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No input tax credit is available for rent paid on leasehold land acquired for construction of resort

January 9, 2019[2019] 101 taxmann.com 138 (AAR - WEST BENGAL)
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GST: Input Tax Credit was not available to applicant for lease rent paid during pre-operative period for leasehold land on which resort was being constructed on his own account to be used for furtherance of business, when same was being capitalised and treated as capital expenditure

• The applicant company was in the hospitality and real estate business and was contemplating a new project on a leasehold land. Bengal Housing Infrastructure Development (WBHIDCL) had leased a piece of land for a period of 32 years to the applicant. The applicant was liable to pay annual lease rent at certain rate. The project was proposed to be completed within a period of two years from the foundation of the project and the lease rent paid during the pre-operative period would be capitalized in the books of account by the applicant.

• The applicant had sought advance ruling as to whether Input Tax Credit was available for lease rent paid during pre-operative period for the leasehold land on which the resort was being constructed to be used for furtherance of business, when the same was capitalised and treated as capital expenditure.

• The moot question, therefore, is whether the lease rental paid during the pre operative period should be treated as part of the cost of goods and services received for the purpose of constructing animmovable property (other than plant and machinery) on the applicant's own account.AS10 is relevant. It says that the cost of a self-constructed asset should be determined using the same principles as for an acquired asset, and it is usually the same as the cost of constructing an asset for sale. When an immovable property like a building is sold the profit is computed after deducting from the sale proceeds the cost of the property, including the land. The cost of constructing the immovable asset, therefore, includes the lease rental paid for right to use the land on which the asset is built. Being an integral part of the cost of the immovable property the lease rental paid for the service of right to use the land is a supply for construction of the said property.

• The prohibition from availing input tax credit, as provided under section 17(5)(d), is not limited to the civil structure being constructed. It extends to the immovable property in general (other than plant and machinery), which includes the supplies received for retaining the right to use and develop the land. Such supplies are essential for construction of the civil structure on the piece of land. The applicant will admittedly capitalize the lease premium. The property is, therefore, admittedly being constructed on the applicant's own account and treated as fixed asset, including the lease rental paid. Whether the lease rental paid for the pre-operative period is capitalized under the head 'Leasehold Land' or 'Building Block' is of little significance in this context.

• Therefore, the lease rental paid during the pre-operative period should be treated as part of the cost of goods and services received for the purpose of constructing an immovable property (other than plant and machinery) on the applicant's own account. Input tax credit is, therefore, not admissible on such lease rental in terms of section 17(5)(d).

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