Karnataka High Court rules that compulsory acquisition of immovable property is not a GST supply and orders refund of ₹12.28 lakh with 15% interest to landowners.
The Karnataka High Court has delivered an important ruling on the applicability of Goods and Services Tax (GST) to compensation paid for compulsory acquisition of immovable property. The Court has held that acquisition of land and structures by the State in exercise of its statutory power of eminent domain cannot be regarded as a “supply of goods or services” for the purposes of GST.
In a significant relief to landowners, the Court quashed the deduction of ₹12,28,906 towards GST from land acquisition compensation and directed the authorities to refund the entire amount along with interest at 15% per annum from the date of the award until the date of payment. The Court also imposed costs of ₹50,000 on the authority.
Background of the Case
The case arose from the compulsory acquisition of a house property belonging to four landowners at Basavanahalli Village in Kodagu District, Karnataka. The property, measuring approximately 1,195 square metres, was acquired for the widening of the Mysuru-Madikeri Highway.
An award was passed determining total compensation of ₹96,92,624.80 for the land and structure. However, while making payment of the compensation, the authorities deducted ₹12,28,906, calculated at 18% as GST.
The landowners challenged the deduction before the Karnataka High Court. Their primary contention was that they had neither sold the property nor rendered any service to the Government. The property had been acquired compulsorily under statutory authority and, therefore, the transaction could not be treated as a taxable supply under the GST framework.
Authorities’ Argument on GST
The authorities sought to justify the deduction by contending that GST was applicable to the works contract or structural component forming part of the compensation. They also argued that similar treatment had been followed in respect of other landowners whose properties were acquired.
However, the Court was not persuaded by this argument. It noted that the authorities failed to point out any specific provision under the GST law under which compulsory acquisition of land or a structure could be characterised as a supply of goods or provision of services.
Karnataka High Court’s Legal Reasoning
Justice R. Nataraj examined the fundamental concept of “supply” under the GST regime. GST is essentially a tax on the supply of goods or services or both. The Court therefore considered whether compulsory acquisition of immovable property could satisfy this basic requirement.
The Court held that an immovable property cannot ordinarily be treated as “goods”. More importantly, the transfer of property through compulsory acquisition is fundamentally different from a voluntary commercial transaction.
The landowners did not voluntarily sell their property to the Government. Nor did they provide any service to the State. Their property was taken over through the exercise of statutory power of eminent domain.
Consequently, even if the expression “supply of goods or services” were interpreted broadly, compulsory acquisition by the State could not be brought within that expression.
The Court also observed that the compensation represented the value of the land and structure acquired by the Government. The existence of a structure attached to the land did not convert the compulsory acquisition into a taxable supply.
GST Cannot Be Deducted Merely Because a Structure Is Involved
One of the important aspects of the ruling is the Court’s rejection of the argument that GST could automatically be imposed on the structural component of the acquisition compensation.
The authorities were unable to identify a statutory provision authorising GST deduction from the compensation merely because the acquired property contained a building or structure.
The Court consequently concluded that the respondents had acted beyond their legal authority in deducting GST from the compensation payable to the landowners.
Refund with 15% Interest
Having found the GST deduction to be legally unsustainable, the Karnataka High Court quashed the relevant portion of the award notice.
The authorities were directed to refund ₹12,28,906 to the petitioners. Significantly, the refund was not ordered without compensation for the delay. The Court directed payment of interest at 15% per annum from the date of the award until the actual date of payment.
The Court further directed that the interest payable on the wrongly deducted GST should be recovered personally from the concerned official. It also ordered payment of ₹50,000 as costs to the petitioners towards the expenses incurred in pursuing the writ proceedings.
Key Takeaway for Landowners
The judgment provides important guidance in cases involving compulsory acquisition of land, buildings and other immovable properties for highways and public infrastructure projects.
Where property is acquired compulsorily under statutory authority, the compensation paid to the landowner cannot simply be subjected to GST on the assumption that the acquisition constitutes a taxable supply. The nature of the transaction and the statutory basis for taxation must be examined.
The Karnataka High Court’s ruling therefore reinforces the principle that tax can be imposed only when there is clear statutory authority for doing so. A deduction from land acquisition compensation cannot be sustained merely because such deduction has allegedly been followed in other cases.
Conclusion
The Karnataka High Court’s decision is a significant development in GST jurisprudence concerning land acquisition compensation. By holding that compulsory acquisition of immovable property does not constitute a supply of goods or services, the Court has provided substantial relief to affected landowners.
The direction to refund ₹12.28 lakh with 15% annual interest, coupled with costs and personal recovery of interest from the concerned official, also underscores the seriousness with which the Court viewed the unauthorised deduction.
The ruling may have wider implications for landowners whose compensation has been reduced by GST deductions in compulsory acquisition proceedings, particularly in infrastructure and highway projects.
Case: Subbaiah A.P. v. The Deputy Commissioner
Court: Karnataka High Court
Writ Petition: W.P. No. 25600 of 2026 (LA-RES)
Citation: 2026 LLBiz HC (KAR) 180
Judge: Justice R. Nataraj
Issue: GST on compulsory land acquisition compensation
Relief: Refund of ₹12,28,906 with 15% interest and ₹50,000 costs.