Levy of Service Tax on Rented Property is Constitutional, says Allahabad HC [Read Judgment]

Service Tax

In a recent ruling, the division bench of the Allahabad High Court upheld the constitutional validity of provisions of Finance Act, 1994 imposing Service Tax on rented immovable property. While dismissing a bunch of writ petitions, the Court also confirmed the vires of connected circulars passed by the Ministry of Finance.

The petitioners in the instant case, approached High Court challenging the constitutionality of Sections 75(A)(6)(h) and 77 of Finance Act, 2010 and Sections 65(90)(a) and 65(105)(zzzz) read with Section 66 of Finance Act, 1994 as amended by Finance Act, 2007 and Finance Act, 2010. They urged that the provisions are illegal, arbitrary and lacking legislative competence infringing Articles 14, 246 and 265 of Constitution of India. They further impugned the validity of circulars dated 04.01.2008 and 22.05.2007.

The bench noticed that a similar issue was raised before various High Courts wherein these Courts upheld the validity of the above provisions.

The Delhi High Court in Home Solutions Retail India Limited  struck down the circular dt. 04.01.2008, by finding the same as obnoxious and beyond the scope of provisions of Section 65(105)(zzzz). The bench found that the said provision does not in terms entail that renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the said Act.

Thereafter Parliament has made further amendment by Finance Act, 2010 in Section 65(105) (zzzz) and the substantive provision under Clause (zzzz) is amended and given retrospective effect from 01.06.2007 while Clause (v) inserted in Explanation I to Section 65(105) (zzzz) has been given effect from the date of amendment.

The amended provision and its retrospective amendment came up for consideration before Division Bench of Punjab and Haryana High Court in M/s Shubh Timb Steels Limited Vs Union of India and another, wherein the Court has upheld the retrospective amendment. It has also negatived arguments that service tax on service of renting of property is exclusively covered by Entry 49 List II and therefore, argument of lack of legislative competence has also been negatived.

Orissa High Court has also examined validity of Section 65(90a) and 65(105) (zzzz) as amended by Finance Act, 2007, 2008 and 2010 in the case of Utkal Builders Limited Vs Union of India, wherein a Division Bench of the Court has dissented with Delhi High Court judgment in Home Solution Retail India Ltd.

Subsequently, the Bombay High in M/s Retailers Association of India (RAI) Vs Union of India and others, and other connected matters, took a similar view taken by the Orissa and Punjab and Haryana High Courts.

Later, a Full Bench of Delhi High Court over ruled its earlier judgment in Home Solution Retail India Ltd. (supra) and held that amendments made with retrospective effect are nothing but clarificatory and by way of ex abundanti cautela. It has also held that there is no lack of competence and earlier Bench did not properly appreciate Section 65(90a). Consequently two amendments have been affirmed and all the writ petitions have been dismissed.

All the above decisions of the High Court are challenged before the Supreme Court which is pending disposal.

In view of the above decisions, the Allahabad High Court dismissed all the writ petitions and upheld the provisions.

Read the full text of the Judgment below.