Service Tax Payable on Consolidated Rent Collected by Co-owners when Threshold Exceeds: Calcutta HC on Clubbing of Rent [Read Order]

The Calcutta High Court upheld the tribunal’s decision that consolidated rent received jointly by co-owners under a single lease agreement can attract service tax liability when the amount exceeds the threshold prescribed for taxable services.

The appeal was filed by Goutam Mukherjee challenging the levy of service tax on rent received under a tripartite arrangement involving a common bank account through which the rental income was routed for repayment of a jointly availed housing loan.

The appellant, along with two other co-owners, had let out their jointly owned premises to ICICI Bank and later to Vishal Retail Ltd. While the earlier tenancy with ICICI Bank showed each co-owner receiving rent separately falling below the small service provider exemption limit the later lease with Vishal Retail Ltd. involved a single consolidated rent paid under a common agreement.

As part of the tripartite loan agreement dated 8 May 2009 with the State Bank of India, the consolidated rental income was directly routed into a joint bank account for loan repayment.

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The Department treated the joint receipt as a single taxable amount, clubbed the rental income, and demanded service tax, alleging that the threshold exemption under Notification No. 06/2005-ST was no longer available.

The appellant raised the questions that the three co-owners were distinct persons with separate ownership shares, separate Permanent Account Numbers (PANs), and separate income tax assessments under Section 26 of the Income Tax Act, 1961.

It was contended that consolidation of rent into one account as mandated by the loan agreement could not by itself create a taxable unit, especially in the absence of any partnership, AOP, BOI, or HUF arrangement.

The appellant further submitted that clubbing of rents was unjustified and that the extended limitation period under Section 73(1) of the Finance Act, 1994 could not be invoked without evidence of wilful suppression.

The Tribunal, however, found clear distinctions between the two leasing arrangements. For the ICICI Bank tenancy, the rent was paid separately to each co-owner, fell below the statutory threshold, and therefore did not attract service tax, noted the court.

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The bench of Justices Rajarshi Bharadwaj and Uday Kumar also observed the tribunal’s observation that the Vishal Retail arrangement involved a consolidated lease agreement and aggregate rent crossing the threshold limit. The Tribunal held that for the latter agreement, the appellants were liable to pay service tax if the consolidated rent exceeded the exemption limit for the relevant period.

The tribunal further directed the adjudicating authority to compute the precise tax liability after verifying whether the co-owners received any other rent, whether jointly or separately.

The High Court observed that the matter had been remanded by the tribunal solely for quantification with detailed directions. It held that no substantial question of law arose from the Tribunal’s order.

The court said that “From perusal of the order of the learned Tribunal passed on August 1, 2024 it is very clear that the matter has been remanded to the adjudicating authority with specific direction to calculate the liability of service tax payable by the appellant. According to us, no substantial question of law arises from such order of the Tribunal. Accordingly, the appeal along with the connected application stands disposed of.”

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