Aditya Tripathi Vs Principal Commissioner of CGST & Central Excise (CESTAT Delhi)
Compensation for Premature Lease Termination Is Not Rent: CESTAT Deletes Tax on an Unreceived Claim
Background: Hotel Lease Terminated Before the Agreed Period
Brijrani Hospitality Private Limited owned Hotel Ambrosia, which it leased to Shotz Hospitality Private Limited under an agreement dated 1 April 2013. The lease stipulated monthly rent of ₹4.50 lakh for eleven years.
The agreement provided that, if either party cancelled it, the other could recover rent for the entire contractual period. Shotz operated the hotel until August 2014 and vacated the premises on 8 August 2014.
Brijrani subsequently issued a legal notice demanding approximately ₹5.83 crore, calculated by deducting rent already paid from the rent for the full eleven-year term.
The hotel was later leased to Vishwa Mangal Trade Mart Private Limited. During investigation, the Department found two agreements: one specifying monthly rent of ₹2.90 lakh and another recording only ₹60,000.
The Department confirmed an aggregate service tax demand of ₹1,06,31,026, together with penalties. Brijrani and its Managing Director, Aditya Tripathi, challenged the appellate order upholding these liabilities.
Three Components of the Demand
The demand comprised ₹84,63,192 on the premature-termination claim against Shotz, ₹8,89,920 on rent assessed for sixteen months of Shotz’s occupation, and approximately ₹12.78 lakh on rent from Vishwa Mangal.
The Department contended that the legal demand triggered liability under the Point of Taxation Rules. It also relied on section 66E(e), concerning an agreement to tolerate an act or situation, and argued that the termination amount remained contractual lease rent.
The appellants submitted that the termination claim was never received. After litigation before the High Court and Supreme Court, the parties entered into a compromise dated 27 April 2024 under which neither party was required to pay compensation, damages or any other claim to the other.
Contractual Description Does Not Determine the Payment’s Nature
CESTAT accepted that the premature-termination amount was compensation for breach of contract rather than rent.
Although the agreement described the recovery by reference to rent for the remaining period, the premises had already been vacated. The proposed payment therefore could not represent consideration for continued occupation.
The Tribunal held that its substance was compensation for reneging on the contract. It further noted that the amount had never been paid.
On these two grounds—its compensatory character and non-receipt—the Tribunal deleted the service tax demand of ₹84,63,192.
The ruling thus distinguished rent for actual letting from a claim quantified using future rent as the measure of damages.
Actual Rent Required Recalculation After Exemption and Tax Credit
Regarding Shotz’s occupation, Brijrani contended that it had paid service tax after claiming the ₹10 lakh exemption available to small service providers. It also asserted that no rent had been paid for August 2014.
The Tribunal found no evidence of payment of rent for that month and set aside the corresponding demand.
For the remaining period, it directed recalculation of the liability by considering rent actually received, the available small-service-provider exemption and service tax already deposited. The appellant claimed an earlier payment of ₹2,67,461, which required verification and adjustment.
Accordingly, this component was not deleted in full. The surviving liability was to be recomputed after giving the appropriate exemption and credit.
Higher Rent Agreement Supported the Vishwa Mangal Demand
The Tribunal examined both agreements concerning Vishwa Mangal. Both were executed on stamp papers and signed by the parties.
However, the statement relied upon by the Department confirmed monthly rent of ₹2.90 lakh. The Tribunal also considered this figure more realistic against the earlier rent of ₹4.50 lakh, while finding ₹60,000 substantially out of proportion.
It therefore upheld the demand based on monthly rent of ₹2.90 lakh, rather than accepting the lower figure in the subsequent agreement.
The Tribunal also held that the factual circumstances furnished sufficient grounds for invoking the extended limitation period.
Result and Scope of Relief
Both appeals were disposed of with partial relief. The termination-compensation demand was deleted, the Shotz rental demand required recalculation, and the Vishwa Mangal rental demand was sustained. Interest and the penalty under section 78 were directed to be reduced proportionately.
The operative paragraph refers to December 2014–June 2015 for the Vishwa Mangal component, whereas the demand table and substantive discussion consistently describe December 2014–June 2017, covering thirty-one months. This inconsistency should be checked when implementing the order.
Author’s Comments
The significant principle is that a damages claim does not become rental consideration merely because the agreement calculates it using the remaining lease rent. The Tribunal examined what the payment represented after vacation of the premises.
The ruling should nevertheless be applied within its facts. The claim was never received and was ultimately extinguished by settlement. Its observations on non-receipt should not be converted into a general proposition that unpaid consideration can never attract service tax.
The contrasting treatment of the two rental agreements is equally instructive. Documentary form alone did not settle the valuation dispute; the Tribunal considered the accompanying statement and surrounding circumstances.
Finally, although the Managing Director’s appeal was also disposed of, the operative directions do not separately address his ₹50,000 penalty under section 78A. An automatic deletion of that personal penalty should therefore not be inferred from the relief granted to the company.
FULL TEXT OF THE CESTAT DELHI ORDER
1. The order in appeal dated 29.03.20191 passed by the Commissioner (Appeals) is assailed by M/s Brijrani Hospitality Private Limited2 and its Managing Director of Shri Aditya Tripathi3 in these two appeals. The Commissioner (Appeals) had, in the impugned order, upheld the order dated 26.09.2019 passed by the Additional Commissioner of Central Excise, Indore in which service tax demand of Rs.1,06,31,026/- has been confirmed under section 73 of the Finance Act, 19444 and penalties of Rs. 50,00,000/- under section 78 of the Act and Rs. 10,000/- under section 77 of the Act have been imposed on Brijrani and a penalty of Rs.50,000/- was also imposed on Tripathi under section 78 A of the Act.
2. We have heard learned counsels for the appellants and the learned authorized representative for the Revenue and perused the records.
3. Brijrani was the owner of Hotel Ambrosia which it rented out to M/s Shotz Hospitality Pvt Ltd.5 under a lease agreement dated 01.04.2013 on a monthly rent of Rs.4.5 lakhs for 11 years. One of the conditions of the agreement was that if either of the parties wants to cancel the agreement for any reason, then the other party can recover the rent for the entire 11 years. Shotz operated the hotel from April 2013 to August, 2014 and vacated the said property on August 08, 2014 well before 11 years. Brijrani had obtained registration and filed periodical returns in the ST-3 with the department. Brijrani served a legal notice on Shotz seeking payment of Rs.5,83,66,854/- calculated as lease rent for 11 years minus the rent already paid for the period April, 2013 to August, 2014. Thereafter, Brijrani leased the hotel to another party, namely, M/s Vishwa Mangal Trade Mart Pvt. Ltd., Indore under a rent agreement dated 07.02.2015 at a monthly rent of Rs.60,000/-only. The records of Brijrani were examined and it was felt that it was liable to pay service tax on the gross amount of Rs. 4.50 lakhs per month which it had claimed from Shotz for the entire period but it failed to deposit the same. Investigation also showed that Brijrani had entered into an another agreement dated 28.11.2014 effective from December, 2014 with M/s Vishwa Mangal according to which it was to receive the rent of Rs.2,90,000/- per monthly for a period of five years. Accordingly, a show cause notice was issued to the Brijrani demanding service tax of Rs.1,06,31,026/- under section 73 of the Act along with interest under section 75 and proposing to impose penalties under section 77 and 78 of the Act.
