Munjaal Manishbhai Bhatt: the one third land deduction is optional, not mandatory

A buyer paying for a plot worth more than the building challenged a deemed deduction, and won. Most developers still apply the deeming provision blindly.

The arithmetic that produced the case

A buyer entered into a single agreement for the purchase of a plot and the construction of a bungalow on it. The land component was separately identifiable and, in the location concerned, was worth far more than one third of the total price.

Applying the deemed one third deduction meant paying GST on a value that included a substantial part of the price of land. Land is outside GST altogether. Entry 5 of Schedule III places the sale of land beyond the scope of supply.

The petitioner therefore argued that a deeming provision in a rate notification cannot achieve indirectly what the statute forbids directly.

What the Court held

The Court held that the deeming fiction was arbitrary when applied uniformly, because the proportion of land value to total consideration varies enormously between a metropolitan plot and a peripheral one.

It held that a mandatory deemed deduction, in a case where the actual land value is ascertainable, results in the levy of tax on the transfer of land, which is beyond legislative competence under the GST enactments.

Rather than strike the provision down, the Court read it down. The one third deduction remains available as an option where the land value is not ascertainable. Where it is ascertainable, the actual value must be deducted.

The Court also directed a refund of the excess tax collected in that case, with interest.

Who this helps, and how it is being resisted

It helps plot plus construction arrangements, bungalow schemes, and any transaction where the agreement or the market discloses a separable land value. It is of limited use in a multi storey apartment where the undivided share of land is not separately priced and is genuinely difficult to ascertain.

The department resists on three fronts. It argues that the decision is confined to its facts. It argues that in an apartment sale land value is not ascertainable, so the deemed deduction properly applies. And it questions the evidence of land value where the developer's own agreement does not bifurcate.

The answer to the third objection is documentary. Where a developer wishes to claim actual land value, the agreement, the cost sheet, the jantri or circle rate, the acquisition cost and a valuation report must support the figure. A bifurcation invented at the time of a notice does not survive.

The refund and the risk

For the buyer, the excess is a real cost and the recovery route is a refund claim, usually pressed by the developer who collected and deposited it, with the unjust enrichment question addressed by evidence of pass through to the buyer.

For the developer, adopting the actual land value prospectively lowers the taxable value and therefore the credit utilisation pattern, and it must be applied consistently across a project.

The commercial risk of a selective application is significant. A developer who claims actual land value on high value units and the deemed deduction on others invites the allegation that the bifurcation is driven by tax and not by valuation.

Authorities relied on

What to do on Monday

1. Identify projects where the land component demonstrably exceeds one third of consideration; that is where the exposure and the opportunity both sit.

2. Assemble the valuation file before adopting actual land value: acquisition cost, circle rate, valuation report and the cost sheet used for pricing.

3. Apply the chosen basis consistently across a project and record the reason in the pricing note.

4. For past periods, compute the excess paid and check the Section 54 limitation before deciding whether a refund claim is worth the disclosure.

Questions we are asked on this

Can an apartment developer claim actual land value?

It is difficult but not impossible. The claim requires a defensible bifurcation supported by acquisition cost, circle rate and a valuation, applied consistently across the project.

Is the deemed deduction now invalid?

No. It survives as an option where land value is not ascertainable. What was struck down was its mandatory application in cases where the value is known.

Who claims the refund of the excess, the buyer or the developer?

In practice the developer, since it collected and deposited the tax. The unjust enrichment question is answered by showing the amount has been or will be passed back to the buyer.

Does the decision affect the one percent affordable housing scheme?

The scheme operates on a concessional rate with credit restrictions rather than on a land deduction, so the reasoning does not translate directly. Analyse the scheme conditions separately.

What if our agreement bundles land and construction with no split?

Then the department's position is at its strongest. Prospectively, price the land separately in the agreement if that reflects the commercial reality.

In this cluster

• GST on real estate: the complete developer position
• Joint development agreements: who pays, when, and on what value
• Transfer of development rights: the exemption and its conditions
• Works contracts under GST: classification, rate and the credit position
• Government contracts, escalation clauses and rate changes
• ITC restriction under Section 17(5)(c) and (d) for construction
• Preferential location charges, club charges and society transfer fees
• Affordable housing at one percent: the conditions that decide eligibility
• Redevelopment, slum rehabilitation and the value of free flats
• Leasing of land and buildings: the exemption boundary

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.