Compensation for Surrendering Tenancy Rights is a Capital Receipt, Not a Service: CESTAT [Read Order]

The Ahmedabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) held that compensation received for surrendering tenancy and occupancy rights constitutes a capital receipt arising from transfer of immovable property and is not liable to service tax.

Supertex Woven Industries, the appellant, was engaged in the manufacture of goods under Chapter 39 of the Central Excise Tariff Act, 1985. During an audit for the years 2015-16 and 2016-17, the department found that the appellant had surrendered tenancy and occupancy rights of its registered office premises at Mumbai to Sumer Buildcorp Pvt. Ltd. for a consideration of Rs. 6,29,44,000 but had not paid service tax on the amount.

The department issued a show cause notice demanding service tax of Rs. 94,41,600 along with interest and penalty. The adjudicating authority confirmed the demand and the Commissioner (Appeals) upheld the order. Aggrieved, the appellant approached the tribunal.

The appellant’s counsel argued that the transaction was a transfer of tenancy rights, which are benefits arising out of land and hence constitute immovable property. They argued that such a transfer is specifically excluded from the definition of "service" under Section 65B(44) of the Finance Act, 1994.

The counsel relied on judgments which held that surrender of tenancy rights amounts to transfer of immovable property and cannot be taxed as a service. The counsel further argued that the Daman Commissionerate lacked jurisdiction since the property was situated in Mumbai.

The revenue counsel opposed the appeal and argued that the appellant was a tenant, not the owner and the transaction did not involve sale or transfer of title in immovable property. It was explained that the consideration received for surrendering tenancy rights was taxable as it amounted to a service under Section 65B(44).

The counsel further argued that the show cause notice was correctly issued by the Daman Commissionerate as the registered office was part of the Daman unit, and the appellant had neither registered the activity nor paid tax voluntarily, justifying invocation of the extended limitation period.

The two-member bench comprising Somesh Arora (Judicial Member) and Satendra Vikram Singh (Technical Member) observed that tenancy rights are benefits arising out of land and thus qualify as immovable property. The tribunal referred to Section 65B(44) of the Finance Act, 1994, which excludes transfer of title in immovable property from the definition of service.

It relied on precedents holding that surrender of tenancy rights amounts to transfer of an interest in immovable property and cannot be treated as a taxable service. The tribunal also observed that the consideration received was in the nature of compensation for surrender of a capital asset and was subject to capital gains under the Income Tax Act, not service tax.

The tribunal pointed out that the Daman Commissionerate had jurisdiction since the registered office was part of the same unit and not independently registered. On merits, it held that the activity did not fall within the scope of taxable service.

The CESTAT set aside the demand of Rs. 94,41,600 along with interest and penalties, holding that the compensation received for surrendering tenancy and occupancy rights was a capital receipt and not liable to service tax. The appeal was allowed with consequential reliefs.

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