assignee alongwith rights and liability, lease involves a estate transfer limited to a right to enjoy such property.

    o   Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Gopal Saran v. Satya Narayana [(1989) 3 Supreme Court Cases 56] which refers to the definition of "assignment" as defined in Black's Law Dictionary to mean "transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein" and further held that assignment would include transfer by a  party of all it's rights to some kind of property such as right in lease, mortgage.

    o   Considering the above, the Court held that the assignment deed executed by the lessee-assignor is a deed of divesting all the rights in favour of the assignee and the assignee becomes liable to the lessor on the covenants running with the land and it amounts to assignment of all the rights in the immovable property by the lessee-assignor.

    o   The respondents placed reliance on the decision of Allahabad High Court in the case of Greater Noida Industrial Development Authority [2015 (40) STR 95 (All.)]. The Court distinguished this judgement as it related to renting of immovable property on lease whereby the term of the lease would not alter the character of the service which is distinct from the assignment of leasehold rights in immovable property for a consideration.

     

  3. Legislative History -

    o   The Court referred to the Statement of Objects and Reasons stated in the Central Goods and Services Tax Bill, 2017 and observed that the legislative intention is to subsume all the existing indirect taxes in a single tax called Goods and Services Tax. As the GST Act is nothing but a levy of tax subsuming all the indirect taxes which were levied under different legislations, the definition of "service" as well as section 65B(44) of the Finance Act, 1944 under the erstwhile Service Tax Law may be relevant to note. It observed that there was a specific exclusion of transfer of title in immovable property implying the legislative intent to exclude levy on immovable property.

    o   Further, it observed that under the erstwhile Service Tax law, development rights which are the benefits arising from land were not liable to tax. It, therefore, held that leasehold right, which is a greater right and interest than development right, shall also be treated as immovable property continuing to apply the principles of service tax regime.

    o   Reference was made to the case of Munjaal Manishbhai Bhatt v. Union of India [(2022) 104 GSTR 419 (Guj)], wherein this court had observed that the intention of introduction of GST regime was not to change the basis of taxation of the Value Added and Service Tax regime and that supply of land in every from was excluded from the purview of GST Act.

    o   It also referred to the minutes of the 5th and 7th GST Council Meetings wherein after a detailed discussion, the imposition of GST on land and building was deferred which fortifies the legislative intent to not impose tax on immovable property continuing the object of the erstwhile service tax regime.

    o   The Respondents referred to Article 25 of the Council directive of the Council of European Union states that a supply of service may consist, inter alia, of the "transaction of assignment of intangible property, whether or not the subject of a document establishing title". The Court held such article to be inapplicable as the leasehold rights and the building constructed are an immovable property and not an intangible property.

    In view of the foregoing observations of the High Court, it was held that assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC to the lessee in favour of third party-assignee and the building thereon for a consideration shall be assignment/sale/transfer of benefits arising out of "immovable property" by the lessee-assignor in favour of third party-assignee. Such third party-assignee would become the lessee of GIDC. As a result, assignment of leasehold rights shall not fall within the ambit of levy under GST.

     

Implications of this Decision:

This ruling of the Gujarat High Court is certainly a welcome step towards settling disputes surrounding the scope of land / immovable property and taxability of rights in or benefits arising out of land / immovable property. Applicability of the ratio of this judgement to other jurisdictions will have to be carefully considered having regard to the terms of agreement with respect to exclusivity of assignment of leasehold rights. Recently, the Bombay High Court has also set aside a demand order for GST on assignment of leasehold rights remanding the matter for fresh order after considering the Gujarat High Court decision on the said matter.

Reference to legislative intention and continuation of principles of erstwhile law while interpreting the scope of immovable property and assignment of rights in immovable property could have far reaching implications on similar disputes relating to other rights (development rights, tenancy rights).

While on one hand, Circular No. 44/18/2018-GST dated 2nd May, 2018 clarifies the activity of transfer of 'tenancy rights' is squarely covered under the scope of supply and taxable; on the other hand, the Telangana High Court in the case of Prahitha Construction Private Limited [TS-60-HC(TEL)-2024-GST] has held that transfer of development rights of land by land owners to real estate developer by way of a joint development agreement (JDA) should not be treated sale of land by land owners. The impact of this decision on such contradictory positions will have to be seen. It is also expected that the government may move the Supreme Court against this order.