Commercial Development on Personal Land: GST Implications on Sale and Leasing of Units — Maharashtra AAR Ruling
Background and Context
The Maharashtra Authority for Advance Ruling (AAR) recently examined a significant question that arises frequently in practice — whether an individual who develops commercial units on personally held land, sells some units, and leases out the remaining ones, is carrying on a "business" for GST purposes. The ruling in In re Sunil Vishvasrao Khune (GST AAR Maharashtra) addresses this question comprehensively and carries important implications for property owners, retired individuals, and real estate investors who undertake construction activities on privately held assets.
Facts of the Case
The applicant, Mr. Sunil Vishvasrao Khune, had served as a City Engineer with the Nashik Municipal Corporation and retired in March 2017. Post-retirement, he draws a monthly pension and also receives income from an Association of Persons (AOP) engaged in agricultural activities.
The applicant and his wife had jointly purchased a plot of land measuring 989.49 sq. mtrs. at Plot No. 37 & 38, S. No. 712/2A/2D/37/38, Nashik Shiwar from M/s Galaxy Knives Pvt. Ltd. and M/s Galaxy Saws Pvt. Ltd. vide a sale deed dated 23rd July, 2003. This property was consistently recognised as a capital asset in their personal balance sheets and disclosed as such in income tax returns over the years.
The existing bungalow structure on the land had previously been let out to M/s Prestige Hospitality. Rental income from this arrangement was assessed under the head "Income from House Property" under the Income Tax Act, 1961. The leave and licence agreement was terminated in July 2018, after which the structure was demolished.
With the objective of generating a steady post-retirement income stream, the applicant and his wife decided to develop a new commercial building on the plot. To fund construction, they resolved to sell a few units while retaining the remaining units for earning regular rental income. They obtained:
- TDR of 1,140.37 sq. mtrs. from Mr. Sandip Jadhav via a TDR sale deed dated 14 March 2019
- Building permission and Commencement Certificate bearing no. LND/BP/A1/22/2019 dated 6 June 2019 from the Town Planning Division of Nashik Municipal Corporation
- RERA registration bearing no. P51600025992 for the project named "ONE GANGAPUR", as mandated under
Section 3(2)(a)of the Real Estate (Regulation and Development) Act, 2016 - An MOU dated 29 May 2020 between the applicant and his wife for developing the co-owned property and distributing units between themselves
Questions Raised Before the AAR
Two questions were placed before the Maharashtra AAR under Section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017:
Whether the activity of constructing/developing commercial units on a vacant plot of land acquired as a capital asset out of surplus funds amounts to an activity carried out in the course or furtherance of business, in relation to:
- (a) Sale of commercial units to prospective buyers
- (b) Rent received on leasing of commercial units
If the answer to Question 1 is yes, whether input tax credit (ITC) is eligible on inputs and input services used for the construction of such commercial units, in relation to:
- (a) Sale of commercial units to prospective buyers
- (b) Rent received on leasing of commercial units
Applicant's Arguments
Investment vs. Business Activity
The applicant's primary contention was that the land and the commercial building constructed thereon were held as capital assets, not as stock-in-trade or business assets. The applicant argued that:
- He had never engaged in any business activity during his working life and had no prior experience in real estate development
- The construction was a one-time activity undertaken purely to generate rental income for sustenance in retirement
- Only a few units were being sold — not to profit from trade, but merely to arrange the funds needed for completing construction
- RERA registration was obtained purely due to mandatory legal requirements and not as an indicator of commercial intent
- The rental income received previously from the same land was consistently assessed as "Income from House Property" under the Income Tax Act, 1961, and was never characterised as business income
Reliance on Income Tax Precedents
The applicant drew upon judicial precedents under income tax law to argue that since the activity was not treated as a business activity under that regime, it could not be treated as such under GST either. The applicant cited: