Residential use of Property by Company’s MD Not Taxable Despite Lease to Company: CESTAT quashes Service Tax Demand [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ), Chennai Bench held that rental income from a property used as a residence by a company’s Managing Director is exempted from service tax, even if the lease is formally signed with the company.

The tax department accused the appellant, N Devarajan,a registered provider of "renting ofimmovable property services" of failing to pay service tax on specific rental income.

Although the appellant had settled taxes for other properties under the Voluntary ComplianceEncouragement Scheme (VCES), the department argued that a specific property in Anna Nagar, Chennai, was rented out commercially and should be taxed.

Based on this assumption, the adjudicating authority confirmed a tax demand of over ₹10 lakh, with interest and penalties.

The appellant, in response, argued that the property was leased specifically for the residential use of the lessee company’s Managing Director. Because of this residential use, it fell outside the taxable scope of "renting of immovable property" under Section 65(105)(zzzz) of the Finance Act, 1994.

To support this claim, the appellant provided the original lease agreement from March 30, 2009, along with a notarized affidavit from the Managing Director confirming that the premises were used strictly as a residence.

The Tribunal noted that buildings used solely for residential purposes are explicitly excluded from the definition of taxable "immovable property."

The bench of Ajayan TV (Judicial member) and M. Ajit Kumar (Technical member) observed that the lease agreement itself clearly stated the property was let out for the Managing Director's residential use.

Additionally, the department failed to present any concrete evidence proving the property was actually used for commercial activities. The Tribunal further concluded that the initial adjudicating authority made a mistake by ignoring the clear terms of the lease and the affidavit without any solid justification.

Accordingly, the appellate tribunal dismissed the service tax demand, stating that taxability is determined by the actual use of the property, not just the identity of the entity signing the lease.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates