Deepak Singh*
Source: LawChakra
The Gujarat High Court at Ahmedabad in R/Special Civil Application No. 11345 of 2023 titled ‘Gujarat Chamber of Commerce and Industry & Ors. Versus Union of India & Ors.’ recently concluded that the Goods and Services Tax is not applicable on the assignment of
leasehold rights by the lessee in favour of the assignee. The rendition of this position by the High Court has burned a hole in state exchequer and State Tax Authorities which hitherto could raise a tax demand arising from such transaction is now barred from doing so, in light of the aforesaid judgment. The High Court while traversing the issue erroneously equated the assignment of leasehold rights to outright sale under the Transfer of Property Act, 1882 (‘T.P Act’) thereby bringing the assignment within the purview of Schedule III appended to Section 7 of the Goods and Services Tax Act. 2017 (‘GST Act’) which excludes the requirement of imposition of tax on ‘sale of land and building’. The after effect of the ratio has a rippling ramification on the state exchequer as well as on similar transactions such as transferring development rights in real estate projects.
INTRODUCTION
The Gujarat High Court at Ahmedabad in Gujarat Chamber of Commerce and Industry v Union of India recently concluded that the Goods and Services Tax is not applicable on the assignment of leasehold rights by the lessee in favour of the assignee. While traversing the issue, the Court equated the assignment of leasehold rights to outright sale under the Transfer of Property Act, 1882 (‘T.P Act’) thereby bringing the assignment within the purview of Schedule III appended to Section 7 of the Goods and Services Tax Act. 2017 (‘GST Act’) which excludes the requirement of imposition of tax on ‘sale of land and building’. It reasoned that the assignment of leasehold rights along with building constructed thereon on land is an immovable property and thus profit à prendre. In other words, absolute transfer of leasehold rights in immovable property without any incident left with the lessee has been compared with an outright sale. I argue that the rendition of this position by the High Court is wrong in law, and has the consequence of burning a hole in state exchequer by exempting such transactions from the purview of taxation.
FACTS LEADING TO THE JUDGMENT
The Gujarat Industrial Development Corporation (‘GIDC/lessor’) is a nodal agency for the purpose of development of industrial estates, which leases industrial plots for 99 years to industrial entities under a licensing and lease deed framework. The lease deed also permits the allottee/lessee to further assign the leasehold rights and interest in the plot to any other persons subject to approval of GIDC. After acquiring such plots, several lessees transferred or assigned their leasehold rights to third parties. As several corporations were allocated the land, the author would only take a reference to one entity to demonstrate the point. M/s Imperial Engineers was allocated a parcel of land by the GIDC for 99 years which further assigned the entire leasehold rights to Shri. Chandubhai Jerambhai Makwana (Second Party/Assignee) for a consideration for the residue period of 99 years. In other words, it means that the lessee transferred the absolute rights in the leasehold to assignee for the residue period which is left out of 99 years. Thereafter, in the post-GST regime, the State Authorities initiated proceedings by issuing show cause notices/summons to the corporations who had assigned the leasehold rights to show cause as to why GST at the rate of 18% should not be levied on such transactions, in light of provisions enunciated under the new GST regime which categorically includes lease as a taxable event. Being aggrieved by the show cause notices, the corporation and more particularly GCCI approached the High Court against the show cause notices/summons issued by the tax authorities primarily on the ground thatthe imposition of GST on assignment of leasehold rights by the lessee in favour of a third party would be tantamount to double taxation and is excluded from the purview of the GST Act.
ERRONEOUS DICTA RENDERED BY THE HIGH COURT
It is argued that the High Court approached the matter through a microscopic view for four reasons. First, it is a trite law that a taxing statue is to be construed strictly in light of the pronouncement of Hon’ble Supreme Court in Ajmera Housing Corporation & Anr. Etc. vs. CIT which categorically laid down that Courts should not show anxiety to read into taxing statute. The High Court, however, wrongly imported the definition of other statutes such as T.P Act in GST Act as a guiding light to determine whether absolute assignment of leasehold rights along with buildings constructed would amount to immovable property under the GST Act or not. Such importation of definition from other statute has the effect of converting the absolute assignment of leasehold rights in an immovable property into sale as has been laid down by the Hon’ble High Court in the instant case. Section 2 (102) of the GST Act prescribed that “anything other than goods” is service. Therefore, if the assignment of leasehold rights is not covered under the definition of ‘Goods’, then it is clearly covered under the definition of ‘services’ as enunciated under the provisions of GST Act. Thus, the legislature was conscious of the definition of the service and could have excluded the imposition of service tax on immovable property, considering that the legislature was well aware of the existence of the Finance Act, 1994. I argue that nothing stopped the legislature from doing so.
