Rent received from jointly owned property cannot be combined to impose service tax on individuals

M. Vijayabharathi Vs Commissioner of GST & Central Excise (CESTAT Chennai)

In a recent case, M. Vijayabharathi v. Commissioner of GST & Central Excise [Service Tax Appeal No. 42320 of 2014 dated June 14, 2023], the CESTAT (Customs, Excise and Service Tax Appellate Tribunal) in Chennai made a significant ruling. The tribunal overturned the order that imposed service tax on the entire rent received by co-owners collectively. Instead, it concluded that the income earned as rent by each co-owner fell below the threshold limit, making it exempt from service tax.

Facts:

Mr. M. Vijayabharathi (“the Appellant”) jointly with Smt. Akila entered into an agreement with tenants of Ananda Towers for providing services of renting of immovable property during the period of 2007-08 onwards.

Upon investigation the Commissioner of GST & Central Excise (“the Respondent”) found that the Appellant and Smt. Akila have not paid the service tax on the rental income received from the property. The Department issued a Show Cause Notice (“the SCN”) demanding service tax from both co-owners jointly. The Adjudicating Authority confirmed the demand along with the interest and penalty from both the co-owners.

Aggrieved by the order of the Adjudicating Authority the Appellant filed an appeal before the Commissioner of Central Excise (Appeals) who vide Order-in-Appeal No. TCP-CEX & CUS-000-APP-067-14 dated August 21, 2014 (“the Impugned Oder”) upheld the order of the Adjudicating Authority.

Aggrieved by the Impugned Order, the Appellant filed the appeal before CESTAT, Chennai.

The Appellant contended that the CESTAT, Chennai in the case of Smt. Akila vide final order No. 42538/2018 dated October 01, 2018 observed that the rental income received individually is within the threshold limit of levy of service tax thus, Smt. Akila is not required to pay service tax on the rental income.

Issue:

Whether the Co-owners of the property are liable to pay service tax on the rental income jointly?

Held:

The CESTAT, Chennai in Service Tax Appeal No. 42320 of 2014 held as under:

• Observed that CESTAT, Chennai in the case of Smt. Akila has set aside the demand by observing that income received as rent individually by co-owner is much below the threshold limit of levy of service tax.
• Held that the rent received by the Appellant individually is much below the threshold limit of levy of service tax thus, no service tax can be imposed.
• Allowed the Appeal and set aside the Impugned Order.

Conclusion: The CESTAT’s decision clarifies that since the rent received by individual co-owners is below the specified threshold, there is no basis for imposing service tax on these amounts. Therefore, the ruling ensures that no service tax can be levied on such rental income. This judgment provides clarity and a fair approach to the taxation of rental income in co-owned properties, ensuring that only income surpassing the threshold is subjected to service tax.

FULL TEXT OF THE CESTAT CHENNAI ORDER

Brief facts are that based on intelligence that the appellant is providing services under ‘Renting of Immovable Property Service’ during the period from 2007-08 onwards and have not paid appropriate service tax, verification of the transactions were conducted by the Anti-Evasion Wing of the Department. On perusal of documents, it was noticed that agreements with tenants of Ananda Towers were jointly entered into by the appellant as well as one Smt. Akila. The department was of the view that property tax on the said commercial complex was assessed jointly in the name of both appellant and other co-owner Smt. Akila and the rental income received by the appellant from the property has to be considered for discharging service tax. Show cause notice was issued proposing to demand service tax from both co-owners jointly. After due process of law, the original authority confirmed the demand, interest as well as imposed penalty. Against the order of original authority, appellant preferred appeal before Commissioner (Appeals) who upheld the same. Hence this appeal.

2. Counsel Shri K. Sankaranarayan appeared and argued for the appellant. It is submitted that the co-owner Smt. Akila had already preferred an appeal before the Tribunal and the demand was set aside as per Final Order No.42538/2018 dated 01.10.2018 observing that the rental income received separately is within the threshold limit and is not required to pay service tax. Ld. Counsel submitted that the same view may be taken in the case of this appellant also and prayed that the appeal may be allowed.

3. A.R Shri N. Sathya Narayanan appeared for the department and supported the findings in the impugned order.

4. Heard both sides.

5. On going through the records of the case, we find that in the case of the co-owner Smt. Akila, the Tribunal has set aside the demand observing that income received as rent separately by each co-owner is much below the threshold limit to subject to levy of service tax. Thus, the income falls within the threshold limit for payment of service tax. Vide Final Order No.42538 dated 01.10.2018 the Tribunal has relied upon the decision of Anil Saini Vs CCE Chandigarh 2017 (51) STR (Tri.-Chan.). and also the case of S.V. Janardhanam Vs CGST & CE Salem – Final Order No.42474/2018 dated 25.09.2018. Following the decision in the case of the co-owner as well as other decisions, we hold that demand cannot sustain. Impugned order is set aside. Appeal is allowed with consequential relief, if any.

(Order dictated and pronounced in open court)

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