The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad Bench, has set aside a Service Tax demand of ₹22,82,275 along with interest and penalty imposed on rental income from four immovable properties, holding that the properties were rented out for residential purposes and therefore covered by the exemption under Section 66D(m) of the Finance Act, 1994. 

The bench of Justice P. K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) found that the documentary evidence, including lease deeds, established that the premises were intended for residential use.

The appellant was registered with the Service Tax Department for providing the service of ‘Renting of Immovable Property Service’ and had been regularly filing Service Tax returns and discharging his tax liability.

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For the financial year 2014-15, the appellant had reported rental income from four properties. The properties included premises at Sunder Nagar, New Delhi, a property at Sector 15A, Noida, a premises at Windsor Place, Lucknow, and another property at Khushalganj Pargana, Kakori, Lucknow. The appellant’s reported share of rent from these properties was ₹36 lakh, ₹1.44 crore, ₹4.05 lakh and ₹60,000 respectively.
The Department took the view that Service Tax had not been discharged on the rental amounts received from these properties. Proceedings were consequently initiated, resulting in confirmation of a Service Tax demand of ₹22,82,275 along with interest through an Order-in-Original dated May 17, 2019.

A penalty of ₹2,28,227 was also imposed under Section 76 of the Finance Act, 1994. The Commissioner (Appeals) subsequently upheld the Service Tax demand, interest and penalty, prompting the appeal before the CESTAT.

Before the Tribunal, the appellant contended that all four properties had been rented out for residential purposes and that the rental receipts were consequently exempt under Section 66D(m) of the Finance Act, 1994.

The appellant relied upon the statutory exemption for “services by way of renting of residential dwelling for use as residence.” It was also pointed out that, for three of the properties, the Commissioner (Appeals) had subsequently accepted the residential character of the properties and granted the exemption for the financial year 2016-17.

With respect to the fourth property at Khushalganj Pargana, Kakori, the appellant specifically relied upon a lease agreement dated April 1, 2011. According to the appellant, the agreement expressly stated that the premises were being rented for the residence of employees.

The appellant therefore argued that the rental income from all four properties fell within the statutory exemption and that the Service Tax demand was legally unsustainable. It was also submitted that the appellant had acted under a bona fide belief that Service Tax was not payable and, therefore, the penalty should not have been imposed.

The Department’s representative opposed the appeal, primarily contending that the appellant had not produced the lease agreements relating to the properties before the lower authorities.

On this basis, the Department supported the confirmation of the Service Tax demand and the impugned order.

The Tribunal noted that Section 66D(m) of the Finance Act, 1994 specifically placed “services by way of renting of residential dwelling for use as residence” within the negative list.

The Bench observed that the dispute concerned the financial year 2014-15 and examined the documentary material relating to the four properties. A significant factor considered by the Tribunal was that the Commissioner (Appeals), while deciding the appellant’s case for a subsequent period, had already examined lease deeds relating to three of the properties and concluded that they had been rented out for residential purposes.

With respect to the Sunder Nagar property in New Delhi, the Commissioner (Appeals), in the subsequent-period proceedings, had examined the lease deed and supplementary deed executed with M/s P.B.S. Foods Pvt. Ltd.

The documents recorded that the property was being used for residential purposes. The lease was subsequently renewed from September 1, 2014 to August 31, 2019 on the same terms and conditions. The Commissioner (Appeals) therefore held that the rental service fell within Section 66D(m) and was exempt from Service Tax.

Similarly, the lease documents concerning the property at House No. 22, Sector 15A, Noida, showed that the tenant, M/s Forum Pharma Private Limited, was paying rent for use of the property for residential purposes. The lease was also renewed on the same terms. The Commissioner (Appeals) consequently treated the rental income from the property as covered by the residential-renting exemption.

The third property, situated at 17/9, Windsor Place, Lucknow, was covered by a lease deed executed with Misra and Misra Associates. The Commissioner (Appeals) found that the premises were residential and had been rented out specifically for residential purposes.

An affidavit/declaration from the tenant also stated that the rented property was being used for residence.

The CESTAT observed that the lease deeds examined by the lower authority categorically established that the first three properties were rented for residential purposes.

The Tribunal held that the evidence available on record indicated that the three premises were meant for residential use. Accordingly, the Bench concluded that the appellant was entitled to the benefit of Section 66D(m) of the Finance Act, 1994.

It therefore held that the Service Tax demand relating to these three properties was legally unsustainable and set aside the corresponding demand.

The Tribunal separately examined the fourth property situated at Khushalganj Pargana, Kakori, Lucknow.

The appellant produced the lease deed executed with effect from April 1, 2011. The document, reproduced in the Tribunal’s order, stated that the lessors agreed to let out the residential building for the purpose of the residence of the lessee’s employees.

The lease deed further contained provisions concerning the rent payable and the use and occupation of the premises. The document therefore directly linked the letting of the property to residential accommodation for employees. The reproduced lease deed is visible in the Tribunal’s order at pages 6 and 7.

After examining the lease deed, the Tribunal held that the property had been rented out for residential purposes of the employees. It consequently concluded that the rental service was eligible for the exemption under Section 66D(m).

The demand relating to the fourth property was therefore also set aside.

The Tribunal also dealt with the penalty imposed under Section 76 of the Finance Act, 1994.

The Bench held that once the underlying Service Tax demand was found to be unsustainable, the question of imposing a penalty did not arise.

The CESTAT set aside the impugned order and allowed the appeal, with consequential relief, if any, in accordance with law.

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