Vintage Cars, Taxation & Compliance: Lessons from Narendra I. Bhuva v. ACIT (Bombay HC, 2025)

By CA Surekha 

Cars are more than vehicles — they’re lifestyle assets, investments, and sometimes even objects of pride. But for tax purposes, the law draws a sharp distinction between personal effects, capital assets, and business-use vehicles. Recent judicial rulings highlight that misclassification can lead to costly mistakes.

A landmark decision by the Bombay High Court in Narendra I. Bhuva v. ACIT [2025] 177 taxmann.com 540 clarifies how vintage cars are treated under Indian tax law, and the conditions under which they qualify as personal effects.

The Case: Narendra I. Bhuva v. ACIT

• The assessee, a salaried employee with income from house property and dividends, purchased a vintage car for ₹20,000 and later sold it for ₹21 lakhs.

• He claimed the car as a personal effect, exempt from capital gains tax.

• The AO disagreed and taxed the gain as business income.

• CIT(A) sided with the assessee, treating the car as personal.

• ITAT reversed, and the matter reached the Bombay High Court.

High Court’s Findings

• Under Section 2(14) of the Income-tax Act, “capital asset” excludes personal effects (movable property for personal use, excluding jewellery, etc.).

• Mere capability of personal use does not prove personal use.

• To qualify as personal effect, there must be intimate connection with personal life and actual usage evidence.

In this case, the assessee:

• Used his company’s car for commuting.

• Never parked the vintage car at his residence.

• Couldn’t show maintenance or running costs.

• Admitted the car was purchased out of pride, not for use.

Conclusion: Since no evidence of personal use was furnished, the vintage car was not a personal effect. The gain on sale was taxable under Capital Gains.

Broader Learnings for Car Owners

This ruling clarifies that:

1. Vintage or luxury cars are not automatically “personal assets.”

2. Evidence of actual personal use is critical — parking at residence, maintenance bills, insurance, or logbooks.

3. Lifestyle purchases made for pride, status, or investment are generally treated as capital assets, taxable on sale.

Regulatory Compliance Beyond Taxes

1. Fitness Certificates

   • Cars >15 years old require periodic renewal of fitness certificate unless registered as vintage.

2. Vintage Vehicle Policy, 2021

   • Cars >50 years old can be registered as vintage.

   • Permitted for rallies, exhibitions, leisure drives.

   • Not allowed for daily commuting or commercial use.

3. Insurance

   • Usage must align with insurance policy — a vintage car insured for leisure use cannot be used for regular travel.

Tax Planning: Smart vs. Risky

Legitimate Planning

• Claim depreciation & expenses only for business-registered cars with evidence of usage.

• For mixed-use vehicles, maintain logbooks and claim proportionate deductions.

• Register vintage cars correctly and restrict use as per policy.

• On sale, apply capital gains computation with indexation, not blanket exemptions.

Risky / Evasion-Prone Moves

• Claiming personal luxury/vintage cars as business assets.

• Treating investment cars as “personal effects” without evidence.

• Ignoring compliance under Motor Vehicles Act (fitness/vintage certification).

Compliance Checklist for Car Lovers & Professionals

• Renew fitness certificate for cars >15 years old.

• If car is >50 years, register under Vintage Vehicle Policy, 2021.

• Maintain logbooks, bills, insurance records to establish usage.

• Treat personal-use cars separately — don’t mix with business accounts.

• Ensure correct perquisite reporting if employer provides a car.

• On sale, classify correctly under Capital Gains (personal asset) or Business Income (business asset).

The Narendra I. Bhuva (2025, Bombay HC) ruling underscores a vital principle: “ownership alone is not proof of personal use.” Vintage or luxury cars, unless backed by evidence of personal usage, are treated as capital assets, and gains on sale are taxable.

For car lovers and professionals, the lesson is clear:

• Enjoy your cars, but respect the law.

• Keep your tax planning clean, evidence-backed, and compliant.

• Avoid the trap of claiming exemptions where they don’t exist — what may seem like planning can quickly be viewed as tax evasion.

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Advisory on Form MGT-7 Certification under MCA V3 Portal

The Ministry of Corporate Affairs (MCA) has recently rolled out the updated annual filing forms on the MCA-21 V3 portal, bringing a significant change in the certification mechanism of Form MGT-7 (Annual Return).

Legal & Regulatory Background

• Section 92 of the Companies Act, 2013 mandates every company to prepare an annual return in Form MGT-7.

• Rule 20 of the Companies (Management and Administration) Rules, 2014, read with subsequent amendments, prescribes certification of the annual return in certain cases through Form MGT-8 by a practicing Company Secretary.

• Pursuant to the Companies (Management and Administration) Amendment Rules, 2025, the certification portion of Form MGT-8 has been integrated within Form MGT-7 on the MCA V3 portal. This integration means that certification is now captured as a static field within the e-form itself.

Key Procedural Update under MCA V3

• Earlier, Form MGT-8 was filed as a separate attachment. Now, the certification is embedded directly within Form MGT-7.

• Any qualifying remarks or disclosures can be inserted in the ‘Optional Attachment’ section of Form MGT-7, with specific reference to the embedded certification.

• While MCA has enabled this structural change, practical compliance requires additional care by professionals to safeguard credibility and due diligence.

Advisory for Professionals

Until MCA issues further clarification or amends the form structure, Company Secretaries in practice are advised to:

1. Continue to issue a full-fledged MGT-8 certification on their letterhead.

2. Ensure that the certifying PCS is from a peer-reviewed practice unit as per ICSI guidelines.

3. Generate a valid UDIN (Unique Document Identification Number) for the certification in accordance with ICSI requirements.

4. Attach the signed MGT-8 (with UDIN) as an optional attachment to Form MGT-7 while filing on the V3 portal.

5. Maintain complete documentation and working papers supporting the certification for audit trail and regulatory checks.

This dual practice—static certification within the e-form and separate certification as an attachment—ensures compliance, safeguards professional accountability, and avoids interpretational risks.

Practical Checklist for Form MGT-7 Certification

Professionals may follow this checklist before certifying:

•  Verify applicability of Form MGT-8 certification (public companies with paid-up share capital ≥ ₹10 crore or turnover ≥ ₹50 crore, or as otherwise prescribed).

•  Confirm accuracy of particulars relating to shareholding, directors, key managerial personnel, indebtedness, and meetings.

•  Ensure compliance with provisions of:

  • Section 88 (Registers of Members, Debenture holders, etc.)

  • Section 92 (Annual Return)

  • Section 129 & 137 (Financial Statements and Filing)

  • Section 186 (Loans & Investments)

  • Section 188 (Related Party Transactions)

  • Other applicable provisions under the Act and allied laws.

•  Cross-verify filings made under other forms (e.g., PAS-3, DIR-12, MGT-14) for consistency.

•  Record specific qualifications in case of non-compliance, both in the embedded certification and in the attached MGT-8.

•  Generate UDIN immediately upon signing to validate authenticity.

Compliance Takeaway

The integration of Form MGT-8 certification into Form MGT-7 marks a progressive step under MCA’s V3 reforms. However, until detailed clarifications are notified, professionals should adopt a cautious, dual-compliance approach:

• Use the embedded certification within MGT-7, and

• Attach a peer-reviewed, UDIN-backed, signed MGT-8 as an additional attachment.

Which ITR Should You File? A Clear Guide for FY 2024–25 (AY 2025–26)

Filing income tax returns is not merely about uploading numbers. The first and most crucial step is selecting the correct Income Tax Return (ITR) form. A wrong form can render your return defective under Section 139(9), delay processing, or even result in notices. On the other hand, using the right form ensures smooth validation, faster refunds, and compliance clarity.

This guide explains the ITR form selection criteria for FY 2024-25 (AY 2025-26), with added insights on when a form may be beneficial or restrictive.

ITR-1 (Sahaj): Simplified for Salaried Individuals

Who can file:

• Resident individuals (excluding NRIs and RNORs)

• Total income up to ₹50 lakh

• Income from:

  • Salary or pension

  • One house property

  • Other sources (interest, dividends, family pension)

  • Long-Term Capital Gains (LTCG) from listed equity shares/equity mutual funds up to ₹1.25 lakh

  • Agricultural income up to ₹5,000

Who cannot file:

• Income > ₹50 lakh

• More than one house property

• Any capital gains other than permitted LTCG

• Income from business/profession

• Foreign income/assets, lottery winnings, director in a company, unlisted equity shares, or ESOP deferred tax liability

Benefit of ITR-1:

• The simplest form—auto-population from AIS/TIS makes it user-friendly.

• Faster processing and quicker refunds as scrutiny risk is minimal.

Caution: Do not “force-fit” yourself here for simplicity. If you have any capital gains beyond ₹1.25 lakh or foreign income, shifting to ITR-2 is mandatory.

ITR-2: For Salaried, Investors, and NRIs with Broader Income

Who can file:

• Individuals/HUFs not eligible for ITR-1

• Income includes:

  • Capital gains (short-term or long-term, beyond ITR-1 limits)

  • More than one house property

  • Agricultural income > ₹5,000

  • Foreign income/assets

  • Income > ₹50 lakh

  • NRI or RNOR taxpayers

Benefit of ITR-2:

• Comprehensive form that captures investment activity, capital gains, foreign assets, and multiple income heads.

• Ideal for professionals or salaried individuals with ESOPs, share trading, or overseas income.

Caution: Requires detailed disclosures (foreign assets, directorships, unlisted shares). Accuracy is critical, as errors often trigger scrutiny.

ITR-3: For Business & Professional Income (Non-Presumptive)

Who can file:

• Individuals/HUFs with income from business or profession under normal provisions

• Freelancers, consultants, commission agents, F&O traders, and business owners not under presumptive schemes

Benefit of ITR-3:

• Enables claiming detailed expenses, depreciation, and deductions against business/professional income.

• Flexibility to carry forward losses for tax planning.

Caution: Compliance-heavy. Requires maintaining books of account, balance sheets, and P&L statements. Audit requirements under Section 44AB may apply depending on turnover.

ITR-4 (Sugam): Presumptive Taxation Route

Who can file:

• Individuals, HUFs, or Firms (other than LLPs) opting for presumptive taxation under:

  • Section 44AD (small businesses)

  • Section 44ADA (professionals)

  • Section 44AE (transporters)

• Can also report: salary/pension, one house property, other sources, and agricultural income up to ₹5,000

Who cannot file:

• Those with capital gains, foreign income/assets, or brought-forward losses

• Those not eligible for presumptive taxation

Benefit of ITR-4:

• Minimal compliance—no detailed books of accounts, just a presumptive declaration of income (6%/8% for business, 50% for professionals).

• Saves effort and audit costs for small taxpayers.

Caution: Once opted, presumptive schemes have lock-in conditions (especially Section 44AD). Exiting early may restrict re-entry for the next 5 years.

Other Forms

• ITR-5: For firms, LLPs, AOPs, BOIs not filing ITR-7

• ITR-6: For companies (except those claiming exemption under Section 11)

• ITR-7: For trusts, political parties, charitable institutions, etc., filing under Sections 139(4A)–(4D)

Key Updates for AY 2025-26

1. LTCG up to ₹1.25 lakh allowed in ITR-1 – easing compliance for small equity investors.

2. Expanded Profession Codes in ITR-3/4 – e.g., influencers, F&O traders, betting, etc., for accurate reporting.

3. Extended Due Date – Non-audit cases: 15th September 2025 (instead of 31st July).

Quick Selection Matrix

Income Type / Condition	Correct ITR Form	Benefit Highlight
Salary, 1 house, ≤ ₹50L income, LTCG ≤ ₹1.25L	ITR-1	Simplest form, faster refunds
Multiple properties, capital gains, foreign assets, income > ₹50L	ITR-2	Best for investors & NRIs
Business/professional income (non-presumptive)	ITR-3	Expense & loss claim flexibility
Presumptive income under 44AD/44ADA/44AE	ITR-4	Minimal compliance burden
Firms, LLPs, Companies, Trusts	ITR-5/6/7	Entity-specific compliance

Final Professional Tips

• Match your income profile with the correct form—don’t choose a form for simplicity alone.

• Plan strategically: opting for ITR-3 allows expense claims, while ITR-4 reduces compliance but limits deductions.

• Use reporting to your advantage: correctly disclosing capital gains or foreign assets reduces scrutiny risk.

• Stay timely: non-audit taxpayers must file by 15th September 2025; audited cases follow their statutory due dates.

Conclusion: Selecting the right ITR form is both a compliance necessity and a strategic choice. While ITR-1 and ITR-4 offer simplicity, ITR-2 and ITR-3 provide flexibility and tax-planning advantages. Understanding these nuances ensures smooth processing, minimizes risk of notices, and can even accelerate refunds.

Guidance Note: Correct Business Codes for Securities Trading

Speculative vs Non-Speculative Income, ITR Selection, Section 44AD, and Audit Rules

Statutory Foundation

Section 43(5), Income-tax Act, 1961

• Defines speculative transaction as a transaction settled otherwise than by actual delivery of goods.

• Proviso: Derivative transactions on recognised stock exchanges (F&O) are excluded, making them non-speculative.

Section 44AB – Tax Audit

• Tax audit is mandatory if turnover > ₹1 crore.

• Relaxed limit of ₹10 crore applies where cash receipts and payments ≤ 5% of turnover.

Section 44AD – Presumptive Taxation

• Available only for eligible businesses, excluding commission, brokerage, agency, and speculative transactions.

• Therefore, F&O traders may opt for 44AD, while intraday/speculative traders cannot.

Business Code Selection (CBDT Notified ITR Codes)

Nature of Activity	CBDT Code	Speculative / Non-Speculative	ITR Form	Sec. 44AD Eligibility	Audit Applicability	Loss Treatment
Intraday Equity Trading	13018	Speculative (u/s 43(5))	ITR-3	❌ Not allowed	Mandatory if turnover > ₹1 cr	Carry forward 4 yrs, set off only against speculative profits
Equity Delivery (STCG/LTCG)	13018	Capital Gains (not business)	ITR-2	NA	No audit	Set-off per CG rules
Equity Delivery (treated as business by assessee)	13018	Non-speculative	ITR-3	✔ Possible	Audit if turnover > ₹1 cr / ₹10 cr	Normal business loss, 8-year carry forward
F&O Trading (Equity, Currency, Commodities)	13018	Non-speculative	ITR-3	✔ Possible	Audit if turnover > ₹1 cr / ₹10 cr	Non-speculative, set off against any income except salary
Commodity Delivery Trading	13018	Non-speculative	ITR-3	✔ Possible	Same audit limits	Non-speculative

Judicial Compass

• CIT v. Shree Capital Services Ltd. (2009) 319 ITR 417 (Cal)
  → Derivative transactions are non-speculative.

