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Finally the inevitable: Renting is now Taxable
28 September, 2011 Ahmedabad :
Finally the inevitable: Renting is now Taxable

Man proposes - Courts disposes. On 23.9.2011, Hon”ble Delhi High Court overruled its earlier decision and finally gave a verdict that Renting of immovable properties is taxable . Colossal Service Tax liability has burdened all those commercial property owners who depended on rental incomes. Year on year list of taxable services has grown . Service Tax on renting of immovable property was one such levy where the parliament decided to levy a tax on the rental income of its subjects. Service Tax on renting of immovable properties was first introduced from 01.06.2007. At the time of introduction Section 65 (105)(zzzz) of the Finance Act, 1994 defined taxable service to mean “any service provided or to be provided to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce.”

The judicial review of this levy was first undertaken by the Delhi High Court in the case of Home Solution Retail India Ltd. Vs. UOI and others (STO 2009 Del 825). The Division Bench of the Delhi High Court held that service tax was a value added tax and there was no value addition which could be discerned from the renting of immovable property for use in the course or furtherance of business. The view of the Delhi High Court was that Section 65(105)(zzzz) did not in terms entail that the renting out of immovable property for use in the course or furtherance of business or commerce would constitute a taxable service and be exigible to service tax. The levy was held to be ultra vires the Act and were set aside. The Delhi High Court did not decide the constitutional challenge for, in the course of the concluding paragraph of the judgment, the Division Bench noted that it was not examining the plea in challenge to the legislative competence of Parliament in the context of Entry 49 of List II of the Seventh Schedule to the Constitution. This order of Delhi High Court was stayed by the Hon’ble Apex Court on appeal by the Union of India and a final decision on the issue is awaited.

During the pendency of this appeal, with the singular motive to neutralise the ruling of the Delhi High Court in the case of Home Solution Retail India Ltd, an amendment was introduced in the definition of “taxable value” under Section 65 (105) (zzzz) of the Finance Act, 1994 by the Finance Act, 2010, which substituted the words “in relation to renting of immovable property” with words “by renting of immovable property or any other service in relation to such renting”. This amendment was given retrospective effect from 01.06.2007.

Not undone by the unscrupulous manner of introduction of the amendment to the definition, the retrospective nature of the amendment was challenged in various High Courts in the Country. The first decision on this issue was delivered by the Punjab and Haryana high court in case of M/s Shubh Timb Steels Ltd. The P & H High Court held that renting of property for commercial purposes is certainly a service and has value for the service receiver. As regards the power of Parliament to amend any law with retrospective effect, the Court observed that it is well settled that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary. Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which earlier law was enacted.

Not to be left behind the High of Court of Bombay also upheld the constitutional validity and legislative competence to levy Tax on rental income in the case of Retailers Association of India and dealt a telling blow on the hopes of the rental income earners by observing that the assumption by a legislative body that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the Court as being so manifestly absurd or perverse as to lead to an inference that Parliament had treated as a service, an item which in no rational sense could be regarded as involving service.

The glimmer of hope provided by the decision rendered by the division bench of Delhi High Court in the case of Home Solution Retail India Ltd. Vs. UOI and others (STO 2009 Del 825) was also lost when this decision was overruled by the larger bench of the same Court on 23.09.2011. (STO 2011 DEL 468) The larger bench decision which commenting on the issues of constitutional validity, legislative competence, value addition in renting held that imposition of service tax under Section 65(105)(zzzz) read with Section 66 is not a tax on land and building which is under Entry 49 of List II. What is being taxed is an activity, and the activity denotes the letting or leasing with a purpose, and the purpose is fundamentally for commercial or business purpose and its furtherance. The decision rendered in the first Home Solution case does not lay down the correct law as there is value addition when the premises is let out for use in the course of or furtherance of business or commerce and it is, accordingly overruled.

It is worth noting that the Parliament, keeping in view the first Home Solution case, substituted sub-clause (zzzz) in the present incarnation and gave retrospective effect to cure the deficiency. It is well settled in law that it is open to the legislature to pass a legislation retrospectively and remove the base on which a judgment is delivered. The rental income earners who have not been collecting tax from the clients or if collecting not depositing the Service Tax on such rental income with the department have every right to feel aggrieved by these decisions, but cannot hope for any relief from the Supreme Court since the appeal of department against the order of division bench in the first Home Solution case have been rendered infructuous. In view of the overruling of the judgement of the division bench by the larger bench, it is not expected that the Supreme Court will hear the appeal and declare its view on this matter. The only solace to the rental income earners is the observation of the larger bench of Delhi High Court to that the government may examine whether any waiver or exemption can be granted from penalty for non-payment of tax.

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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