4. The Additional Commissioner confirmed these proposals which order was upheld by the Commissioner (Appeals). The details of the tax demanded are as follows:
| Sr No. | Head of Demand/category | Period/ Transaction | Assessable value | Service Tax Payable |
|---|---|---|---|---|
| 1 | Rent Accrued (M/s Shotz) | April 2013 to August 2014 (16 Months @ Rs.4.50 Lakhs/months) | 72,00,000/- | 8,89,920/- |
| 2 | Demand via Legal notice Termination Claim (M/s Shotz) | Premature Cancellation Claim (Point of Taxation Rules, 2011) | 5,83,66,845/- | 84,63,192/- |
| 3 | Undervalued Rent (M/s Vishwamangal) | 01.12.2014 to 30.06.2017 (31 Months @2.90 Lakhs) | 89,90,000/- | 12,77,914/- |
| Total | Aggregate confirmed demand | — | — | 1,06,31,026/- |
5. The submissions of the learned counsel for the appellants were as follows:
(i) Of the total demand, a demand of Rs.84,63,192/-was on account of service tax on the total rent payable for 11 years by Shotz to Brijrani on account of premature cancellation of the rent agreement. As per the agreement, a legal notice was issued to Shotz demanding an amount of Rs.5,83,66,845/- as compensation. The matter was agitated before Hon’ble High Court of Madhya Pradesh and further Supreme Court and finally both parties entered into a compromise agreement dated 27.04.2024 according to which no compensation or claim or damages of any kind was payable by either party to the other. Since no amount has been paid as rent or as compensation by the Shotz to Brijrani no service ax can be demanded.
(ii) As far as service tax demand of Rs.8,89,929/-on the rent of Rs.72,00,000/- for the period April, 2013 to August, 2014 is concerned, Brijrani had already paid service tax of Rs.2,67,461/-on the rent of Rs.27,00,000/- received for six months from Shotz after claiming the basic exemption of Rs.10,00,000/- available to the appellant. Although these figures were presented before the adjudicating authority and the Commissioner (Appeals), this submission was not considered. Further, for the month of August, 2014 the Shotz did not pay any rent as it vacated the premises on August, 2008 itself. Therefore, no consideration was received for this period.
(iii) After the hotel was vacated by the Shotz, Brijrani entered into a monthly agreement for a rent of Rs.60,000/- only for Vishwa Mangal and paid service tax as applicable. Revenue has discovered an agreement with a rent of Rs.2,90,000/- which is not an enforceable agreement.
(iv) In view of the above, the demand is not sustainable on merits. It is also partly time barred.
(v) In view of the above, the appeal may be allowed and the impugned order may be set aside.
6. Countering the submissions by the learned counsel, learned authorized representative for the Revenue submitted that the lease agreement of Brijrani with Shotz clearly specifies monthly rent of Rs.4.5 lakhs from 01.04.2013. Once the taxable service is provided and the rent accrued for a period of 16 months (Rs.72,00,000), non recovery of the consideration does not negate the taxability of the service.
7. As for the demand of service tax of Rs.84,63,192/- on legal notice claim of Rs.5,83,66,845/-, as per Rule 3(a) of the Point of Taxation Rules, 2011, Brijrani was legally required to pay service tax when the invoice/ demand was issued or when the consideration has been received whichever was earlier. Further, under the negative list regime, agreeing to tolerate an Act or situation constitutes a declared as per Section 66E(e) of the Finance Act, 1944. Brijrani had the contractual right to recover rent for the residual period of 11 years. Therefore, the amount was lease rent and was exigible to service tax.
8. As for the agreements with Vishwa Mangal, agreement dated 28.11.2014 was for a rent of Rs.2,90,000/- per month. A subsequent agreement dated 07.02.2015 indicating rent only of Rs.60,000/- per month was executed in order to suppress the taxable value. The Director of Vishwa Mangal had also admitted in his statement that the actual rent payable was Rs.2,90,000/- per month. Therefore, service tax has to be paid on this amount.
9. Extended period of limitation was correctly invoked in this case as the appellant had suppressed the actual lease agreements, filed false ST-3 returns, and created dummy agreements to undervalue services and further evaded summons which show that this was an active fraud by the appellant to evade duty. In view of the above, the impugned order is correct and proper which may be upheld and the appeals filed by the appellants may be dismissed.
10. We have considered the submissions advanced by both sides and perused the records.
11. There are three contentious points of demand as follows:
(a) Demand of Rs.84,63,192/- on an amount of Rs.5,83,66,845/- which Brijrani was supposed to receive from Shotz for premature cancellation of the agreement.