• CIT v. Lakshmikanth Reddy (2015) 229 Taxman 1 (Kar)
  → F&O trading treated as business income, not speculative.

• CBDT Circular No. 23/2019
  → Clarifies distinction between speculative and non-speculative transactions for derivatives.

Audit & Presumptive Taxation Rules

(A) Section 44AD – Presumptive Taxation

• Only for non-speculative businesses (e.g., F&O, delivery-based trading if opted).

• Presumptive income: ≥ 6% / 8% of turnover (digital / non-digital) must be declared.

(B) Section 44AB – Tax Audit

• Mandatory if:

  1. Turnover > ₹1 crore (₹10 crore if cash ≤ 5%), or

  2. Profit < 6% / 8% under 44AD and total income exceeds exemption limit.

Decision Flow – Quick Compliance Compass

Step 1: Determine Nature of Trading

• Intraday → Speculative → ITR-3 → No 44AD

• F&O / Delivery (business) → Non-speculative → ITR-3 → 44AD possible

• Delivery (investment) → Capital Gains → ITR-2

Step 2: Turnover Threshold

• ≤ ₹2 cr → Consider 44AD (non-speculative only)

• ₹2–10 cr, digital ≥ 95% → Audit not required if 44AD presumptive profit declared

• ₹10 cr → Audit compulsory

Step 3: Loss Treatment

• Speculative loss → Carry forward 4 years, set off only against speculative profits

• Non-speculative loss → Carry forward 8 years, set off against any business income

Common Pitfalls (Red Flags)

❌ Filing ITR-2 instead of ITR-3 when business income exists.
❌ Claiming 44AD for intraday trading.
❌ Miscomputing turnover for audit purposes.
❌ Mixing speculative and non-speculative losses in set-off.
❌ Treating short-term capital gains as business income without consistent treatment.

Compliance Strategy for Traders

• Maintain separate ledgers for speculative vs non-speculative trades.

• Record turnover correctly (ICAI guidance for F&O).

• Evaluate presumptive vs regular taxation before 31st March.

• Plan advance tax instalments to avoid 234C interest.

• Preserve contract notes, broker statements, and audit trail for assessments.

Conclusion – Practical Compass

Correct classification is critical, impacting:

• ITR form selection

• Eligibility for presumptive taxation

• Audit requirement

• Loss treatment and set-off

Judicial clarity (Shree Capital, Lakshmikanth Reddy) and statutory rules (s.43(5), 44AD, 44AB) must guide compliance.

Quick Reference:

Activity	Classification	ITR Form	44AD	Audit
Intraday	Speculative	ITR-3	❌	Turnover > ₹1 cr
F&O	Non-speculative	ITR-3	✔ Possible	Turnover > ₹1 cr / 10 cr
Delivery (Investment)	Capital Gains	ITR-2	NA	NA
Delivery (Business)	Non-speculative	ITR-3	✔ Possible	Turnover > ₹1 cr / 10 cr

Peer Review Applicability for CAs in 2025: Turnover, Foreign JV, Tax Audit & Audit Thresholds

 The Peer Review Mechanism of ICAI is no longer limited to audits of listed entities, banks, and insurance companies. With the launch of Audit Quality Maturity Model (AQMM v.2.0), ICAI has widened the mandatory scope in a phased manner starting April 1, 2026.

This has direct implications for signing of financial statements for FY 2024-25 (31.03.2025) and FY 2025-26 (31.03.2026). Firms must now carefully examine:

• Entity type (listed / unlisted / group entity / JV / foreign subsidiary)

• Thresholds of turnover, paid-up capital, and borrowings

• Date of signing (before or after April 1, 2026)

Applicability Framework

For signing 31.03.2025 financials (FY 2024-25):

Peer Review + AQMM mandatory only if firm audits:

1. Listed entity (equity/debt listed in India)

2. Banks (other than co-operative banks, except multi-state co-operative banks)

3. Insurance companies

 No threshold of turnover or capital applies yet.
 Group entities (subsidiaries/JVs) not covered yet.

For signing 31.03.2026 financials (FY 2025-26):

(A) If report signed before 01.04.2026 → Old rules apply

• Only listed entities / banks / insurance audits require Peer Review.

(B) If report signed on or after 01.04.2026 → Expanded scope applies

Category 1 – Group Entities (Holding / Subsidiary / Associate / JV)

• If firm audits Holding, Subsidiary, Associate, or JV of:

  • Listed entity (India listed)

  • Banks (other than co-operative banks, except multi-state co-op banks)

  • Insurance companies

• Branch audits are excluded.

• Foreign subsidiaries/JVs are covered only if parent is an Indian listed / Indian bank / Indian insurer.

Category 2 – Large Unlisted Public Companies
Peer Review mandatory if any one threshold is met as on 31st March of preceding year:

• Paid-up share capital ≥ ₹500 crores, OR

• Turnover ≥ ₹1,000 crores, OR

• Aggregate loans + debentures + deposits ≥ ₹500 crores

(Standalone financials, not consolidated, unless specified otherwise in law).

