Case Law Details
N Devarajan Vs Commissioner of CGST & Central Excise (CESTAT Chennai)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, allowed the appeal and set aside the service tax demand, interest, and penalties relating to rental income from a property claimed to be used for residential purposes. The appellant, a registered service provider of renting of immovable property, had leased multiple properties, including one property (AL-61, Anna Nagar, Chennai), which was claimed to have been rented for residential use and therefore not liable to service tax.
The department initiated proceedings on the basis of income tax records and alleged that the property was rented for commercial purposes to a company, thereby attracting service tax. A show cause notice proposed demand of service tax along with interest and penalties, alleging that the declaration under the Voluntary Compliance Encouragement Scheme (VCES) was substantially false. The adjudicating authority confirmed a revised demand and imposed penalties, holding that the lease agreement mentioning residential use was artificial and intended to avoid tax.
The appellant contended that the property was leased for the residential use of the Managing Director of the company, as explicitly stated in the lease agreement dated March 30, 2009. A notarised affidavit from the Managing Director confirmed that the premises were used for residential purposes until March 31, 2011. The appellant argued that rental income from such use is excluded from the definition of taxable “immovable property” under Section 65(105)(zzzz) of the Finance Act, 1994.
The Tribunal examined the statutory provisions and noted that buildings used solely for residential purposes are excluded from the scope of taxable service. It observed that the lease agreement clearly specified residential use and that the adjudicating authority had also acknowledged this aspect. The Tribunal held that the mere fact that the lease was executed with a company does not alter the nature of usage when the property is actually used for residential purposes.
In the absence of any evidence from the department to prove commercial use, and considering the affidavit and agreement on record, the Tribunal found no basis to reject the appellant’s claim. It concluded that the property was used solely for residential purposes and therefore fell outside the ambit of taxable service.
Accordingly, the Tribunal set aside the impugned order and allowed the appeal with consequential relief.
FULL TEXT OF THE CESTAT CHENNAI ORDER
Shri N Devarajan, the appellant herein, has preferred this appeal aggrieved by the Order in Original No.CHN-SVTAX-001-COM-110/2015-2016-ST 1 dated 31.03.2016 (impugned order) passed by the Adjudicating Authority.
2. The relevant facts are that the appellant is a registered service provider of renting of immovable property service. Based on intelligence that the appellant was providing renting of immovable property service for commercial purpose and was not paying service tax on the consideration received, the Department called for the details of income returns, profit and loss a/cs and copies of invoices raised for the period in 2008 – 2009, 2012 – 2013 to determine the service tax liability. On the basis of the income tax returns provided indicating income from house property, when the appellant was further enquired, the appellant informed vide its letter dated 04.12.2013, that four immovable property belonging to him namely A-80, A-89, A-79, and AL -61 all located at Ann Nagar, Chennai was being let out, out of which three were rented out for commercial purpose and AL – 61 was not let out for commercial purpose till March 2011. The appellant informed that since the rental income received from renting out AL -61, being rent for residential purpose, it does not attract service tax.
3. Soon thereafter, the appellant opted for VCES Scheme and vide declaration dated 26.12.2013, declared a service tax liability of Rs.7,59,897/- for the period from October 2007 – March 2011 and paid the said amount. The Department, being of the view that the property located at AL -61 was rented out to M/s. Iswaryalaxmi Properties (P) Ltd. for commercial purpose, contrary to the claim made by the appellant, issued a Show Cause Notice dated 19.12.2014 alleging that the VCES declaration filed by the appellant was substantially false as per the provision of Sec.111 of the Finance Act, 2013 and proposing a demand of service tax of Rs.14,60,604/- along with applicable interest for the period from October 2007 to December 2012. The Notice also proposed to appropriate the amount already paid as well as imposition of penalties. After due process of law, the Adjudicating Authority, vide the impugned order, demanded a re-quantified amount of Rs.10,13,552/-, confining it to the period upto 2010 – 11, while imposing equivalent penalty under Section 78 of the Finance Act, 1994 (Act) and a penalty of RS.10,000/- under Sec.77 of the Act. Aggrieved, the appellant has preferred this appeal.
