Is Service Tax Payable on Rent Earned From Commercial Shops Located Within Church Premises After July 1, 2012? CESTAT

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a church is liable to pay service tax on rent received from commercial shops located within its premises after July 1, 2012. However, the bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) has restricted the demand to the normal limitation period and set aside all penalties. The appellant, a church registered as a charitable trust and religious institution, owned various commercial properties and shopping complexes within its premises that were rented out to tenants for business purposes. The Service Tax Department initiated proceedings seeking service tax on the rental income derived from these properties. The Commissioner (Appeals) had earlier confirmed the service tax demand for the period after July 1, 2012, holding that the church was not entitled to the exemption under Notification No. 25/2012-Service Tax dated June 20, 2012. Though the penalty was reduced, the tax demand was sustained, prompting the appeal before the Tribunal. Before the Tribunal, the church argued that it was registered under Section 12AA of the Income Tax Act and was engaged in charitable and religious activities. Relying upon Clause 4 of Notification No. 25/2012-ST, it contended that services provided by an entity registered under Section 12AA by way of charitable activities were exempt from service tax. The appellant further submitted that advancement of religion or spirituality falls within the definition of “charitable activities” under the exemption notification and, therefore, the benefit should be extended to it. The principal question before the Tribunal was whether rent received from commercial shops situated within church premises could qualify for exemption either: as a charitable activity under Clause 4 of Notification No. 25/2012-ST; or as “renting of precincts of a religious place meant for general public” under Clause 5(a) of the same notification. The Tribunal observed that mere registration under Section 12AA of the Income Tax Act was insufficient to claim exemption. To qualify under Clause 4, the institution must establish that the specific activity generating income constituted a charitable activity as defined in the notification. According to the Bench, the church failed to place any material on record demonstrating that the renting activity itself amounted to a charitable activity. Therefore, the exemption under Clause 4 was held to be unavailable. The Tribunal also examined Clause 5(a) of Notification No. 25/2012-ST, which exempts services by way of renting precincts of a religious place meant for the general public. Rejecting the church’s argument, the Bench held that the commercial shops had been leased to private individuals for conducting business and selling merchandise. Such rentals could not be treated as renting of religious precincts for use by the general public in connection with religious purposes. The Tribunal relied upon its earlier decision involving a similar issue concerning another church, where it was held that commercial shops located within church premises do not qualify for the exemption available to religious places. The Bench noted that prior to July 1, 2012, renting of immovable property by a religious body enjoyed exclusion under the then prevailing statutory provisions. Consequently, no service tax liability arose for the pre-July 2012 period. However, following the changes in the service tax regime effective from July 1, 2012, rental income from commercial properties became taxable. Since the shops were rented out for commercial purposes, the church became liable to pay service tax on such receipts from that date onwards. While affirming the taxability of the rental income, the Tribunal granted substantial relief to the appellant. It observed that the church had continued to claim exemption under a bona fide belief and had properly disclosed the transactions in its records. The Tribunal ruled that the extended period of limitation could not be invoked. Accordingly, the service tax demand was restricted only to the normal period. Further, all penalties imposed in the case were completely set aside. CESTAT held that rent earned by a church from commercial shops leased for business activities is liable to service tax after July 1, 2012. The Tribunal ruled that such activity does not qualify either as a charitable activity or as renting of religious precincts meant for the general public under Notification No. 25/2012-ST. Nevertheless, considering the bona fide belief of the appellant, the demand was confined to the normal period and all penalties were deleted. Case Details Case Title: M/s. Marthoma Cheriya Pally Versus The Commissioner of Central Excise, Customs and Service Tax Citation: JURISHOUR-1495-HC-2026(Ker) Case No.: Service Tax Appeal No. 20528 of 2018 Date: 01.06.2026 Counsel For Appellant: Anil D. Nair, Advocate Counsel For Respondent: Vinod Kumar Garhwal, Superintendent Click Here To Read Order Read More: Reassessment Notice Beyond Limitation Invalid Even After Excluding Assessee’s Reply Period: Delhi HC

Is Service Tax Payable on Rent Earned From Commercial Shops Located Within Church Premises After July 1, 2012? CESTAT

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