Category 3 – Effective from 01.04.2027 (future)

• Entities raising funds > ₹50 crores from public / banks / FIs during period under review, OR

• Any body corporate (including trusts) classified as a Public Interest Entity (PIE).

Year-wise Matrix

FS Year	Signing Date	Entity Type	Thresholds / Conditions	Peer Review Mandatory?
31.03.2025	Anytime (before 31.03.2026)	Listed entities	Listing in India	✅ Yes
		Banks	All banks except co-op (but incl. multi-state co-op)	✅ Yes
		Insurance Companies	N/A	✅ Yes
		Large unlisted public companies	Thresholds not yet in force	❌ No
		Holding/Subsidiary/Associate/JV of listed/bank/insurance	Not applicable yet	❌ No
31.03.2026	Before 01.04.2026	Same as above	Same	✅ Yes only for listed / banks / insurance
31.03.2026	On/After 01.04.2026	Listed entities / Banks / Insurance	N/A	✅ Yes
		Holding/Subsidiary/Associate/JV of listed/bank/insurance	Parent is Indian listed / bank / insurer	✅ Yes
		Unlisted public companies	Paid-up cap ≥ ₹500 Cr OR Turnover ≥ ₹1,000 Cr OR Borrowings (loans+debts+deposits) ≥ ₹500 Cr	✅ Yes
		Private companies / foreign companies without Indian listing	N/A	❌ No

Special Cases

1. JV of Indian Listed + Foreign Company → Covered (because of Indian listed linkage).

2. Indian subsidiary of a foreign listed company → Not covered (unless foreign parent also listed in India).

3. Indian audit of foreign subsidiary/JV of Indian listed company → Covered (group linkage test satisfied).

4. Private companies → Not covered (unless they themselves become listed or fall under PIE category from April 2027).

Disclosure Requirements

• ICAI will now publish AQMM Levels (v.2.0) on its website for all peer-reviewed firms.

• Peer Review Certificates will explicitly mention the AQMM Level alongside validity.

• Clients, regulators, and banks will increasingly rely on this publicly available benchmark for firm selection.

Practical Checklist for Firms

Before accepting / signing an audit engagement for FY 2024-25 or 2025-26, check:

Step 1 – Identify entity type

• Listed (equity/debt) in India?

• Bank / Insurance company?

• Unlisted public company?

• Holding/Subsidiary/JV of listed/bank/insurance?

Step 2 – Check thresholds (for unlisted public co.)

• Paid-up capital ≥ ₹500 Cr?

• Turnover ≥ ₹1,000 Cr?

• Borrowings (Loans + Debentures + Deposits) ≥ ₹500 Cr?

Step 3 – Signing date

• Before 01.04.2026 → Old rules apply

• On/after 01.04.2026 → Expanded rules apply

Step 4 – Cross-border check

• If foreign group entity → Ask: is the Indian parent listed / bank / insurer? If yes → Covered. If no → Not covered.

Step 5 – Documentation

• Ensure valid Peer Review Certificate (with AQMM level) is available and uploaded with NFRA / SEBI / RBI filings wherever applicable.

• Maintain internal checklist and minutes of peer review compliance before signing audit reports.

Conclusion

• For 31.03.2025 FS → Peer Review applies only to listed entities, banks, and insurance audits.

• For 31.03.2026 FS →

  • If signed before 01.04.2026 → old rule continues.

  • If signed on/after 01.04.2026 → expanded scope applies: group entities of listed/bank/insurance + large unlisted public companies (₹500 Cr/₹1,000 Cr thresholds).

• Foreign JVs/subsidiaries are covered only if tied to Indian listed/bank/insurance companies.

With ICAI publishing AQMM levels publicly, Peer Review will now act as a quality seal, and firms must prepare well in advance to ensure compliance.

GST ITC on Brokerage Commission for Commercial Leasing — Law, Risks & Judicial Compass

Brokerage or commission is often the “entry ticket” into a long-term lease arrangement. In commercial leasing, it is not uncommon for landlords to pay brokerage equal to 3–6 months’ rent upfront, even when the lease itself runs for 9–18 years or longer. The question that inevitably arises is:

Can GST charged on such brokerage be claimed as Input Tax Credit (ITC) against GST payable on commercial rental income?

This blog decodes the issue with statutory provisions, interpretative analysis, judicial guidance, and compliance safeguards.

Taxability of the Underlying Services

• Brokerage / Commission Service

  • Classified under SAC 997212 – Real estate services on a fee/commission basis

  • Taxable at 18% GST

• Commercial Renting of Property

  • Taxable service under GST at 18%

  • Landlord must charge GST on monthly rentals

The nature of both inward (brokerage) and outward (renting) supplies being taxable lays the groundwork for ITC admissibility.

Statutory Framework for ITC

• Section 16(1), CGST Act, 2017

  ITC is allowed on goods/services used in the course or furtherance of business.

