Delhi HC in Mala Sahni Seth: Prima Facie No GST on Leasehold-to-Freehold Conversion

Leasehold-to-Freehold Conversion and GST: Why This Case Matters

The question of whether GST applies to the conversion of property from leasehold to freehold has become a flashpoint for property owners, businesses, and authorities alike. The Delhi High Court’s interim order in Mala Sahni Seth & Anr. vs Delhi Development Authority & Ors. has brought much-needed clarity—at least for now—by holding that, prima facie, such conversion charges are not liable to GST. This article unpacks the Court’s reasoning, the statutory framework, and what it means for those facing GST demands on property conversions.

Understanding the Legal Landscape: Leasehold, Freehold, and GST

Leasehold vs Freehold: What’s at Stake?

In India, many properties—especially in Delhi and other metros—are initially allotted on a leasehold basis. This means the lessee gets the right to use the property for a fixed period (often 99 years), but the ultimate ownership remains with the authority (like DDA). Converting to freehold gives the owner absolute rights, making the property easier to sell, mortgage, or develop. The conversion process involves paying “conversion charges” and other fees to the authority.

GST and the CGST Act: The Key Provisions in Plain English

The GST regime, under the Central Goods and Services Tax (CGST) Act, 2017, taxes “supplies” of goods and services. But not everything is a “supply.” Here’s how the law breaks it down:

• Section 7(1): Defines “supply” to include all forms of supply of goods or services for a consideration.
• Section 7(2): Excludes certain activities from “supply”—notably, those listed in Schedule III.
• Schedule III, Sr. No. 5: Clearly states that the sale of land and, subject to clause (b) of paragraph 5 of Schedule II, the sale of a building, is not a supply of goods or services—so, no GST.
• Schedule II, Sr. No. 5(e): Deems certain activities as “supply of services,” including “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.” Authorities sometimes invoke this to argue that waiving future rent is a taxable service.

DDA’s SOP and the GST Demand

The Delhi Development Authority (DDA) issued a Standard Operating Procedure (SOP) on 28 March 2025, justifying GST on conversion charges by equating them to ground rent. The DDA’s logic: by converting to freehold, it is “foregoing” its right to collect future lease rent, which it claims is a taxable service under Schedule II, 5(e). However, neither the DDA’s 2016 Conversion Scheme nor its 2023 rate notifications mention GST on conversion charges.

Delhi High Court’s Prima Facie Interpretation: Conversion = Sale, Not Service

Case Brief and Timeline

The petitioners, owners of commercial units in DLF South Court Mall, paid all conversion-related charges to DDA for converting their properties from leasehold to freehold. Months later, DDA raised a fresh demand for GST on these charges, citing its new SOP. The petitioners challenged this, arguing that conversion is part of the sale of immovable property and not a taxable service.

Core Judicial Reasoning

The Court’s interim order is clear and reasoned:

• Conversion Charges Are Part of Sale Consideration: The Court observed that when a lessee pays conversion charges, it is simply affirming their title—completing the sale process. The conversion is not a separate service but an integral part of transferring ownership.
• Reliance on Supreme Court Precedent: The Court leaned heavily on the Supreme Court’s decision in Estate Officer v. Charanjit Kaur, which held that conversion from leasehold to freehold is a transfer of ownership rights, not a service. The conversion charges are part of the sale consideration, not a fee for a service.
• Distinction from DDA’s “Foregoing Rent” Argument: The Court noted that neither the DDA’s conversion scheme nor its rate notifications mention GST on conversion charges, even though these were issued after GST came into force. The Court found no statutory or policy basis for treating conversion as a taxable service under Schedule II, 5(e).
• Schedule III Exclusion Prevails: Since the sale of immovable property is excluded from GST by Section 7(2) read with Schedule III, the Court held that, prima facie, GST does not apply to conversion charges.

Interim Relief Granted

Recognising the stakes, the Court directed that no coercive steps be taken to recover the impugned GST demands until the next hearing (05-12-2025). Both DDA and the GST Department have been asked to file affidavits, and the matter remains sub judice.

Comparative Analysis: DDA’s Argument vs Court’s Reasoning

DDA’s Position: Service by Waiving Future Lease

DDA’s main plank is that by converting property to freehold, it is providing a service—waiving its right to collect future lease rent. This, it claims, is taxable under Schedule II, 5(e).

Court’s Response: Substance Over Form

The Court rejected this, focusing on the substance of the transaction. The conversion is not about waiving rent; it is about affirming ownership. The charges are not for a service but for completing the sale. The Court also pointed out the absence of any GST reference in DDA’s own policies and the alignment with the Supreme Court’s view.

Key Legal Takeaways

• Conversion charges for leasehold-to-freehold are, prima facie, part of the sale of immovable property and not a taxable service.
• The absence of GST in DDA’s conversion scheme and rate notifications weakens the case for retrospective GST demands.
• The Supreme Court’s Charanjit Kaur decision is a strong precedent supporting this view.

Practical Implications and Impact Assessment

For Lessees, Owners, and Businesses

• Ongoing/Past Conversions: The Court’s order brings relief to those facing GST demands on conversion charges. For now, authorities cannot enforce recovery.
• GST Already Paid: If you have already paid GST on conversion charges, you may have grounds to seek a refund or adjustment, depending on the final outcome. Learn more about GST refund services.
• Retrospective Demands: The risk of retrospective GST demands is now under judicial scrutiny. The Court’s interim order offers a shield, but the final position will depend on the outcome of the case.

