Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2023)

Issue: Input Tax Credit (ITC) on construction of immovable property used for leasing

Introduction

The Goods and Services Tax (GST) system in India was created to simplify indirect taxes and to ensure a smooth flow of Input Tax Credit (ITC). However, some provisions of the law restrict ITC, especially in matters connected to immovable property. A key restriction is found in Section 17(5)(d) of the CGST Act, which disallows ITC for construction of immovable property, except when it relates to plant or machinery.

The Safari Retreats Pvt. Ltd. case raised a fundamental question: Can ITC be claimed if the immovable property is constructed not for sale, but for leasing as part of business?

Background of the Case

• Safari Retreats Pvt. Ltd., a real estate company, built a shopping mall in Bhubaneswar, Odisha.
• Instead of selling the shops, the company chose to lease them out to tenants.
• During construction, Safari Retreats paid GST on materials like cement and steel, and on services like architecture and contracting.
• The company claimed ITC on these costs, arguing that the mall was being used for a taxable business activity (leasing).

The Department rejected this claim. It relied on Section 17(5)(d), which blocks ITC for goods and services used in constructing immovable property.

Legal Question Before the Court

👉 Can ITC be claimed on construction of immovable property when the property is not sold but leased out for business use?

Arguments by Safari Retreats Pvt. Ltd.

Leasing is Business: Leasing shops is a taxable supply under GST. Since GST is paid on rental income, ITC should also be allowed on construction costs.

1. Double Taxation: Denying ITC means the company pays GST twice — once on construction materials and services, and again on rental income.
2. Purpose of GST: The entire GST framework is designed to remove cascading taxes. Blocking ITC here defeats that objective.
3. Interpretation of Section 17(5)(d): The provision should not be applied literally. It was intended to block ITC for personal use or for sale of property, not for leasing as part of business.

Arguments by the Department (Revenue)

1. Clear Bar in Law: Section 17(5)(d) clearly blocks ITC on construction of immovable property. The law must be applied as written.
2. Policy Decision: Allowing ITC in such cases would go against legislative intent. Courts should not override tax policy.
3. No Exception for Leasing: The law does not distinguish between properties meant for sale or lease. Both fall under the bar on ITC.

High Court Ruling (Orissa HC, 2019 – applicable in 2023)

The Orissa High Court supported Safari Retreats:

• Leasing is a legitimate business activity under GST.
• Denying ITC results in unjust double taxation.
• Section 17(5)(d) should be interpreted in line with the purpose of GST and not in isolation.
• Thus, ITC was allowed on the construction of the shopping mall used for leasing.

Supreme Court Developments (2023)

• The Department appealed to the Supreme Court.
• In 2023, the SC admitted the case but did not deliver a final verdict.
• Since no stay was granted, the Orissa HC judgment remains effective.
• This means businesses leasing immovable property can still rely on the HC ruling, but uncertainty remains until the SC’s conclusive decision.

Key Takeaways

1. Leasing as Business Activity: Leasing is taxable under GST, so ITC should logically apply.
2. Double Taxation Issue: Denying ITC leads to cascading taxes, contrary to GST principles.
3. Judicial Divergence: Different courts may interpret Section 17(5) differently.
4. Unsettled Law: Final clarity awaits the Supreme Court’s judgment.

📝 TL;DR – Safari Retreats Case (2023)

• Case: Safari Retreats Pvt. Ltd. built a shopping mall and leased it out to tenants.
• Dispute: Company claimed ITC on construction costs; Department denied citing Section 17(5)(d) of CGST Act.
• High Court Ruling: Orissa HC allowed ITC, reasoning that leasing is a business activity and denying ITC causes double taxation.
• Supreme Court (2023): Appeal admitted, no final ruling yet. Orissa HC decision remains in effect until SC gives a conclusive verdict.
• Impact: Businesses leasing immovable property may rely on this judgment, but legal uncertainty continues.

You can Read the Judgement Attached below;