(b) Tax of Rs.8,89,920/- on rent of Rs.72,00,000/- from Shotz for a period of 16 months at the rate of Rs.4.5 lakhs per month from April 2013 to August, 2014.
(c) Service tax of Rs. 12,77,914/- on rent of Rs.89,90,000/- for a period of 31 months from December 2014 to June 2017 on the rent at the rate of Rs. 2.9 lakhs per month received from Vishwa Mangal.
12. The total demand comes to Rs.1,06,31,026/-. As far as the demand of service tax on the amounts which Brijrani could have claimed from Shotz is concerned, the submission of the learned counsel is that this amount was never paid and a compromise agreement was reached after litigating the matter before High Court and Supreme Court according to which neither party was to pay any damage to the other. Thus, according to the learned counsel, Brijrani never received this amount. Even otherwise, an amount received for default of a contract is in the nature of compensation for breach of contract and is not in the nature of rent. It is true that in the agreement, the parties agreed that the defaulted party can recover rent from the defaulting party but the nature of payment cannot be rent because the premises would have already been vacated when there was a breach of the agreement. The amounts so payable as per the agreement is, in essence, a compensation to be paid for reneging on the contract. At any rate, when the amount has not been paid service tax cannot be demanded on such amount.
13. As far as the rent accrued to Brijrani from Shotz is concerned, learned counsel has two submissions-(i) for the month of August, 2014 since the premises were vacated on August 08 no rent was paid by Shotz. For the remaining 15 months, according to the learned counsel, service tax was paid after claiming the exemption limit of Rs.10,00,000/- available to small service providers. This submission deserves to be accepted, subject to verification. There is no evidence that rent was paid for August, 2014 and, therefore, service tax cannot be charged on the rent not paid. Further, if the appellant is entitled to benefit of exemption available to small service providers, it cannot be denied to the Brijrani. According to the learned counsel, after reckoning the exemption, it had paid total service tax of Rs.2,67,461/. This payment and the service tax payable after considering the rent actually received and the exemption available, the amount of service tax needs to be re-computed.
14. As far as the demand of service tax on the rent paid at the rate of Rs.2.9 lakhs per month by Vishwa Mangal is concerned, learned counsel submits that they have another agreement for showing Rs.60,000/- per month as rent. We have seen both these agreements which are at pages 164 and 189 of the appeal paper book. Both are on stamp papers. Both are with signatures of the parties. In the statement Shri Vishwa Mangal confirmed that the rent of Rs.2,90,000/- per month was correct. Even otherwise, the rent of the hotel was Rs.4.5 lakhs per month when it was rented to Shotz. After it is vacated, the rent could have been reduced to attract another tenant but an amount of Rs.60,000/- per month is nowhere comparable to previous rent of Rs.4.5 lakhs. Rent of Rs.2,90,000/- appears to be more realistic. We, therefore, find no reason to interfere with the demand of Service tax on the rent of Rs.2,90,000/- paid per month both by Vishwa Mangal to Brijrani.
15. In the factual matrix of this case, we find that the sufficient grounds to invoke extended period of limitation to raise the demand.
16. In view of the above, the appeal is partly allowed and the impugned order is modified as follow:
(a) The demand of service tax of Rs. 84,63,192/- on the legal claim of Brijrani of an amount of Rs.5,83,66,845/- is set aside for the reason that the amount was never received and also for the reason that the amount is in the nature of compensation.
(b) The demand of service tax on the rent paid by Shotz for a period of April, 2013 to August, 2014 is partly upheld and the demand of service tax for month of August 2014 is set aside as no rent has been received. The exemption of Rs.10,00,000/- available to small service providers should also be reckoned while calculating the demand and any amount of service tax already deposited should be appropriated towards the confirmed demand.
(c) The demand of service tax of Rs.12,77,913/- on the rent to Vishwa Mangal for the period December 2014 to June 2015 is upheld.
(d) The amount of interest and penalty under section 78 shall be reduced proportionally.
17. Both appeals are disposed of accordingly.
[Order pronounced on 05/10/2026]
Notes:
1 Impugned order
2 Brijrani
3 Tripathi
4 Act
5 Shotz
