Service Tax Demand on Residential Let-Out to Company Director Quashed: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, has held that renting of a property to a company for use as the residence of its Managing Director would qualify as “residential use” and remain outside the ambit of taxable service under the erstwhile service tax regime. The Bench of M. Ajit Kumar (Technical Member) and Mr. Ajayan T.V. (Judicial Member) has observed that the law focuses on the “use of the property”, not merely the identity of the lessee. The lease agreement explicitly stated residential use. There was no evidence from the department to prove commercial usage. Under the Finance Act, 1994 buildings used solely for residential purposes are excluded from the definition of taxable “immovable property.” The appellant, Shri N. Devarajan, was engaged in providing renting of immovable property services and had leased out multiple properties in Anna Nagar, Chennai. Based on intelligence inputs, the department initiated an inquiry alleging non-payment of service tax on rental income. During the investigation, it was found that four properties were rented out, of which three were used for commercial purposes. However, one property—AL-61, Anna Nagar—was claimed by the appellant to have been let out for residential purposes, and therefore not liable to service tax. The appellant had also opted for the Voluntary Compliance Encouragement Scheme (VCES) under the Finance Act, 2013 and paid ₹7.59 lakh towards tax dues for the period between October 2007 and March 2011. The tax department disputed the appellant’s claim, asserting that the property at AL-61 was leased to M/s Iswaryalaxmi Properties Pvt. Ltd., a corporate entity, and therefore should be treated as being used for commercial purposes. A show cause notice was issued alleging that the VCES declaration was “substantially false” under Section 111 of the Finance Act, 2013. The department demanded ₹14.60 lakh in service tax, later revised to ₹10.13 lakh by the adjudicating authority, along with interest, equal penalty under Section 78 of the Finance Act, 1994, and dditional penalty of ₹10,000 under Section 77 The appellant contended that the lease agreement dated March 30, 2009 clearly stated that the property was leased for residential use by the Managing Director of the company. A notarised affidavit from the Managing Director confirmed that the premises were used solely as his residence. The lease was valid until March 31, 2011, after which the premises were vacated. The appellant argued that merely because the lease was executed with a company does not automatically imply commercial use. The central question before the Tribunal was whether the property rented to a company—but used as a residence by its Managing Director—would qualify as taxable service under Section 65(105)(zzzz), or excluded as residential use, which is not subject to service tax The adjudicating authority’s assumption—that leasing to a company automatically implies commercial use—was rejected. The Tribunal clarified that a company can lease property for non-commercial purposes, including residential accommodation for its executives. The notarised affidavit from the Managing Director confirming residential use was accepted as credible evidence. The Tribunal found no reason to disbelieve the statement in absence of contrary proof. The Tribunal concluded that the property at AL-61 was used solely for residential purposes up to March 31, 2011. The service tax demand raised by the department was unsustainable. Case Details Case Title: Shri N Devarajan Versus Commissioner of CGST & Central Excise Citation: JURISHOUR-641-CES-2026(CHE) Case No.: Service Tax Appeal No.41478 of 2016 Date: 06.04.2026 Counsel For Appellant: Murugappan, Advocate Counsel For Respondent: N Satyanarayana, Authorised Representative Click Here To Read Order Read More: CESTAT Quashes Rs. 477 Crore Excise Demand On Pan Masala and Gutkha Citing Lack of Evidence

Service Tax Demand on Residential Let-Out to Company Director Quashed: CESTAT

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