Section 17(5), the blocked credits clause by clause, and what is left of the construction exception

How the sub-section works

Section 17(5) opens by overriding Section 16(1) and Section 18(1). Credit that passes every condition in Section 16(2) is still unavailable if the supply falls within one of its clauses, even where it is used in the course or furtherance of business. Blocked credit is not credit that is reversed later; it was never available. In GSTR-3B it is shown at Table 4(B)(1) so that it does not enter the net credit, and Rule 42 strips it out first, as T3, before the common credit is worked out (see the article on Rules 42 and 43).

The Supreme Court's starting point in Safari Retreats is that credit is a creation of the statute, so Parliament may exclude whole categories from it and the courts will not widen the entitlement. Arguments from principle get little traction. What is argued is the wording of a clause and the facts of the supply.

Two habits prevent most errors. Read the exception inside the clause before applying the block, and classify an item by what it is and what it was used for, not by the ledger head it was booked under.

The clauses as they now stand

For periods before 01.02.2019, clauses (a) and (b) carry their earlier wording. Before 01.11.2024, clause (i) named Sections 74, 129 and 130; it now names Section 74 for periods up to FY 2023-24 only.

Construction: clauses (c) and (d)

What each clause blocks

Clause (c) blocks works contract services supplied for construction of immovable property other than plant and machinery, unless the service is an input service for a further supply of works contract service. Clause (d) blocks goods or services received for construction of immovable property other than plant and machinery, on his own account, including when they are used in the course or furtherance of business.

"Construction" includes re-construction, renovation, additions, alterations and repairs, but only to the extent of capitalisation (the Explanation to clauses (c) and (d)). Repairs charged to the profit and loss account are therefore outside both clauses.

"Plant and machinery" is defined at the end of Section 17. It means apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making outward supply, including that foundation and those supports. It excludes land, buildings and other civil structures, telecommunication towers, and pipelines laid outside the factory premises.

What the Supreme Court decided in Safari Retreats

The taxpayer was building a mall to let out and had claimed credit on the construction. The Orissa High Court had read clause (d) down in its favour. The Supreme Court (Civil Appeal No. 2948 of 2023, decided 3 October 2024, 2024 INSC 756) held:

• The challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) and of Section 16(4) was not established. Credit is a creation of the statute, and Parliament may exclude categories from it.
• Clauses (c) and (d) stand on different footing. Clause (c) uses the defined expression "plant and machinery", and clause (d) then used "plant or machinery". The Court declined to read "or" as "and". The word "plant" in clause (d) was therefore not tied to the statutory definition, and took its ordinary commercial meaning.
• Whether a building is a plant is a question of fact, answered by a functionality test. A building could be a plant where its construction is essential for carrying on the activity of supply, such as renting or leasing it. The Court sent the question back to the High Court to be decided on the facts.
• Construction is on a taxable person's own account when it is made for personal use and not for service, or when it is to be used by the person constructing as a setting in which business is carried on. It is not on own account if it is intended to be sold or given on lease or licence.

The Revenue's review petition against the judgment was dismissed in May 2025.

What Parliament did

On the recommendation of the GST Council (55th meeting, 21 December 2024), section 124 of the Finance Act, 2025 amended clause (d) in two ways:

1. It substituted "plant and machinery" for "plant or machinery", deemed to have been substituted with effect from 1 July 2017.
2. It inserted Explanation 2, which provides that for clause (d), notwithstanding any judgment, decree or order of any court, tribunal or other authority, any reference to "plant or machinery" is to be construed, and is deemed always to have been construed, as a reference to "plant and machinery".

The Act received assent on 29 March 2025, and the section was brought into force on 1 October 2025 by Notification No. 16/2025-Central Tax dated 17 September 2025. (Commentary that cites "section 119 of the Finance Act, 2025" is referring to the clause number in the Finance Bill.)

The effect, for every period from 1 July 2017 and for cases still pending:

The first Tribunal decision on the amended clause

In Flora Kingdom Farm Resort v. Commissioner of Commercial Taxes (GSTAT, Bengaluru, pronounced 30 September 2026), a resort in Udupi had taken credit in FY 2019-20 on goods and services used to build its own premises. The Tribunal dismissed the appeal and confirmed a demand of ₹9,32,177 (tax ₹8,45,972, interest ₹1,607, penalty ₹84,598). On the points that matter:

• Plant and machinery. The Tribunal applied the amended clause to FY 2019-20 and held that a resort building cannot be plant and machinery as defined. The taxpayer did not dispute that the amendment operates from 01.07.2017, and the Tribunal noted that a statutory tribunal does not sit in judgment on the validity of the law it administers. It added that, even before the amendment, the functionality test as the Supreme Court framed it, for buildings other than hotels and cinema theatres, did not reach a hotel or resort.
• Own account. The Tribunal applied the Supreme Court's description. The resort was the setting in which the taxpayer carried on its own accommodation, restaurant and events business. No lease or licence of any part of it, and no renting invoice, was produced, and calling weddings, events and stays "renting" did not change the substance of the supplies. The construction was on its own account.
• Not every purchase is blocked. Clause (d) reaches only goods and services received for construction. Furniture, movable fixtures and equipment bought and used as such are outside it, and eligibility depends on what the item is and why it was acquired, not on its accounting treatment. The officer had already allowed ₹1,47,922.92 of credit on the items the taxpayer identified (electrical equipment, air-conditioners and expensed purchases). The balance was cement, steel, tiles and similar material built into the structure, and the burden under Section 155 was on the taxpayer to identify anything more.
• Interest and penalty. Interest was upheld only on credit wrongly availed and also utilised, measured from the credit-ledger balance under Section 50(3) read with Rule 88B(3), which came to ₹1,607. Penalty of 10% of the tax under Section 73(9) was upheld because tax and interest were not paid within thirty days of the notice.

This is a decision of one Tribunal bench on a hotel. It does not decide the position of buildings built to be let or sold, and it is not binding on other benches.

The live question: buildings built to sell or let

Because the amendment left "own account" untouched, the argument has moved there. On the Supreme Court's description, a building intended to be sold or given on lease or licence is not constructed on the taxpayer's own account, so clause (d) does not block the goods and services received for it. Taxpayers who build to let or sell rely on that.

The Revenue's approach in some assessments has been to treat ownership, control and capitalisation as making the construction own account, whatever is done with the building later. In Esnp Property Builder and Developers Private Limited v. State Tax Officer, reported in October 2026, the Madras High Court set aside an assessment of that kind because it had not applied Safari Retreats, and directed fresh orders after a hearing within five months. A remand is not a ruling on the merits, but it shows that the "own account" description is being applied by the High Courts.

Two cautions apply to anything written on this point:

• Clause (c) has no "own account" words. On its terms it blocks works contract services for construction of immovable property other than plant and machinery whoever the property is for, subject only to its own exceptions. The Supreme Court noted that the two clauses are differently worded but did not settle how they overlap for lessors and developers. Record the position as an interpretation.
• The facts decide. The Tribunal in Flora Kingdom looked for documents showing that an identifiable part was built for letting. Intention to sell, lease or license has to be shown by agreements, supplies made and project records, not asserted afterwards.

Sorting items for the working paper

For the working paper

Officer:

• Identify the clause first, from the nature of the supply and its use. For construction, take the fixed-asset register, the capital work-in-progress ledger, the project cost sheet and the agreements, not the return.
• Put three questions to each item: was it received for construction (repairs only to the extent capitalised), is the resulting property plant and machinery as defined, and, for clause (d), was it on the taxpayer's own account.
• Where the building is said to be for sale or letting, call for the sale, lease or licence agreements and the supplies actually made, and record which reading of "own account" has been applied.
• Remember that the burden of proving eligibility lies on the person claiming credit (Section 155).
• Charge interest only on credit that was availed and utilised, traced through the credit ledger (Section 50(3), Rule 88B(3); see the interest article).
• Desktop check A3 lists credit that may fall in Section 17(5) for verification. It works from return data and cannot see the use of the item.

Practitioner:

• Split project invoices item by item when they are booked: civil inputs, services, foundations for machinery, and movable assets. A single capitalised total cannot be defended later.
• Record the intended use of each building before construction starts: own use, sale, or lease. That is the evidence of intention.
• Do not take credit on civil items for the taxpayer's own premises, and do not rely on the functionality argument for any period from 01.07.2017 while the amendment stands.
• For plant and machinery, keep proof that it is fixed to earth by foundation or structural support and used for outward supply.