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    Co-Owners Vs Small Services Provider Exemption

    From the inception of the levy of service tax on ‘Renting of Immovable Property Service’, there was hue and cry from the trade. The trade is of the strong belief that there shall not be any service tax in the case of renting of immovable property service since there is no service element existing. However, the revenue was of the strong opinion that the activity of mere renting of immovable property is also a service and thus attracting service tax on the same. The fight started from the High Courts in light of various writs filed and reached the Apex Court and currently pending at the later for its judgment. 

    Leaving the taxability of the said service to the wisdom of the Apex Court, the trade is now facing another problem from the revenue pertaining to the claim of small service provider exemption notified vide Notification No 06/2005-ST dated 01.03.2005 (as amended from time to time) in relation to the renting of immovable property. This article aims at analysing the problem faced by the trade with respect to the exemption notification vis-à-vis renting of immovable property service. 

    It is very common in certain parts of the country that the immovable property is being purchased togetherly by immediate family members vide single sale deed or inherited by surviving family members from their ancestors vide a single document. Let us assume there was a family of three brothers who have purchased a property togetherly vide single sale deed. Later the said property was given on rent by three brothers to a single person by entering three different rental agreements individually. 

    As per the said agreement, each land lord (brother) is entitled for separate rental income amounting to the tune of Rs 30,000/- per month which is to be credited to the individual bank accounts after deduction of tax at source as per the provisions of the Income Tax Act, 1961. 

    Before discussing about the applicability of service tax on the said rental income, it is very important to discuss the benefit of exemption notification provided vide Notification No 6/2005-ST dated 01.03.2005 (in the earlier law) and Notification No 33/2012-ST dated 20.06.2012 (in the existing law). Both of the said notifications deal with the benefit of exempting small service providers from the ambit of service tax. There shall be no applicability of service tax on the first Rs  10,00,000/- if the previous financial year’s taxable services turnover is less than Rs 10,00,000/-subject to certain conditions in the notifications, which shall be dealt in the later part of this article. 

    Applying such benefit to the instant case, there shall be no service tax impact on the said rental income since the income pertaining to each land lord (brother) is Rs. 3,60,000/- (Rs 30,000/-*12 months) which is less than Rs 10,00,000/-. 

    However, the revenue has a problem here. They were of the opinion that the benefit of the exemption notification shall not be applied individually and has to be applied for all the three brother put together, since the three brother have formed an ‘Association of Persons’ since the property is purchased vide single sale/title deed. That is to say, if the entire rental incomes of all the brothers is considered, the rental income shall be Rs 10,80,000/- (Rs 30,000*12*3) which would cross Rs 10,00,000/- and hence service tax is applicable. 

    From the above it is clear that if the rental incomes are to be considered individually, then the benefit of exemption is applicable and if the same are considered jointly the benefit of exemption notification is not applicable. Hence, the question whether such land lord has to be treated as ‘individuals’ or ‘Association of Persons’ is to be answered for claiming the benefit of the exemption notification. 

    The revenue’s claim is that since the property has been purchased jointly, the three brothers have to be treated jointly and hence the service tax has to be charged in the capacity of ‘Association of Persons’. It is very important to note that with effect from 01.07.2012, the phrase ’person’ has been defined in the Finance Act, 1994 to include ‘Association of Persons’. However, the claim of the land lord is they never had an intention to form an association of persons to rent out the property. They have entered the rental agreements individually, the rents are collected separately by three different cheques and the tax is deducted in the capacity of the ‘individual’ by the tenants and hence there cannot be any tax in the capacity of association of persons which is claimed by the revenue. 

    In my view, there cannot be tax in the capacity of the ‘Association of Persons’ as claimed by the revenue, since the reason laid by the revenue is inappropriate. The Apex Court in the case of Ramanlal Bhailal Patel vs State of Gujarat, Appeal No (Civil) 4420 of 2004 has held that just because a property is purchased vide single sale deed by two persons, there cannot be called that an ‘Association of Persons’ coming into existence. There should be any intention between the parties that they have come together to achieve a common goal/purpose to call them as an ‘Association of Persons’ which is absent in the instant facts of the case. Hence, the claim of the revenue shall not be held good by the higher courts since they have failed to prove that the parties (brothers) have an intention to achieve a common goal/purpose to call them as an ‘Association of Persons’. 

    Hence, the benefit of exemption can be claimed individually even if the properties are held by virtue of single title/sale deed. The Honorable CESTAT, Ahmedabad in a bunch of cases held that the benefit of exemption notification shall be available to each co-owner separately and there cannot be any assessment under ‘Association of Persons’. However, the ultimate judgment shall be delivered by the apex court since the revenue shall be determined to take this matter to such a forum in light of the stakes involved.

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