Munjaal Manishbhai Bhatt GST Case (2022) – Gujarat High Court on 1/3rd Land Deduction Validity

Munjaal Manishbhai Bhatt GST Case: One of the long-debated issues under GST has been the valuation of under-construction property. As per Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, read with para 2 of the same notification, where construction services involve transfer of land or undivided share of land, the law deemed 1/3rd of the total consideration as land value. The balance 2/3rd was subjected to GST at 18%.

In Munjaal Manishbhai Bhatt vs. Union of India [2022 (5) TMI 397 – Gujarat High Court], the validity of this deeming fiction was challenged on constitutional and statutory grounds.

Facts of the Munjaal Manishbhai Bhatt GST Case

• The petitioner entered into an agreement (29.09.2020) with Navratna Organisers & Developers Pvt. Ltd. for purchase of a plot of land in Ahmedabad and construction of a bungalow on it.
• The agreement had separate consideration for:
  1. Sale of land
  2. Construction of bungalow
• As per the agreement, the petitioner agreed to pay GST only on the construction portion.
• The developer insisted that GST was payable on the entire value (land + construction), after deducting 1/3rd towards land as per Notification 11/2017-CT(R).
• The dispute arose on whether such mandatory 1/3rd deduction was constitutional and in line with the CGST Act.

Points of Dispute

1. Whether the mandatory 1/3rd deduction for land value under Notification 11/2017 is ultra vires the CGST Act.
2. Whether the notification is arbitrary and violative of Article 14 of the Constitution.
3. Whether tax can be levied on land, which is expressly excluded under Schedule III of the CGST Act.

Submissions by the Petitioner

• Land not taxable under GST:
  • As per Section 7(2) read with Schedule III, sale of land is neither supply of goods nor services.
  • Delegated legislation cannot override this.
• Separate consideration available:
  • Since land and construction had distinct values, actual consideration for land must be excluded.
• Deeming fiction arbitrary:
  • Uniform 1/3rd deduction irrespective of land size, location, or value is arbitrary.
• Reliance on Delhi HC ruling in Suresh Kumar Bansal (2016):
  • Valuation of land cannot be determined by way of abatement in notification unless provided in statute.

Submissions by the Revenue

• Section 15(5) CGST Act:
  • Government has power to notify valuation methods on GST Council’s recommendation.
  • Para 2 of Notification 11/2017 is within this power.
• Support from Supreme Court rulings:
  • Narne Construction (2012) – Sale of developed land is not mere sale of land.
  • VKC Footsteps (2021) – Courts cannot interfere with valuation formulas unless they are unworkable or absurd.
• Justification:
  • 1/3rd abatement ensures uniformity and prevents manipulation in land valuation.

Findings of the Gujarat High Court

1. Scope of taxation under GST:
   • GST applies only on construction services.
   • Land, whether plain or developed, is outside GST (Schedule III).
2. Valuation principles:
   • Section 15(1) mandates valuation based on actual transaction value where available.
   • Deeming fiction applies only when actual land value is not ascertainable.
3. Ultra vires nature of 1/3rd deduction:
   • The mandatory formula applies irrespective of actual land value.
   • Arbitrary standard with no link to actual valuation.
   • GST Council minutes show 1/3rd deduction was contemplated only for flats (undivided share of land), not for independent plots.
4. Violation of Article 14:
   • Uniform deduction ignores differences in land value across locations.
   • Arbitrary classification results in discrimination.
5. Distinction from VKC Footsteps case:
   • In VKC Footsteps, the formula was provided in statute.
   • Here, the 1/3rd deduction contradicts Section 15.

Conclusion and Judgment

The Gujarat High Court held that:

• Mandatory application of 1/3rd deduction is ultra vires the CGST Act and violative of Article 14.
• The deeming fiction can be applied only at the option of the taxpayer, when actual land value is not ascertainable.
• Para 2 of Notification 11/2017-CT(R) was read down accordingly.

Practical Impact on Real Estate and Buyers

• Relief to buyers: GST not payable on artificially inflated value (land + construction). Only actual construction value is taxable.
• Developers’ compliance: Must segregate land and construction values clearly in agreements.
• Legal clarity: Notification-based formulae cannot override statutory provisions.
• Litigation impact: Strengthens challenges against arbitrary deeming provisions.

Key Takeaways

1. Land is outside GST scope – valuation cannot artificially include land.
2. 1/3rd standard deduction invalid – applies only where actual land value is unascertainable.
3. Delegated legislation limited – cannot override Section 15 of CGST Act.
4. Article 14 violation – uniform formula ignoring actual conditions is unconstitutional.

Why This Case Matters

This ruling is a landmark in GST real estate taxation, ensuring that GST applies only on construction services and not on land. By reading down the deeming fiction, the Court reaffirmed that delegated legislation cannot expand taxability beyond the Act.

It provides relief to homebuyers and developers involved in bungalow and plot sales, where land value is clearly ascertainable, and sets a precedent for future challenges against arbitrary valuation methods.