2019 (2) TMI 862 - AT - Service Tax

Renting of immovable property - inherited property - joint owners - association of persons or not - demand of service tax on co-owners when the property is jointly owned by them - SSI Exemption - Held that - When family members come together to rent property belonging to the family or inherited by operation of law, it cannot be considered as an association of persons . The levy of service tax on Renting of Immovable Property is on the income received from the service provided. The co-owner can lease only that part of the property belonging to him. The Tribunal in the case of Sarojben Khusalchand Vs. C.S.T. 2017 (5) TMI 240 - CESTAT AHMEDABAD had occasion to analyse the very same issue as to whether co-owners can be considered as an association of persons and it was held that it is difficult to accept the proposition advanced by the Revenue that all the co-owners providing the service of renting of immovable property be considered as an association of persons and the service tax on the total rent be collected from one of the co-owners. SSI Exemption - Held that - For verification as to whether these appeals fall within the threshold limit, it is necessary to remand the matter back to the adjudicating authority for the limited purpose of verifying the threshold limit of the individual co-owners, as may be applicable during the relevant periods of dispute. Appeal partly allowed and partly remanded.

Summary

Issues involved:
Demand of service tax on co-owners of jointly owned property; Whether co-owners can be considered as an 'association of persons' for service tax liability; Interpretation of Section 26 of the Income Tax Act, 1961; Applicability of Section 65B(37) of the Finance Act, 1994; Assessment of rental income of co-owners separately; Threshold limit for service tax exemption for individual co-owners.

Analysis:
The judgment by the Appellate Tribunal CESTAT Chennai addressed the issue of service tax demand on co-owners of jointly owned properties. The appellants, who were co-owners of properties leased out to tenants, argued that they should not be considered as an 'association of persons' for service tax liability as they received rent individually and were assessed for income tax separately. They relied on Section 26 of the Income Tax Act, 1961, stating that rental income of each co-owner should be assessed separately. The Department contended that co-owners forming an association of persons were liable for service tax, citing Section 65B(37) of the Finance Act, 1994.

The Tribunal examined previous cases and legal provisions to determine whether co-owners could be treated as an association of persons. They referred to the case of Sarojben Khusalchand where it was argued that co-owners receiving rent proportionate to their share should not be considered as an association of persons. The Tribunal agreed with this argument, emphasizing that an association of persons is a separate legal entity under the Income-tax Act and should be assessed separately. They highlighted that service tax is levied on the service provided, not on the physical ownership of the property, and individual co-owners should be eligible for the threshold limit of service tax exemption.

The Tribunal also discussed the High Court's judgment in Jaswant Singh Mann, clarifying that it upheld the validity of the relevant clause but did not determine the applicability to co-owners. Ultimately, the Tribunal set aside the impugned orders, remanding the matter to verify the threshold limit for individual co-owners during the relevant periods. The appeals were partly allowed and partly remanded for further assessment, ensuring individual co-owners' rights and benefits as per law.