The respondents, including M/s Safari Retreats Pvt. Ltd., were engaged in constructing commercial malls and intended to let out the premises on rent. They sought to utilise accumulated Input Tax Credit (ITC) on goods and services used for such construction against their GST liability on rental income. However, the tax authorities denied the claim by invoking Section 17(5)(d) of the CGST Act, 2017, which blocks ITC on goods and services used for the “construction of immovable property” on one’s own account.

The Orissa High Court, in Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019), read down Section 17(5)(d), holding that denial of ITC where GST was payable on rental income would defeat the purpose of the GST regime. The Union of India challenged this decision, arguing that the provision was constitutionally valid and based on intelligible classification between immovable and movable property.

The Supreme Court upheld the validity of Section 17(5)(c) and (d) of the CGST Act, 2017. It ruled that ITC is a statutory, not a constitutional, right and may be restricted by legislative policy. The Court found that the differentiation between assessees constructing immovable property for sale and those constructing it for letting out has a rational nexus with the legislative objective of preventing revenue leakage.

It held that the expression “plant or machinery” in Section 17(5)(d) must be read in conjunction with the definition of “plant and machinery” in the Explanation to Section 17, and both refer to movable assets. Thus, immovable structures such as shopping malls and buildings do not qualify as “plant.”

The Court further ruled that the denial of ITC on construction of immovable property, even if intended for renting, is consistent with the scheme of GST. It overruled the Orissa High Court’s judgment and held that clauses (c) and (d) of Section 17(5) are constitutionally valid and do not violate Articles 14, 19(1)(g), or 300A of the Constitution.