ITC on Construction of Commercial Buildings for Leasing: Landmark Supreme Court Ruling Overturned by Retrospective Amendment to Section 17(5)(d)
The Safari Retreats Pvt Ltd V/s. Chief Commissioner of CGST case is a landmark in clarifying the availability of Input Tax Credit (ITC) for leasing-based business models under GST. The dispute arose when ITC on GST paid for constructing a commercial building meant exclusively for leasing was denied under Section 17(5)(d) of the CGST Act, which blocks credit on immovable property. The Orissa High Court ruled in favour of the taxpayer, holding that denying ITC where the output supply is taxable breaks the GST credit chain. On appeal, the Supreme Court upheld the constitutional validity of the blocking provision but narrowed its application by introducing the “functionality test,” stating that a building could qualify as “plant” if it is integral to making taxable supplies, such as leasing. The matter was remanded for factual examination, and a subsequent review petition was dismissed. Later, the Finance Act, 2025 retrospectively amended Section 17(5)(d), reinforcing legislative intent. The case highlights the evolving interplay between courts, administration, and lawmakers in GST interpretation.
Brief background of the case:
A company constructed a commercial property with the sole intention of leasing it out, which is a taxable supply under GST.
GST was paid on inputs and input services used for construction, and the company claimed ITC against its output tax liability on rental income.
The tax department denied ITC by invoking Section 17(5)(d) of the CGST Act, which blocks credit on construction of immovable property.
Proceedings before the Orissa High Court:
The company approached the Orissa HC challenging the denial of ITC.
The HC ruled in favour of the taxpayer, holding that where output supply is taxable and the tax chain is intact, denial of ITC defeats the very objective of GST.
Appeal before the Supreme Court:
The department carried the matter to the SC.
The SC upheld the constitutional validity of Section 17(5)(d) but clarified its scope.
The Court introduced the “functionality test”, observing that in certain factual situations, even a building could qualify as “plant” when it is integral to the business of making taxable supplies such as leasing.
The matter was remanded for factual examination based on this test.
Review proceedings:
A review petition was filed by the Finance Dept.
The SC dismissed the review,
Subsequent legislative development:
Through the Finance Act, 2025, Section 17(5)(d) was amended retrospectively, substituting the words “plant or machinery” with “plant and machinery”.
The Safari Retreats litigation highlights how judicial interpretation, administrative response, and legislative action interact in shaping GST law.
For taxpayers and professionals alike, the case underscores the importance of careful fact analysis, especially where immovable property is used as a core business tool for making taxable supplies.
Author Bio
Sir,
What is your opinion on validity of retrospective amendment to S.17(5)(d) & adding explanation.
CA Om Prakash Jain s/o J.K.Jain, Jaipur
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