Gujarat High Court on ITC Reversal for GIDC Leasehold Rights: No GST, No Blocked Credit, No Section 74 Proceedings

Background of the Dispute

The Gujarat High Court in Kor Chems Vs Assistant Commissioner (Gujarat High Court) examined whether Input Tax Credit (ITC) taken on GST charged on assignment of Gujarat Industrial Development Corporation (GIDC) leasehold rights could be treated as blocked credit under Section 17(5)(d) of the CGST Act 2017, and whether penalty proceedings under Section 74(1) were sustainable.

The assessee, a partnership firm dealing in industrial chemicals such as Hydrogen Peroxide, Caustic Flakes and Phosphoric Acid (classified under HSN Code 28061000, 29031200 and 28151110 respectively), had acquired leasehold rights in an industrial plot at Ankleshwar from M/s. Myspace Infracon [GSTIN: 24ABDFM5324K1ZB] in February 2022.

Key transactional facts:

  • Total consideration for transfer of leasehold rights: Rs.1,91,75,000/-
  • GST component included in the above: Rs.29,25,000/-
    • CGST: Rs.14,62,500/-
    • SGST: Rs.14,62,500/-
  • Tax invoice: No. CS/7/21-22 dated 17.02.2022, issued by M/s. Myspace Infracon
  • ITC of Rs.29,25,000/- was availed by the assessee in GSTR-3B for February 2022 and reflected in its books and returns.

The assessee believed that ITC on GST charged for acquisition of leasehold rights was admissible and accordingly claimed credit.

Departmental Proceedings and Voluntary Reversal

Inspection and Statements

On 16.01.2023, the department conducted an inspection under Section 67(1) of the CGST Act. During this exercise:

  • The statement of one of the partners, Shri Rameshchandra, was recorded under Section 70 of the CGST Act.
  • He accepted that ITC had been availed on GST paid towards leasehold rights.
  • He clarified that the credit was taken under a bona fide understanding that such ITC was permissible and that the firm was not aware that it could be treated as blocked under Section 17(5)(d).

Subsequently, the statement of another partner, Shri Sanjay Soni, was recorded. He confirmed:

  • ITC of Rs.29,25,000/- was correctly reflected in GST returns and books.
  • ITC was taken after consultation with the Chartered Accountant and in good faith.
  • Without waiting for a formal notice, the assessee voluntarily:
    • Reversed ITC of Rs.29,25,000/- via DRC-03 (Debit E.No.DC2401230416348/DI2401230611178) dated 21.01.2023; and
    • Paid interest of Rs.4,44,280/- through DRC-03 (Debit E.No.2412230320082) dated 22.12.2023 to avoid protracted litigation.

Initiation of Section 74 Proceedings

Despite the voluntary reversal and payment of interest, the department proceeded as follows:

  1. Intimation in Form GST DRC-01A

    • DIN: DIN20240365VB0000D4A9
    • Date: 05.03.2024
    • Called upon the assessee to pay penalty.

  2. Assessee’s Reply (13.03.2024)

    • Pointed out that tax (via reversal of ITC) and applicable interest had already been paid under protest through DRC-03 during investigation.
    • Emphasized:
      • All books and documents were duly produced.
      • There was no fraud, suppression, or willful misstatement.
      • Penalty was unwarranted in facts of the case.

  3. Show Cause Notice under Section 74(1)

    • DIN: DIN20240565VB000000060
    • Date: 31.03.2024
    • Issued by Deputy Commissioner (Prev.), CGST & Central Excise, Vadodara-II Commissionerate.
    • Allegations:
      • ITC of Rs.29,25,000/- was ineligible as it was “blocked credit” under Section 17(5)(d) of the CGST Act.
      • Recovery of ITC, along with interest and equal penalty under Section 74(1) was proposed.

Assessee’s Defence Before Adjudicating Authority

In response to the Show Cause Notice, the assessee submitted a detailed defence, highlighting:

  • ITC was claimed transparently:
    • GST was correctly charged by the supplier via a valid tax invoice.
    • The transaction appeared in Form GSTR-2A and was reported in Form GSTR-3B.
  • Credit was availed on a bona fide understanding of law, based on professional advice.
  • ITC was fully reversed and interest of Rs.4,44,280/- was paid prior to issuance of the Show Cause Notice.
  • There was no element of:
    • Fraud
    • Suppression of facts
    • Wilful misstatement
  • Reliance was placed on Uniworth International Limited Vs. Commissioner Of Central Excise, Nagpur, which holds that mere non-payment or incorrect availment of credit, without intent to evade duty, does not amount to suppression of facts.

Order-in-Original and Appeal

Despite the above submissions: