Madras High Court upholds Section 74 proceedings for wrongful ITC on immovable property construction

Background of the dispute

RMZ Infinity (Chennai) Pvt. Ltd Vs Joint Commissioner of CGST & Central Excise came before the Madras High Court as a challenge to Order‑in‑Original No. 69/2025‑GST(JC) dated 04.02.2025. The adjudication order partly confirmed the demand proposed in Show Cause Notice No. 98/2023 dated 28.09.2023, issued under Section 74 of the CGST/TNGST Act read with Section 20 of the IGST Act.

The core allegation was that the assessee had wrongly availed input tax credit (ITC) on construction of immovable property, in violation of Section 17(5)(c) and Section 17(5)(d) of the CGST Act, and had done so in a manner attracting the ingredients of fraud / wilful misstatement / suppression, thereby inviting Section 74 proceedings.

The Show Cause Notice (SCN) proposed:

  • Recovery of ineligible ITC aggregating to ₹103,45,34,884/-
  • Appropriation of ITC already reversed through DRC‑03 and GSTR‑3B
  • Interest under Section 50
  • Penalty under Section 74 read with Section 122(2)(b)

The assessee, a company engaged in renting and leasing of immovable properties, had initially not availed ITC on construction‑related procurements in view of the express statutory bar in Section 17(5)(c) and Section 17(5)(d). Later, relying upon the decision of the Orissa High Court in Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST [2019 (25) GSTL 341], it changed its position and decided to claim such credits.

Assessee’s representation and subsequent conduct

Initial decision not to avail ITC

  • The assessee had constructed immovable properties using works contract services and construction‑related goods.
  • Conscious of the restrictions placed by Section 17(5)(c) and Section 17(5)(d), it originally did not avail ITC on such inward supplies.

Reliance on Safari Retreats and letter dated 16.08.2019

After the Orissa High Court judgment in Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST dated 17.04.2019, which read down Section 17(5)(d) in favour of assessees engaged in renting of immovable property, the assessee shifted its stance.

On 16.08.2019, it addressed a detailed representation to the jurisdictional Assistant Commissioner, stating its intention to claim ITC on:

  • Construction materials
  • Capital goods deployed in construction
  • Sanitary and plumbing materials
  • Electrical and electronic items installed in the building
  • Architecture, landscaping, construction and labour contract services
  • Works contract services (including sub‑contracts)
  • Certain selling and marketing‑related services linked to construction

In that communication, the assessee:

  • Quantified the proposed ITC claim at ₹22,51,11,167/- for April 2018 to June 2019
  • Emphasised that the claim was, in its view, within the timelines of Section 16(4)
  • Furnished invoice‑wise details through an input credit register (Annexure 1)
  • Explicitly sought approval / concurrence from the department to claim such credits

Crucially, the department did not issue any written approval or concurrence. Nor was there any express acceptance of the assessee’s position.

Expansion of ITC claim beyond the amount in the representation

Although the 16.08.2019 letter mentioned a proposed claim of ₹22,51,11,167/-, the assessee ultimately availed ITC aggregating to ₹103,45,34,884/- for the period July 2017 to July 2021, broken up as:

  • IGST – ₹21,22,00,856/-
  • CGST – ₹41,11,67,014/-
  • SGST – ₹41,11,67,014/-

Subsequently, during investigation and proceedings, the assessee reversed substantial credit under protest:

  • ₹62,83,59,982/- via DRC‑03 on 28.09.2021 for July 2017 to July 2021
  • ₹26,24,33,923/- through reversals in GSTR‑3B from August 2021 to September 2022

Total reversal: ₹89,07,93,903/-, which the adjudicating authority later appropriated against the confirmed demand.

Contents of the Order‑in‑Original

The Order‑in‑Original invoked Section 74(1) to hold that the case involved:

  • Wrongful availment of ITC on blocked credits
  • Wilful misstatement and suppression of material facts
  • Intent to evade tax through misdeclaration in GSTR‑3B

Findings on suppression and misdeclaration

The adjudicating authority recorded, inter alia:

  • The assessee availed ITC barred under Section 17(5)(c) and Section 17(5)(d).
  • Instead of reporting ineligible ITC in the correct field Table 4(D)(1) of GSTR‑3B, it declared such credit in Table 4(A)(5) (eligible ITC), thereby masking its ineligibility.
  • This manner of declaration was treated as a deliberate device to avoid departmental scrutiny, discovered only due to targeted investigation.
  • Such conduct evidenced wilful suppression and the necessary mens rea to justify action under Section 74(1).

Statutory contraventions noted

The authority held that the assessee had: