Co-Owners of Rental Property cannot be Association of Persons for Joint Service Tax Assessment: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) recently held that co-owners of an immovable property that is rented out cannot have their respective shares be treated as an “Association of Persons” (AOP) for the purposes of conducting joint service tax assessment.

The decision was given by the Tribunal against a 2015 service tax appeal filed by Naresh Gopaldas Lund and Eight Others against a batch of orders passed by the Commissioners of Appeals; the Department was of the view that co-owners renting out commercial premises together constituted an Association or Body of Individuals and their service tax liabilities would be assessed accordingly.

The appellants had rented out their properties or premises for commercial purposes to various lessees under lease agreements and thus had provided the taxable service of “Renting of Immovable Property Service” which is classified under Section65(105)(zzzz) of the Finance Act, 1994.

The co-owners disclosed their individual rental income in their respective ST-3 returns and discharged their service tax liability when the individual threshold limit was crossed.

However, departmental investigation found that the indivisible service of renting of immovable property was provided collectively by all appellants as an 'Association of Individuals.'

According to the Department, the service of renting could not have been provided unless the co-owners acted together, as the share of each co-owner was not demarcated. The Department contended that only when the co-owners joined together as an association or a body of individuals did the provision of service come into existence.

Accordingly, the co-owners were served show-cause notices alleging that they constituted an association of persons and were required to obtain a single service tax registration and discharge tax liability jointly in respect of the entire consideration received, without availing individual threshold exemptions.

Radhika Chandrasekar appeared for the appellants and submitted that their undivided share in the land had been clearly identified and demarcated. The counsel apprised the tribunal that none of the co-owners had joined their resources to acquire the property, nor was the land or building held in the name of any association. The lease deeds further referred to the co-owners in plural as “lessors”, and security deposits were payable to the individuals separately.

N. Satyanarayanan, Shri M. Selvakumar and Smt. G. Kripa appearing for revenue refuted the submissions.

The Bench of M.Ajit Kumar, Member (Technical) and Ajayan T.V., Member (Judicial) noted various judgments through which it was inferred that “The formation of an association of persons depends fundamentally on the volition of the parties.”

The Bench held that mere co-ownership of property and receipt of rent does not automatically result in the formation of an “association of persons”.

Further noting that the appellants had discharged service tax liability individually based on their respective shares and claimed eligibility for turnover-based exemption independently, there remained no evidence on record to show that the co-owners had come together with a common intention to form an association for the purpose of providing taxable service.

In light of these observations, the tribunal concluded that the individual appellants are entitled to be assessed separately for Service Tax in respect of their respective shares of rental income from the property, setting aside the impugned orders passed by the Commissioners (Appeals) and allowing the appeals.

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