4. Shri Murugappan, Ld. Advocate appearing for the appellant submitted that the Adjudicating Authority, in spite of conceding that the lease agreement dated 30.03.2009 in respect of the property situated at AL – 61 entered into between lessor and M/s. Iswaryalaxmi Properties Pvt. Ltd indicated that the lessor has agreed to demise the property for a period of 11 months from 01 April 2009 (renewable up to a period of 2 years) for the residential use of its Managing Director; has nevertheless rejected the appellant’s claim on the ground that the appellant has artificially mentioned in the agreement that the said property is let out for residential purpose of the Managing Director of the company to avoid service tax. It was also held that the appellant had not stated any valid reason for non-submission of rental agreement at the time of verification of the VCES application filed with the Department and was not able to produce the copy of the original agreement till the issue of the notice and the extension of agreement till date. Ld. Counsel submitted that the appellant has filed a notarised affidavit of Mr. D.L. Madhu Sudan who is the Managing Director of Iswaryalaxmi Properties Pvt Ltd. averring that the premises were used by him for his residential purposes on a monthly rent of Rs.1,00,000/- per month. The affidavit also averred that the lease deed executed by him on 30.03.2009 provided for a period of 11 months and renewable up to 2 years and that at end of lease period of 31.03.2011 he had vacated the said premises. Ld. Counsel prayed that in view of the affidavit filed, the calculation of the service tax liability ought to exclude the income from the rent received in respect of AL-61 which was only for residential purpose, and that the impugned order is liable to be set aside with consequential relief.
5. Shri N Satyanarayana, Ld. Authorised Representative appearing for the respondent, reiterated the findings in the impugned order.
6. We have heard both sides and carefully perused the materials on record.
7. The sole issue that arises for determination is whether the appellant has sufficiently proved that the premises at AL-61 was let out for residential purposes so as to exclude the said property from the ambit of “immovable property” under Section 65(105)(zzzz).
8. We find that the Adjudicating Authority has found that the appellant while furnishing the reply dated 09.01.2015 in respect of the property situated at AL-61, Anna Nagar, in support of their claim that the property was let out for residential purpose has enclosed the lease agreement dated 30.03.2009. He has also found that the agreement entered into indicates that the Appellant had agreed to demise the property described in Schedule A to the lessee M/s. Ishwaryalakshmi Property Limited for use as a residence by the Managing Director of the company. The denial of the benefit claimed as a residential property is on account of the lease being between the Appellant and M/s. Ishwaryalakshmi Property Limited.
9. At this juncture, we notice Section 65(105)(zzzz) defines the taxable service as under:
65(105)(zzzz): “Taxable service” means any service provided or to be provided to any person, by any other person, by renting of immovable property or any other service in relation to such renting for use in the course of or, for furtherance of business or commerce.
Explanation 1.—For the purposes of this sub-clause, “immovable property” includes—
(i) building and part of a building, and the land appurtenant thereto;
ii. land incidental to the use of such building or part of a building;
iii. the common or shared areas and facilities relating thereto; and
iv. in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,
v. Vacant land, given on lease or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce.
but does not include-
a. vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;
b. vacant land, whether or not having facilities clearly incidental to the use of such vacant land;
c. land used for educational, sports, circus, entertainment and parking
purposes;
and
d. building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Explanation 2.—For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce;
10. We notice that the SCN itself indicated the address of AL-61 as AL-61, 3rd Avenue, Anna Nagar, Chennai. Thus, it is not the case of the Department that AL-61 is not a standalone Building or that it is a building that is party used in the course or furtherance of business or commerce. We also notice that the exclusion under clause (d) of the Explanation (1) hinges on the use of the building and thus takes a building used solely for residential purpose, out of the ambit of “immovable property” for the purposes of the sub-clause (zzzz) of Clause 105 of Section 65 of the Act.
11. Admittedly, the adjudicating authority has also found that the Appellant had agreed to demise the property for use as a residence by the Managing Director of the company. Thus, the usage of the property for residential purposes is clearly stated in the lease agreement dated 30.03.2009.
12. We are therefore of the considered view, that the Adjudicating Authority erred in merely assuming that just because the lease was entered into by the company, that the premises is not for the residential purposes of the Managing Director, more so, in the absence of any evidence that it was not being so used as claimed. We also find no reason to disbelieve the notarised affidavit filed by the appellant averring to this fact and its usage for residential purposes till 31.03.2011. In these facts and circumstances, we are therefore of the firm opinion that the impugned order cannot sustain and is liable to be set aside. Ordered accordingly.
The appeal is allowed with consequential reliefs in law, if any.
(Order pronounced in open court on 06.04.2026)
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