Facts of the Case

The petitioner, M/s V R Sundara Murthy, a sole proprietorship engaged in letting out commercial properties on rent and lease, challenged an Order-of-Adjudication dated 28.02.2025 passed by the Commercial Tax Officer under Section 73(9) of the CGST/KGST Act, 2017 for the tax period April 2020 to March 2021, along with the consequential summary in Form GST DRC-07. The dispute concerned entitlement to Input Tax Credit on a building constructed for leasing purposes. The adjudicating authority, after conducting audit proceedings under Section 65, proceeded to confirm the demand without examining whether the building could be treated as "a plant" under Section 17(5)(d) in light of the Supreme Court's ruling in Safari Retreats. The petitioner had already deposited 10% of the disputed demand.

Issues Involved

  1. Whether the authority could adjudicate under Section 73 after having itself conducted the audit under Section 65 without independent application of mind.
  2. Whether the leased-out building qualifies as "a plant" under Section 17(5)(d), entitling the petitioner to ITC per the Safari Retreats functionality test.
  3. Whether an order passed without considering this test could be sustained.

Petitioner's Arguments

  • Adjudication under Section 73 based on the same officer's own audit findings, without fresh application of mind, was impermissible.
  • The Supreme Court in Safari Retreats held that "plant or machinery" in Section 17(5)(d) is not the same as "plant and machinery" defined in the Explanation, and whether a building is "a plant" turns on the functional role it plays in the assessee's business.
  • This functionality test was never applied to the petitioner's leased building despite being raised in the reply dated 26.12.2024.
  • An identical order in W.P. No.4835/2025 had already restored similar proceedings for reconsideration.

Respondent's Arguments

  • The State and Union respondents, represented by the HCGP and CGC, did not seriously contest that the Safari Retreats functionality test remained unexamined.
  • No independent substantive defence was advanced beyond supporting the impugned adjudication order and summary.

Court Order / Findings

  • The Court observed that, following Safari Retreats, it had become imperative for the Assessing Officer to specifically decide whether the leased building fell within "a plant" under Section 17(5)(d) before confirming any demand.
  • Since the first respondent had not considered this jurisdictional and factual question at all, the Court quashed the adjudication order and DRC-07 summary and restored the proceedings for fresh consideration in light of Safari Retreats and other grounds urged.
  • The petitioner was directed to appear on 07.07.2025 without further notice, with liberty to file additional replies and documents; the 10% amount already deposited was to be retained pending fresh adjudication.

Important Clarification

  • Post-Safari Retreats, whether a building is "a plant" under Section 17(5)(d) is a fact-specific functionality inquiry tied to its role in the registered person's business, not a blanket bar on ITC for all buildings.
  • Adjudicating authorities must expressly apply this test before denying ITC on immovable property used for renting or leasing.
  • Failure to do so renders a Section 73 order unsustainable and liable to be set aside for reconsideration.

Sections Involved

  • Section 73(9), CGST/KGST Act, 2017 – determination of tax not paid or short paid for reasons other than fraud.
  • Section 17(5)(d), CGST Act, 2017 – blocked ITC on construction of immovable property, subject to the "plant or machinery" exception.
  • Section 65, CGST Act, 2017 – audit of registered persons.
  • Rule 142, KGST Rules, 2017 – issuance of summary of orders in Form DRC-07.

Decision – In Favour of

Disposed of with directions, in part in favour of the assessee — the adjudication order was quashed and the matter remitted for fresh consideration applying the Safari Retreats test, with the pre-deposit retained pending outcome.

Case Details

High Court of Karnataka at Bengaluru; WP No. 15596 of 2025 (T-RES); Coram: Hon'ble Mr Justice B M Shyam Prasad; Date: 04.06.2025.

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