For Authorities and DDA

• Recovery Powers Suspended: DDA and GST authorities cannot take coercive steps to recover GST on conversion charges until further orders.
• Compliance Burden: Authorities must review their policies and documentation, especially in light of the Court’s observations and the lack of GST references in official schemes.

Procedural and Documentation Guidance: Navigating GST Demands on Conversion Charges

If You Receive a GST Demand Now

Facing a GST demand on leasehold-to-freehold conversion charges can be daunting, especially with the law in flux. Here’s a practical roadmap to safeguard your interests:

1. Respond Promptly to Notices:

• Do not ignore show-cause or recovery notices from DDA or GST authorities.
• File a written reply referencing the Delhi High Court’s interim order in Mala Sahni Seth and the Supreme Court’s Charanjit Kaur decision.
• Clearly state that the matter is sub judice and that coercive recovery is stayed. Explore how GST litigation services can assist you in this process.

1. Payment Under Protest—Why and How:

• If you must pay GST to avoid disruption (e.g., for registration or mutation), pay “under protest.”
• Use a formal protest letter, explicitly reserving your right to claim a refund if the final order favours taxpayers.
• Retain proof of payment and protest communication.

1. Essential Documentation Checklist:

• Payment Receipts: For all conversion charges and GST, if paid.
• Protest Letters: Duly acknowledged by the authority.
• Correspondence: Applications, approvals, and all communication with DDA/GST authorities.
• Historical Precedents: Any VAT or service tax records for similar transactions, if available.

1. Filing Representations/Affidavits:

• Where possible, file a representation before the DDA and GST Department, citing the ongoing litigation and requesting that no adverse action be taken.
• If your case is similar, consider seeking impleadment or intervention in the ongoing writ petition.

For Pending or Retrospective Conversions

• Record-Keeping: Maintain a comprehensive file of all documents—conversion applications, payment proofs, notices, and legal correspondence.
• Legal Representation: Engage a CA or legal counsel early, especially if the demand is substantial or if you are considering a refund claim. Consult with chartered accountants in Delhi or nearby regions to get expert help.
• Refund/Rectification Steps: If GST was paid and the final order favours taxpayers, be ready to file a refund application with supporting documents and a copy of the court order.

Uncertainties, Risks & Monitoring the Next Steps

Legal Status Until 05-12-2025

• No Coercive Recovery: The Delhi High Court’s order means authorities cannot forcibly recover GST on conversion charges until the next hearing.
• No Final Adjudication: The issue is not settled. The interim order is subject to change based on further arguments, affidavits, and possibly higher court review.

Key Risks for Taxpayers and Authorities

• Retrospective GST Liability: If the final order reverses the interim view, taxpayers may face demands for GST, interest, and possibly penalties for past conversions.
• Interest/Penalty Exposure: Delayed payment or non-payment could attract interest or penalties if the final outcome is adverse.

Monitoring Strategy

• Stay Updated: Track the case status, especially around the next hearing date (05-12-2025).
• Participate in Stakeholder Submissions: Industry bodies, associations, and CAs may make collective representations—join these efforts for a stronger voice.

Debunking Misconceptions & Clarifying Tax Positions

Conversion Charges vs Service Fees: What the Case Clarifies

A common misconception is that conversion charges are akin to service fees for “foregoing rent.” The Court’s interim view, backed by the Supreme Court, clarifies that these charges are part of the sale consideration for transferring ownership—not a fee for a service. This distinction is crucial for GST applicability.

For a detailed overview of how tax on renting of property applies differently on residential vs commercial setups, see our blog on tax implications on renting of property: TDS, GST & Income Tax discussed.

Precedent Value & Broader Sectoral Impact

Why This Interim Order Matters

• Influence Beyond Delhi: While the order is interim and specific to the petitioners, it sets a persuasive precedent for similar disputes across India, especially where authorities have not expressly notified GST on conversion charges.
• Guidance for Real Estate and Commercial Properties: The reasoning applies to a wide range of properties—residential, commercial, industrial, and mall units (like DLF South Court Mall)—where leasehold-to-freehold conversions are common.

Collective Action and Model Representations

• Model Representations: CAs and businesses can use the Court’s reasoning to draft representations or replies to GST demands.
• Joint Litigation: Where multiple parties are affected, consider collective petitions or interventions for efficiency and consistency.

You can find expert assistance from chartered accountants in Gurgaon or your nearest location.

Key Takeaways and Closing Thoughts

• The Delhi High Court’s interim order offers significant relief but is not the final word—vigilant monitoring and compliance are essential.
• Conversion charges for leasehold-to-freehold, as things stand, are not liable to GST, but the legal position may evolve.
• Preserve your rights through timely responses, payment under protest, and comprehensive documentation.
• Engage qualified CAs or legal advisors early to manage risks and seize opportunities for refund or rectification.

Strategic, well-documented action today will ensure you’re prepared—whatever the final outcome. For tailored advice or representation, reach out to a trusted chartered accountant in Delhi.