The Supreme Court has put on hold all recovery proceedings related to the disputed 1/3rd deemed deduction for land value in under-construction real estate transactions under GST, until it decides on a Special Leave Petition (SLP) filed by the revenue authorities.
A bench comprising Justice B.V. Nagarathna and Justice Nongmeikapam Kotiswar Singh directed that the High Court’s order for a refund be implemented by the Union of India, with payment to be made within four weeks. However, this compliance will be subject to the outcome of the pending petitions.
The Department filed the special leave petition against the order of the Gujarat High Court.
Case Background
Petitioner Munjaal Manishbhai Bhatt, an advocate, entered into an agreement with a landowner/developer to purchase a developed plot (1,021 sq. m) along with construction of a bungalow (160 sq. m) on the plot. Separate consideration was agreed upon for the land and construction.
Core Issue
Under GST, the tax is levied on the total value of an under-construction property, after deducting the value of land. Notification No. 11/2017-CT (Rate) mandates a fixed deduction of one-third of the total contract value towards land, regardless of the actual land value.
This “mandatory deeming fiction” was challenged in multiple High Courts. The Gujarat High Court (HC) was the first to decide, ruling in favour of taxpayers and ordering refunds of excess GST collected.
Observations of the Gujarat High Court
The HC held that GST valuation should be based on actual consideration wherever it is ascertainable. Deeming fiction can be used only when actual value is not determinable. It also clarified that “sale of land” is outside GST’s ambit, and even developed land is exempt if development occurred before the buyer’s agreement, as the work was not performed for that buyer.
Since the agreement in this case separately specified prices for land and construction, the Court ruled that the fixed one-third deduction could not be applied. The HC found paragraph 2 of Notification No. 11/2017-CT (Rate) and corresponding state notifications ultra vires the GST law and discriminatory, thereby violating Article 14 of the Constitution.
The Court directed that GST authorities refund the excess GST with 6% interest, allowing the deduction only where land value cannot be ascertained. Reliance was placed on the Supreme Court’s judgment in Gannon Dunkerley.
Case Details
Case Title: UNION OF INDIA VERSUS MUNJAAL MANISHBHAI BHATT & ORS.
Case No.: Special Leave to Appeal (C) No(s). 21703/2022
Date: 01-10-2024
Counsel For Petitioner: Arvind P Datar, Sr. Adv.
Counsel For Respondent: Gurmeet Singh Makker, AOR
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