  Brokerage services are clearly incurred in the course of business to secure rental income.

• Section 17(5) – Blocked Credits

  • Denies ITC on:

    • Works contract/construction of immovable property

    • Goods/services capitalised into immovable property

  • Brokerage for leasing is neither “works contract” nor construction.

  • Risk arises only if brokerage is capitalised in books as part of building cost.

• Timing of ITC

  • Commission, though based on 6 months’ rent, is billed and paid once upfront.

  • ITC is claimable immediately in the tax period of invoice/payment, subject to Sec. 16(2) conditions.

  • The lease duration (e.g., 18 years) has no bearing on ITC.

Judicial & Interpretative Support

1. Safari Retreats Pvt. Ltd. v. Union of India (Orissa HC, 2019)

   • Held that ITC should not be denied where the output is a taxable commercial rent.

   • Though under appeal, the judgment reflects the spirit of GST — preventing cascading of taxes.

2. Saphire Foods India Ltd. v. Union of India (Delhi HC, 2024)

   • Clarified that ITC cannot be denied if the input service directly contributes to taxable outward supply, unless specifically restricted under Sec. 17(5).

3. AAAR – DLF Commercial Projects Corporation Ltd. (2019)

   • Affirmed that facilitation/legal services availed for renting of commercial property are eligible for ITC.

 Together, these precedents strengthen the position that brokerage expenses for leasing commercial properties qualify for ITC.

Ifs, Buts & Edge Cases

Scenario	ITC Position	Reason
Lease for commercial use	✅ Allowed	Renting taxable at 18%
Lease for residential dwelling	❌ Blocked	Residential renting is exempt supply
Brokerage expensed in P&L	✅ Allowed	Directly linked to taxable output
Brokerage capitalised in building cost	⚠️ Disputed	May fall under Sec. 17(5)(d) restriction
Broker not GST-registered	❌ No ITC	Valid GST invoice mandatory
Invoice in tenant’s name	❌ No ITC	Must be in landlord’s GSTIN
Lease terminated early	✅ Still allowed	Service already received upfront
Mixed letting (commercial + exempt)	⚠️ Proportionate	Rule 42/43 reversal required
Claim delayed beyond Sec. 16(4) cut-off	❌ Blocked	Time-barred

Audit & Compliance Safeguards

• Invoice: Broker’s GST invoice must show landlord’s name and GSTIN.

• Payment Proof: Commission + GST must be paid; visible in GSTR-2B.

• Expense Head: Book as brokerage/lease facilitation expense, not as capital cost.

• Supporting Agreements: Lease deed + brokerage agreement should be preserved.

• Reconciliations: Match GSTR-3B credit with GSTR-2B data to avoid mismatches.

Compliance Checklist

Requirement	Reference	Proof Needed
GST invoice in landlord’s name	Sec. 16(2)(a)	Original invoice
Broker registered with GST	Sec. 31	GSTIN verification
GST actually paid	Sec. 16(2)(c)	Bank proof + GSTR-2B
Property let out commercially	Sec. 16(1)	Lease deed
Not capitalised in immovable property	Sec. 17(5)(d)	Books of account
Credit claimed within time	Sec. 16(4)	Return filings

Conclusion

Clear Position: GST on brokerage commission for leasing of commercial property is eligible for ITC and can be adjusted against output GST liability on rent.

Caution: ITC will be denied if —

• The property is let out for residential purposes,

• The brokerage is capitalised into immovable property cost, or

• Invoice/GST compliance conditions are not fulfilled.

With proper classification, documentation, and expense treatment, the ITC claim is legally sound, judicially supported, and defensible in audit.

 For landlords with significant rental portfolios, brokerage ITC often runs into lakhs. Structuring it correctly at the outset — through revenue booking, proper invoicing, and documentary trail — ensures smooth credit flow and avoids unnecessary disputes.

GST ITC & Taxability Checklist for Hotels, Resorts, PGs & Hostels

Hotels, resorts, hostels, and recreational clubs operate in one of the most compliance-heavy sectors under GST. The line between eligible Input Tax Credit (ITC) and blocked ITC often gets blurred when it comes to building construction, architectural upgrades, furniture, or interior designing. This creates significant risks during audit and departmental scrutiny.

A structured checklist is therefore essential — both for audit readiness and for future tax planning. It helps taxpayers:

• Avoid wrongful ITC claims that may later be disallowed.

• Maximize credit by proper structuring of contracts and invoices.

• Segregate revenue vs. capital expenditure with clarity.

• Ensure consistency between GST returns, books of accounts, and Income-tax records.

The following Audit & Taxability Checklist has been curated with minute distinctions, judicial references, and practical insights to guide hotels, resorts, PGs, and hostels in safeguarding ITC claims while staying compliant.

1. Building Construction / Major Repairs

• Was the expense incurred on original construction / reconstruction / major civil work?
   → If Yes → ITC blocked u/s 17(5)(c) (unless plant & machinery).
   → If Repairs (revenue in nature) → ITC allowed (subject to capitalization test).

