RENTING OF IMMOVABLE PROPERTY BY JOINT OWNERS

Renting of immovable commercial property is a declared service which had fallen in the ambit of Service Tax from 1st June, 2007. Renting is defined in Section 65B(41) of the Finance Act, 1994 as follows:
‘”renting” means allowing, permitting or granting access, entry occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;’
Renting of property can be done in different ways:

 

• When the property is owned by a single owner/AOP/BOI.
• When the property is owned by joint owners.
• When the property is owned by common owners.

When the property is owned by a single owner, 100% share of the property lies with owner and the whole rent is paid to the same single owner by the service receiver and when the property is owned by Association of Persons (AOPs) and Body of Individuals (BOIs), the ownership of the property is held by the AOP or BOI as a whole.
When the property is owned by joint owners, all the joint owners are deemed to hold equal share in the property, i.e., if there are three joint owners of a single property, each joint owner will hold one third share in the property and each joint owner receives one third rent from the service receiver for the use of such property for commercial purpose.
When the property is owned by common owners, owners can own the property in any proportion they agree. The split ownership determines the amount of rental income each owner is entitled to receive from the service receiver.
Every service provider should consider the threshold exemption of upto ` 10,00,000 before calculating the taxable amount,as specified in Notification No. 33/2012-ST, dated 20<sup>th</sup> June, 2012. The problem of calculating the threshold exemption often arises in case of joint/common ownership. In this issue of Suvidha Digest, we have tried to resolve this problem for our readers, by enumerating this example.
Problem:
Service provider provides his property on lease to Mr. X on ` 1,00,000 per month, where Service Providers are of three types

1. Service provider is a single owner/AOP/BOI.
2. Service providers are two joint owners
3. Service providers are common owners, where first owner (Mr. Y) holds 85% of the ownership of the property, and second owner (Mr. Z) holds 15% of the ownership of the property.

Solution:

1. In the first case, the total amount received annually by the single owner/AOP/BOI is ` (1,00,000 * 12) i.e., ` 12,00,000 which will be considered as if only one deduction for the exemption limit of ` 10,00,000 will be given. Hence, the amount of rent received is liable to Service Tax.
2. In the second case, the total amount received annually is again ` 12,00,000. However, the property is jointly owned by two owners, therefore each owner receives `6,00,000 each, which is clearly below the individual threshold limit of each of the owner. Hence, the above mentioned amount is not liable to Service Tax.
3. In the third case, the total amount received annually is again ` 12,00,000. However, 85% of the property is owned by Mr. Y and 15% of the property is owned by Mr. Z. So, ` 10,20,000 and ` 1,80,000 is received by Mr. Y and Mr. Z respectively. Therefore, the amount of rent received is taxable for Mr. Y, but not taxable for Mr. Z as only Mr. Y crosses the threshold limit of ` 10,00,000.

Case Law:
In the case of Pankajbhai Champaklal Parekh v. CST [Stay Order Nos. A/2102-2104/2012/10ZB/Ahd., dated 18-9-2012] CESTAT, West Zone, Ahmedabad, considered a situation regarding co-ownership of a rented property.
Facts:
The co-owners of a building rented out the premises to a person, who issued different cheques to all the individuals. The department argued that the property involved in this case is jointly owned by all the persons and the said property is being rented out and hence, there is service of renting out immovable property and threshold limit exemption cannot be extended to individuals.
Submission:
Assessee’s submission was that the revenue received by the co-owners collectively should not be considered to charge the Service Tax liability individually on the persons and, the amount received by the individuals would be within the threshold limit of SSI exemption under Notification No. 6/2005-ST, dated 1-3-2005 and amended vide Notification No. 8/2008 – ST, dated 1-3-2008.
Judgement:
Accepting the assessee’s view, the CESTAT decided on perusal of the aforesaid Notification that the Notification talks about the aggregate value of the taxable services rendered and should be considered for the purpose of exemption. In this case if individually all the appellants are considered as providers of such service, their aggregate value would not exceed the threshold limit.
Hence, request for waiver of pre deposit requirement of tax was accepted.
Conclusion
In a nutshell the view that emerges from the given discussion is that for determining the threshold exemption for “Renting of immovable property”, when there are more than one owner of the rented property and there shares are separate and determinable each of the co-owner would be considered separately for basic exemption limit and not by lumping together the total rent received by all the co-owners. However, in case of single owner, AOP or BOI only one deduction for the exemption limit of ` 10,00,000 would be available for working out the tax liability.