In Munjaal Manishbhai Bhatt vs. UOI, the Appellant had entered into an agreement for the purchase of land from a developer and the construction of a building on the same land. Separate consideration was agreed upon for both the elements of the transaction. The Appellant filed a writ application before the Gujarat High Court on the grounds that Paragraph 2 of Notification No.11/2017 – Central Tax dated 28th June 2017 was ultra vires the provisions of the Goods and Services Tax Act, 2017. Paragraph 2 of Notification No.11/2017 states that the value of supply, in case of transfer of property in land or an undivided share in the land, would be the total amount charged for such supply reduced by the value of the land. The value of land is deemed to be one-third of the total amount of supply.
The Appellant contended that the deeming provision of the value of land to be calculated as one-third of the total amount of supply was ultra vires the statutory provisions of the law when the actual value of land was ascertainable. The High Court held that the application of such a mandatory uniform rate of deduction was discriminatory, arbitrary, and violative of Article 14 of the Constitution of India which stated that all of the rights and freedoms set out in the Act must be protected and applied without discrimination. Where the value of land was clearly ascertainable or where the value of construction can be derived with the prescribed valuation rules, such deduction can be permitted at the option of a taxable person. The High Court held that the deeming fiction prescribed under the said notification was ultra vires and not mandatory.
Let’s assume that the value of land is Rs.5,00,000/- and after construction, the apartment constructed on top of the land is Rs.10,00,000/-. Applying the provisions of Notification No.11/2017, the value of supply for the transfer of the apartment would be Rs.6,66,667/- (Rs.10,00,000 – 1/3rd of 10,00,00).
However, if the said notification was not applied and the value of land which was ascertainable was used for the calculation of the value of supply then the value of supply would be Rs. 5,00,000 /-(Rs.10,00,000 – Rs.5,00,000).
The aforesaid judgement by the High Court has held that deeming fiction of reducing 1/3rd of the value of land was unnecessary and arbitrary. The High Court held that “when the value of land was ascertainable then the same could be used for calculating the value of supply. “