Second, the High Court has considered the assignment of leasehold rights as an outright ‘sale’ of an ‘immovable property’. The High Court has treated the assignment of leasehold rights as equivalent to an outright sale under Section 54 of the Transfer of Property Act, 1882. This conclusion is based on the reasoning that an absolute assignment of leasehold rights involves the complete transfer of all rights and liabilities of the lessee to the assignee, thereby fully divesting the original lessee of any interest in the property. The Court further observed that leasehold rights constitute benefits arising out of land and can be likened to a profit à prendre – that is, a right to derive profit from another’s land, such as by extracting a portion of the soil or its produce. As such, leasehold rights are regarded as immovable property in law. In the present case, the assignment not only included the leasehold interest in the land but also encompassed the building constructed on the land and all ancillary attachments. As a result, the transaction amounted, in substance, to a transfer of the entire interest in the immovable property. Accordingly, the Court concluded that the transaction bore the essential characteristics of a sale under Section 54. In other words, absolute transfer of a leasehold rights by a lessee is equated to sale of an immovable property.This was done because Schedule III appended to section 7 of the GST Act which excludes the ‘sale of land and building’ from the purview of taxing statute. The author argues that the concept of profit à prendre is only pertinent to determine whether a particular property or rights is registrable under the T.P Act or not; not for the purpose of whether service tax can be levied under the GST Act. Further, the lessee is merely transferring his rights in the land to the assignee which was hitherto being enjoyed by him and nothing more.
The reliance of the High Court on Anand Behra vs. State of Orissa is also erroneous (para 79). The Hon’ble Supreme Court in the above-mentioned case had held that the ‘right to catch fish’ is a benefit arising out of land and thus immovable property. Juxtaposing the aforementioned case where the ‘right to catch fish’ was effected by the owner itself, in the instant case, only an owner i.e. GIDC has the right to effect absolute sale of land which is buttressed by the maxim that “a lessee cannot give what he does not have”. The GIDC, in the present case has not effected any transfer. The author argues that transfer of an ‘interest’ in favour of a third person, which is recognized by many chapters of the T.P Act cannot be equated with ‘sale’ under section 54 of T.P Act whereby the owner sells it absolutely without any incidents left with the seller. In the present case, the land would revert to the GIDC/Lessor, in case of breach of any incidents of the contract unlike sale of land. The GIDC merely transferred right i.e. right to occupy and enjoy the land.
To drive this point home, it is important to understand that the right acquired by the lessee is not ownership, because in its nature it is restricted. It is the characteristics of a right in re aliena as opposed to ownership. These restricted rights are in the T.P Act called ‘interest’. For example, it is an interest which a mortgagee acquires (Section 58 of T.P Act). The lessee is said to have an interest in the property (Section 108 (j) of T.P Act). Therefore, what the lessee is transferring by way of an assignment is his interests in the property and nothing more.
Third, the assignment of leasehold rights is merely an incident of lease only, not sale as held in Venkataswmay vs. Rani Kathama Natchiar Mad. H.C., 227. Thus, the assignment is also sufficiently covered under Schedule 2, Cl. 2 (a) (b) as Cl. 2 (a) includes any lease or letting out the building including a commercial, industrial or residential complex for business or commerce etc. Further, the assignment of leasehold rights is an incident of ‘lease’ or ‘tenancy’ and even after the transfer of leasehold right, the transaction can still be labelled as a lease or tenancy and thus covered by Schedule I to Section 7 of the GST Act as a supply of service.
Lastly, the High Court did not give due consideration to Heading 9972 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 which exempted one-time transactions such as a lease executed by an Industrial Undertaking of a state in favour of another entity. Thus, it exempts the first transaction from any kind of GST i.e. allotment of land by GIDC to corporate entities. However, it does not apply to the second transaction when the lessee transfers his leasehold rights absolutely in favour of a third party/assignee as laid down in Goa Appellate Authority for Advance Ruling in Advance Ruling No. Goa/GAAR/4 of 2018-2019/2429 dated 02.10.2018.
CONCLUSION
The H.C dicta has barred tax authorities from raising any tax claims in respect of assignment of lease hold rights, which burns a hole in the state exchequer. The judgment affects similar transactions, such as transferring development rights in real estate projects. If such rights are considered benefits arising from land, they could be claimed as exempt from GST based on this decision, reducing tax costs for developers. There is also a prevalence of ambivalence amongst the High Courts on the pertinent question: whether the transfer of leasehold rights can be regarded as sale of land and comes under the ambit of supply of service not. The High Court of Telangana in the case of Prahitha Construction Private Limited Vs. Union of India pronounced that transfer of leasehold rights cannot be regarded as sale of land and comes under the ambit of supply of service. The Bombay High Court seems to have differed from the Telangana High Court in M/s Panacea Biotech Ltd. Vs. Union of India, where it remitted the issue of imposition of GST on assignment of leasehold rights to the authorities to consider it anew in light of Gujarat Chamber of Commerce and Industry (supra). In other words, the tax authorities of Union of India and State Government would now be bound by the dicta pronounced in the GCCI matter. To undo this, the State of Gujarat has preferred a Special Leave Petition (Civil) against the Judgment and Final Order of the Gujarat High Court which is pending consideration of the Hon’ble Supreme Court. It is hoped that that a definite judgment by the Hon’ble Supreme Court on this issue would clear the doubt and settle the law in light of contrary views taken by many High Courts.
* Deepak Singh is a graduate of NLU Odisha (B.A LL.B (Hons.). He is currently working with the State of Gujarat and an Advocate at the Supreme Court of India.
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