• If capitalized as building in books → ITC blocked.

• If capitalized as plant & machinery (lift, DG sets, AC systems, kitchen equipment, fire-fighting) → ITC allowed.

2. Architectural / Interior Designing / Upgradation Fees

• Architectural fees linked to construction of immovable property (building/rooms) → ITC blocked.

• Architectural fees for interior works, furniture design, brand revamp, ambiance improvement → ITC allowed (if not capitalized into immovable property).

• Tax planning: bifurcate contracts – separate invoices for building (blocked) vs. interiors (eligible).

3. Furniture, Fixtures & Furnishings

• Movable furniture (sofas, tables, beds, modular furniture) → ITC allowed.

• Built-in wardrobes, fixed partitions, false ceilings (immovable) → ITC blocked.

• Audit step: verify capitalization treatment in fixed asset register.

4. Repairs & Maintenance

• Routine repairs (painting, plumbing, electrical, tiling) → ITC allowed.

• Major renovation altering structure (treated as civil construction) → ITC blocked.

• Audit check: ensure repairs not wrongly clubbed under construction.

5. Hotel-Specific Areas

• Kitchen equipment, exhausts, refrigeration, cold storage → ITC allowed (plant & machinery).

• Gym, spa, swimming pool – if movable equipment → ITC allowed; if civil construction → ITC blocked.

• Banquet halls / conference rooms – ITC blocked if structural modification, allowed on movable equipment.

6. PGs / Hostels / Lodges

• If providing residential accommodation (long stay, monthly rent) → Exempt supply → No ITC.

• If providing short-term stay (<30 days) like hotel → Taxable → ITC available (same rules as hotels).

• Dual-use property → Segregation required (Rule 42 reversal).

7. ITC Reversal & Apportionment

• If partly exempt (PG/hostel + restaurant/catering) → Apply Rule 42 proportionate reversal.

• Verify reversal workings during audit.

8. Income Tax Perspective (for planning)

• Capitalized repairs → No GST ITC (blocked) but eligible for depreciation under IT Act.

• Revenue repairs → Allowed as expense under IT Act + ITC under GST.

• Architectural & design fees → If blocked in GST, claim as capital/revenue deduction under IT Act depending on treatment.

• Always align Books of Accounts, GST ITC register, and Income Tax depreciation schedules.

Tax Planning Strategies

✅ Keep separate contracts & invoices for movable vs. immovable items.
✅ Do not capitalize interiors/furniture as “building” – classify under furniture & fixtures/plant & machinery.
✅ For long-stay PGs/hostels, evaluate option to charge GST (if commercially viable) to unlock ITC.
✅ Use advance tax planning – claim blocked ITC via depreciation in Income Tax.
✅ Maintain a fixed asset ITC eligibility matrix reviewed annually.

Judicial Support:

• Safari Retreats Pvt Ltd v. Union of India (Orissa HC, 2019) – ITC on mall construction (used for letting) allowed, though stayed by SC → strong taxpayer-friendly precedent.

• Bangalore Turf Club Ltd. (Karnataka AAR) – Civil structure ITC blocked.

• Multiple AARs have clarified furniture & fixtures movable in nature → ITC allowed.

GST Input Tax Credit on Major Repairs, Architectural Upgradation & Capitalization in Hotels, PGs & Hostels

A Comprehensive Taxpayer’s Guidance Note with Planning Insights

Introduction

Hotels, PGs, and hostels are capital-intensive businesses where buildings, interiors, and ambience directly drive revenue. The question of GST Input Tax Credit (ITC) on building-related expenses — particularly major repairs, renovations, architectural design, and furnishing — is complex because:

• GST law restricts ITC on works contract services relating to immovable property (Sec. 17(5)(c)/(d), CGST Act).

• Thin-line distinctions exist between repairs vs. capital improvements, and plant & machinery vs. immovable property.

• Parallelly, Income-tax Act treatment (capitalization vs. revenue) interacts with GST to affect overall tax planning.

This note critically analyses all scenarios with minute detailing, covering both legal restrictions and planning opportunities.

Statutory Framework

2.1 Relevant Sections under CGST Act

• Section 16(1): ITC allowed for goods/services used in course or furtherance of business.

• Section 17(5)(c): ITC blocked for works contract services relating to construction of immovable property (except where used for further supply of works contract).

• Section 17(5)(d): ITC blocked for goods/services used for construction of immovable property on own account, even if for business use.

• Explanation to Sec. 17(5): “Construction” includes reconstruction, renovation, additions or repairs to extent they are capitalized.

2.2 Meaning of “Plant & Machinery” (Explanation to Sec. 17)

• Includes apparatus, equipment, machinery fixed to earth by foundation/support.

• Excludes land, building, civil structures, telecommunication towers, pipelines outside factory.

Thus, if expenditure is treated as plant & machinery, ITC survives; if treated as immovable property, ITC blocked.

Key Analytical Distinctions

1 Routine Repairs vs. Capitalized Renovation

• Routine repairs/maintenance (e.g., plumbing, painting, AC servicing): ITC allowed (not capitalized, revenue expense).

