The Madras High Court has set aside assessment orders rejecting input tax credit (ITC) claimed on goods and services used for constructing an immovable property intended to be leased, holding that the proper officer entered adverse findings without considering the binding principles laid down by the Supreme Court in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd.

The bench of Justice Senthilkumar Ramamoorthy observed that where a taxpayer specifically asserts that the construction was undertaken for leasing purposes, the proper officer must examine the claim in light of the Supreme Court’s interpretation of the expression “on his own account” under Section 17(5)(d) of the Central Goods and Services Tax Act, 2017.

Buy Now: E-Handbook: Draft Replies to GST Notices On 40+ Issues

The Court accordingly set aside the assessment orders and the consequential orders issued in Form GST DRC-07. It remanded the matters to the proper officer for fresh consideration and directed the tax authorities to re-credit or refund more than ₹9.62 crore recovered from the company’s electronic cash and credit ledgers without following the procedure prescribed under Rule 142B of the GST Rules.

The petitioner challenged the assessment orders dated February 23, 2026. The orders rejected the company’s claim for ITC on construction-cum-leasing services.

The company contended that it had relied upon the Supreme Court’s judgment in Safari Retreats, particularly the distinction drawn between construction undertaken by a taxable person “on his own account” and construction intended for sale, lease or licensing.

According to the company, the disputed inputs and input services were procured for the construction of property that was subsequently to be leased. Therefore, its claim could not have been rejected without properly considering whether the construction fell outside the expression “on his own account” as interpreted by the Supreme Court.

The company further argued that although the Safari Retreats judgment was specifically cited before the assessing authority, the operative portion of the assessment orders neither discussed nor applied its legal principles.

The State submitted that the Supreme Court judgment was not expressly dealt with in the operative portion of the assessment orders because Section 17(5) had subsequently been amended.

The State referred to the amendment substituting the expression “plant or machinery” with “plant and machinery.” This amendment was relied upon to defend the rejection of the ITC claim.

The High Court, however, did not enter a final ruling on the eligibility of the company’s ITC claim or on the ultimate effect of the statutory amendment. Instead, it examined whether the assessing authority was justified in deciding the matter without addressing the binding judgment cited by the taxpayer.

The High Court referred to the Supreme Court’s interpretation of Section 17(5)(d) in Safari Retreats. It noted that the provision blocks ITC on goods or services received by a taxable person for constructing an immovable property on the taxpayer’s own account, subject to the statutory exceptions.

The Supreme Court had explained that construction may be regarded as being undertaken on the taxpayer’s own account when the property is constructed for personal use or as the setting or premises from which the taxpayer carries on its business.

By contrast, the Supreme Court held that construction cannot be considered to have been undertaken on the taxable person’s own account where the property is intended to be sold, leased or licensed.

Applying this principle to the controversy before it, the High Court noted that the company’s specific case was that it had procured inputs for construction and leasing. In such a factual situation, the proper officer was required to deal with the Supreme Court judgment before recording findings against the taxpayer.

The impugned assessment orders had concluded that the expression “on own account” under Section 17(5)(d) includes cases where a registered person constructs a property for ownership, control and capitalisation, irrespective of its subsequent commercial use.

The assessing officer also held that the GST law does not provide an exception allowing ITC merely because the completed property is subsequently rented or leased.

According to the assessment orders, leasing constitutes an independent outward taxable supply arising only after the completion of construction and cannot retrospectively alter the character of the inward supplies used during construction. The officer reasoned that accepting the taxpayer’s interpretation would make Section 17(5)(d) ineffective and defeat the legislative intention of blocking ITC on immovable property.

The High Court found that these conclusions were entered without considering the ratio of the Supreme Court’s judgment in Safari Retreats.

“Since the above findings were entered without considering the ratio of the judgment of the Supreme Court in Safari Retreats, re-consideration is warranted,” the Court observed.

The assessment orders and consequential DRC-07 orders were consequently set aside. The proper officer was directed to provide the company a reasonable opportunity of hearing and issue fresh orders within five months from the date of receipt of the High Court’s order.

In a connected petition, the company sought restoration of ₹10,09,208 debited from its electronic cash ledger and ₹9,52,28,986 debited from its electronic credit ledger. The total amount sought to be restored was ₹9,62,38,194.

The amounts were debited pursuant to the assessment orders challenged in the other two writ petitions.

The company contended that the three-month period following the assessment orders expired on May 23, 2026, and the amounts were debited from its GST ledgers within three days thereafter.

It argued that the authorities did not issue the mandatory electronic intimation in Form GST DRC-01D under Rule 142B(1) before taking recovery action.

The High Court examined Rule 142B, which governs the intimation of amounts recoverable under Section 79 of the GST Act.

Under Rule 142B(1), where an amount of tax or interest has become recoverable under Section 79 and remains unpaid, the proper officer must electronically intimate the taxpayer in Form GST DRC-01D. The taxpayer must be given seven days from the date of the intimation to pay the amount along with applicable interest.

Rule 142B(2) provides that the electronic intimation is to be treated as the notice for recovery. Under Rule 142B(3), further recovery proceedings may be initiated only when the amount remains unpaid after the expiry of the seven-day period specified in the intimation.

The High Court held that the sequence of events in the present case showed that this mandatory procedure had not been followed.

The Court observed that recovery measures under the relevant GST Rules may be initiated only after an intimation is issued under Rule 142B(1) and the taxpayer fails to make payment within the stipulated seven-day period.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: CBIC Reviews JNCH Preparedness for 100% Non-Intrusive Inspection of Import Containers