Bombay High Court Suspends GST Proceedings on Land Deduction, Challenges Jurisdictional Authority of Tax Officers

The intersection of real estate transactions and indirect taxation has always been a complex landscape, particularly concerning the valuation of land in composite construction contracts. In a monumental judicial intervention, the Bombay High Court has delivered a crucial interim order in the matter of Khusharav Builders Pvt. Ltd. v. Additional Commissioner (A.E.), bearing WP(L) No. 34439 of 2025. This ruling brings substantial relief to the real estate sector by halting coercive tax demands and questioning the fundamental jurisdiction of the revenue authorities to issue notices based on legally fractured provisions.

The order, officially pronounced on January 6, 2026, directly challenges the validity of a show cause notice issued on September 29, 2025. By scrutinizing the constitutional validity of the underlying tax notification, the High Court has reinforced the principle that an assessee cannot be subjected to arbitrary tax assessments when the foundational law itself has been invalidated by competent constitutional courts.

The Core Dispute: Valuation of Land in Composite Supplies

At the heart of this legal battle is the methodology prescribed by the GST department for calculating the value of land when a developer sells an under-construction property. Real estate transactions typically involve a bundled supply of construction services and the transfer of land. Since the sale of land is outside the purview of GST, determining the exact value of the construction service is critical.

The revenue department relied on Notification No. 11/2017-Central Tax (Rate), dated June 28, 2017. Specifically, Paragraph 2 of this notification mandates a standard, inflexible deduction of 1/3rd of the total agreement value towards the cost of land.

The mandatory 1/3rd deduction assumes that in every real estate project, regardless of its geographical location—be it a prime metropolitan area or a rural outskirt—the land value constitutes exactly 33.33% of the total consideration. This rigid legal fiction became the primary grievance for the assessee.

The petitioner, Khusharav Builders Pvt. Ltd., was served with a show cause notice under Section 74 of the CGST Act and the corresponding MGST Act, demanding tax based on this controversial notification. The developer challenged this notice, arguing that the assessing officer lacked the jurisdictional competence to enforce a provision that had already been struck down by multiple judicial forums.