An industrial entity holding a plot allotted by the Gujarat Industrial Development Corporation on a 99-year lease assigns its leasehold rights in the land and building to a third-party assignee for a lump-sum consideration. Does this assignment amount to a supply of service under the GST framework, or is it a transfer of an interest in immovable property?
The issue arose before the Gujarat High Court in Gujarat Chamber of Commerce and Industry v. Union of India1, where the tax authorities sought to levy GST at 18% on consideration received for the assignment of long-term leasehold rights. The High Court held that such an assignment was not covered within the scope of supply and that GST could not be levied on the consideration paid by the assignee to the assignor.
The ruling gained wider significance when the Supreme Court, by its order dated 21 July 2026 in Union of India v. Gujarat Chamber of Commerce and Industry2, dismissed the Union of India’s Special Leave Petitions making it a persuasive precedent on the GST treatment of comparable assignments of industrial leasehold rights.
When Assignment Transfers the Leasehold Interest Itself
The dispute arose from the structure under which GIDC develops and allots industrial land in Gujarat. GIDC acquires land, develops industrial estates and provides supporting infrastructure such as roads, water supply, street lighting and drainage. Industrial plots are then allotted to eligible entities on long-term leases, ordinarily for 99 years.
The allottee initially enters into a licensing agreement with GIDC for setting up an industrial unit. Once the conditions of allotment are fulfilled, GIDC executes a registered lease deed in favour of the allottee-lessee. The lease deed permits the lessee to assign its leasehold rights and interest in the plot to another person, subject to GIDC’s approval.
After the GST regime came into force on 1 July 2017, the tax authorities issued summons and show-cause notices to entities that had assigned their leasehold rights in GIDC plots. GST at 18% was proposed on the lump-sum consideration received from the assignees. Gujarat Chamber of Commerce and Industry and several affected entities challenged these proceedings before the Gujarat High Court.
The Revenue’s case rested primarily on the breadth of the expression “supply” under Section 7 of the Central Goods and Services Tax Act, 2017. Section 7(1)(a) includes all forms of supply of goods or services, such as sale, transfer, barter, exchange, licence, rental, lease or disposal, when made for consideration in the course or furtherance of business.
Section 2(102) defines “services” to mean anything other than goods, money and securities. Since leasehold rights were neither goods, money nor securities, the Revenue argued that their assignment fell within the definition of services. It was also contended that the exclusion under Entry 5 of Schedule III was confined to the sale of land and building and did not expressly refer to the assignment of leasehold rights.
The assessees contended that this approach ignored the legal character of the rights being transferred. A lease under Section 105 of the Transfer of Property Act, 1882 is a transfer of a right to enjoy immovable property. The lessee therefore holds an interest arising from land. When the entire leasehold interest is assigned to a third party, the assignor does not merely permit the assignee to use the property. It transfers the whole of the interest that it possesses for the remaining term of the lease.
The distinction between an assignment and a sublease was therefore central to the legal issue. In a sublease, the original lessee creates a subordinate interest while retaining its own reversionary interest in the property. The original lessee continues to occupy a legal position between the lessor and the sublessee and may continue to earn rent from the transaction.
An assignment operates differently. The lessee transfers the whole of its remaining leasehold interest. The third-party assignee becomes the lessee in place of the original allottee-lessee and assumes the rights and obligations attached to the lease. The assignor does not retain an interest from which a continuing service can be supplied.
The High Court relied upon the understanding of assignment recognised in Gopal Saran v. Satyanarayana3. Assignment was described as the transfer or making over to another of the whole of any property, estate or right. The Court considered this principle consistent with the transaction before it because the lessee-assignor transferred the leasehold rights and severed its legal relationship with GIDC, while the assignee took its place as lessee.
The Court also considered the legal meaning of immovable property. Section 3(26) of the General Clauses Act, 1897 includes land, benefits arising out of land and things attached to the earth within the expression “immovable property”. In Sri Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co.4, the Supreme Court had recognised that every interest in immovable property or benefit arising out of land may itself constitute immovable property.
Applying these principles, the Gujarat High Court held that leasehold rights were not merely contractual or commercial rights detached from the land. They represented benefits arising out of immovable property. Their outright assignment therefore amounted to the sale or transfer of those benefits by the lessee-assignor to the third-party assignee.
The Court also addressed the Revenue’s reliance on Schedule II. Paragraph 5(a) of Schedule II treats renting of immovable property as a supply of service. The Court found that an outright assignment could not be equated with renting or subleasing. The assignor was not granting a limited right of use while retaining the leasehold estate. It was transferring its entire interest for consideration.
The High Court further distinguished the initial allotment of an industrial plot by GIDC from its subsequent assignment by the lessee. Entry 41 of Notification No. 12/2017 exempts the one-time upfront amount charged for granting a long-term lease of 30 years or more of an industrial plot by a State industrial development corporation or undertaking.
The Court accepted that this exemption did not directly govern a subsequent assignment by a private lessee because the lessee was not a State industrial development corporation. The assignment was nevertheless outside GST for a different reason. It was a transfer of an interest in immovable property and not the provision of a leasing, renting or subleasing service.
The High Court also recognised a distinction between the consideration paid to the assignor and any transfer fee collected by GIDC. GIDC may charge an amount for granting permission to transfer the plot. Such permission may constitute a service supplied by GIDC. The lump-sum consideration paid by the assignee to acquire the assignor’s leasehold rights, however, represented the value of the rights transferred and not consideration for GIDC’s approval.
The Court ultimately held that an assignment by sale and transfer of leasehold rights in a GIDC plot, together with the building, constituted the assignment, sale or transfer of benefits arising out of immovable property. The third-party assignee became the lessee of GIDC in place of the original allottee-lessee.
Consequently, Section 7(1)(a), paragraph 5 of Schedule II and Entry 5 of Schedule III could not be applied to treat the transaction as a taxable supply of service. GST under Section 9 was therefore not leviable. The Court also held that no question of utilising input tax credit arose because there was no GST liability on the assignment itself. The show-cause notices, original orders and appellate orders under challenge were quashed and set aside. A request made on behalf of the State to stay the operation of the judgment was also rejected.
The Union of India challenged the judgment before the Supreme Court. On 21 July 2026, the Supreme Court condoned the delay and recorded that it had already dismissed a similar Special Leave Petition, SLP (C) No. 18772 of 2026, on 22 May 2026. In view of that earlier dismissal, the Court dismissed the connected SLPs arising from the Gujarat High Court judgment.
Conclusion
The Gujarat High Court’s judgment establishes that the GST treatment of a leasehold transaction cannot be determined merely from the presence of the word “lease”. The decisive inquiry is into the nature and extent of the rights transferred.
Renting and subleasing involve the provision of a right to use immovable property while the supplier retains an interest. An outright assignment is materially different. Where the lessee transfers the whole of its remaining leasehold rights and the assignee becomes the lessee in its place, what passes is a benefit arising out of immovable property rather than a service supplied by the outgoing lessee.
Citation
Expositor(s): Adv. Jahnobi Paul