• Capitalized renovations (e.g., building extension, floor redesign, major structural change): ITC blocked.

2 Architectural & Interior Design Services

• Scenario A – Designing new hotel/PG/hostel building: Architectural fees linked to construction, hence ITC blocked (capitalized with building).

• Scenario B – Designing refurbishments without structural alteration (e.g., interior redesign of lobby, furniture design, theme upgradation): If not capitalized as “building,” ITC may be claimed. Careful accounting treatment is key.

3 Furniture, Fixtures & Fit-outs

• Movable furniture/equipment (beds, modular furniture, chandeliers, electronics): ITC available (plant & machinery).

• Fixed immovable fit-outs (false ceiling, fixed wardrobes, wall panelling): If capitalized as “building,” ITC denied. Planning can classify certain modular fixtures as movable to safeguard ITC.

4 PGs and Hostels vs. Hotels

• Same restrictions apply since all are “commercial accommodation services.”

• Whether run as lodging business (with GST output) or on lease basis affects ITC:

  • If property is leased out (rental income), ITC on construction is blocked (immovable property).

  • If operated as hotel/hostel business (taxable outward supply), ITC on furniture, equipment, routine repairs survives.

Taxpayer’s Perspective – Planning Matrix

Expense Category	Capitalized?	ITC Availability	Planning Insight
Routine repairs (painting, plumbing, AC servicing, flooring polishing)	No	✅ Allowed	Book as repairs (P&L) not capitalized.
Major renovation (civil work, extensions, structural changes)	Yes	❌ Blocked	Unavoidable blockage – consider lease structuring or vendor ITC optimization.
Architectural design for new construction	Yes	❌ Blocked	Becomes part of “construction cost” – no ITC.
Architectural/interior fees for refurbishment (theme, décor, layout changes)	Depends	⚖️ Allowed if expensed; Blocked if capitalized with building	Tax planning: expense off P&L if justified as revenue.
Movable furniture & equipment (beds, sofas, TV, AC units, kitchen equipment)	Capitalized (Plant & Machinery)	✅ Allowed	Safest category for ITC.
Fixed immovable interiors (false ceiling, permanent woodwork)	Yes	❌ Blocked	Avoid capitalization with building, classify modular if possible.
Landscaping, façade improvement, parking expansion	Yes	❌ Blocked	Treated as building.
Leasehold improvements (tenant constructing fit-outs)	Yes	❌ Generally blocked	Some tribunals allowed ITC if business necessity; litigation risk.
Repairs in leased premises (done by lessee, not capitalized)	No	✅ Allowed	Book as repair/maintenance.

Thin-Line Distinctions & Judicial Support

• Hotel Upgradation (structural) → ITC blocked.

• Hotel Refurbishment (cosmetic/interior) → ITC possible if not capitalized.

• Movables vs. Immovables: Modular furniture ITC allowed (Delhi Tribunal in Safari Retreats indirectly supports business-use logic, though reversed in higher courts).

• Architectural Fees: If linked to capital construction, blocked; if linked to operational refurbishments, allowable.

• Leasehold improvements: Mixed rulings – advisable to treat as “business repairs” wherever not increasing asset’s life permanently.

Income-Tax vs. GST Interplay

• Income-tax:

  • Capitalized repairs → Depreciation benefit (10% building, 15% furniture, 40% plant & machinery).

  • Revenue repairs → 100% deduction in year.

• GST:

  • Capitalization of building-related → ITC denied.

  • Revenue expensing or plant/machinery → ITC allowed.

Tax planning tip: Sometimes better to expense off (P&L) small refurbishments than capitalize — yields both GST ITC and Income-tax deduction.

Practical Taxpayer Strategies

1. Classification Planning:

   • Keep detailed invoices (segregating furniture, equipment, movable interiors).

   • Avoid lump-sum architectural/furnishing contracts — split into movables vs civil works.

2. Expense Booking Policy:

   • Minor refurbishments → expense in P&L.

   • Only structural works → capitalize.

3. Vendor Contract Structuring:

   • Insist vendors separately mention goods vs services, movable vs immovable, furniture vs civil work.

4. Parallel IT Planning:

   • Where GST ITC blocked, ensure capitalization for depreciation under Income-tax.

   • Where ITC available, book as expense if possible for dual benefit.

5. Advance Ruling Risks:

   • Seek advance ruling in borderline cases (e.g., leasehold improvements, modular interiors).

Conclusion

For hotels, PGs, and hostels, GST ITC on building repairs and upgradations hinges on accounting treatment and nature of asset:

• Routine repairs & movable furniture → ITC available.

• Capitalized building renovations & architectural fees linked to construction → ITC blocked.

• Interior/architectural refurbishments & modular fixtures → ITC possible if carefully structured.

Taxpayers should maintain segregated accounts, vendor contracts, and capitalization policies aligned with GST law to safeguard maximum ITC while ensuring parallel Income-tax efficiency.