The ruling, issued by a bench comprising Justices Abhay S. Oka and Sanjay Karol, cements the principle—according to experts—that ITC cannot be denied merely because the construction involves immovable property, especially when such construction is integral to business operations.
Earlier, the Supreme Court had held that the functionality test and essentiality test must be applied to determine the eligibility of ITC. This means that if a constructed asset is functionally necessary and essential for making taxable supplies, such as leasing commercial property, ITC should not be denied solely because the asset is immovable.
The dismissal of the review petition is being viewed as a major relief for sectors like real estate, infrastructure, hospitality, and leasing, where blocked credit provisions have significantly increased project costs and disrupted tax planning.
Experts speak
Commenting on the development, Abhishek A Rastogi, Founder of Rastogi Chambers, who represented nearly a dozen petitioners in similar matters before the Supreme Court, welcomed the decision.
“The dismissal of the review petition filed by the revenue in the Safari Retreats case is a significant affirmation of the legal position that input tax credit cannot be denied merely on the ground of its use in the construction of immovable property, particularly when such construction is intended for further business use such as leasing. With the review now conclusively dismissed, the matter tilts strongly in favour of the taxpayers.”
Rastogi emphasised that the intent behind GST was to provide a seamless flow of credit and that denying ITC in such cases would contradict the very foundation of the tax structure.
“A narrow and restrictive interpretation of the GST credit provisions defeats the core objective of GST. While the retrospective amendment seeks to modify certain definitions, it cannot override constitutional protections or judicial interpretations already settled by the apex court,” Rastogi said.
Similarly, Abhishek Jain, Indirect Tax Head & Partner, KPMG, said, “The Supreme Court’s rejection of the review petition in the Safari Retreats case puts to rest any doubt around its key findings, especially the broader view on what qualifies as plant and machinery, and the restriction not applying on procurements made for own account.
With that settled, what now becomes crucial is how courts view the retrospective amendment brought in by the Government to offset a significant part of this decision.”
However, experts also pointed to a complication. While the Supreme Court’s judgment aligns with industry expectations of a seamless credit flow for taxed output, the retrospective amendment in the last budget has undermined that clarity. Instead of bringing tax certainty, the dismissal of the review petition may lead to further litigation, with the industry expected to challenge the retrospective amendment—thus prolonging the uncertainty.
Saurabh Agarwal, Tax Partner at EY, said, “While the Supreme Court’s judgment on input tax credit aligns with the industry’s logical expectation – that credit should flow seamlessly when output is taxed – the recent retrospective amendment in the last budget unfortunately negates this clarity.
This development, therefore, doesn’t bring the anticipated tax certainty. Instead, it’s highly probable that after this development industry will now challenge the retrospective amendment made in terms of last budget, prolonging the uncertainty we all hoped to avoid.”
Industry impact
This ruling carries widespread implications across industries investing heavily in infrastructure and real estate for business use. Developers constructing malls, office spaces, hotels, and industrial parks for leasing or commercial purposes can now revisit their GST positions with renewed confidence.
By clarifying that ITC is not automatically blocked for immovable property, the ruling reduces litigation risk and opens up possibilities for cost savings and credit optimisation. Businesses that had written off credit or were engaged in disputes may now reassess their positions in light of the Supreme Court’s clear stance.
What taxpayers should do now
Taxpayers are advised to take the following steps in light of the ruling and the dismissal of the revenue’s review petition:
- Review existing transactions: Re-examine ongoing and past projects where ITC was denied or left unclaimed due to blocked credit provisions.
- Apply the functionality and essentiality tests: Evaluate whether the asset is directly linked to taxable output and essential for business operations.
- Document business use: Maintain robust documentation to establish that the property is used for business purposes (e.g., lease agreements, business models, usage reports).
- Seek refunds or reclaims where applicable: In cases where ITC was disallowed, explore possibilities for refunds or credit reclaims.
- Engage in proactive representation: In ongoing departmental disputes, use this Supreme Court precedent to support your position.
“It is now critical for taxpayers to examine the nature of their business activity and how constructed property is used. The phrase ‘on his own account’ must be interpreted in a manner that allows credit when construction is clearly for furtherance of business. Courts have already recognised this nuance, and administrative authorities must now align accordingly,” Rastogi explained.
“The Supreme Court’s refusal to entertain the review brings much-needed legal certainty and economic relief. Taxpayers should assert their rightful claims backed by this landmark judicial precedent and a purposive reading of the GST law,” he concluded.
As the ruling gains traction, it is expected to influence departmental practices and taxpayer strategies for years to come, re-establishing the foundational GST principle of seamless credit flow.