The Karnataka High Court has held that an owner of a building can claim tax exemption under the Goods and Services Act (GST) if the residential premises leased out are used as a hostel to house students and working professionals.

A division bench of Justice Alok Aradhe and Justice M I Arun while allowing the petition filed by one Taghar Vasudeva Ambrish said, 

"The service provided by the petitioner i.e., leasing out residential premises as hostel to students and working professionals is covered under Entry 13 of Notification No.9/2017 dated 28.09.2017 namely 'Services by way of renting of residential dwelling for use as residence' issued under the Act. The petitioner is held to be entitled to benefit of exemption notification."

Case Background:

The petitioner is co-owner of a residential property situated in Bengaluru, who executed a lease deed in favour of the lessee namely M/s.D Twelve Spaces Private Limited which in turn leased out the residential property as Hostel for providing long term accommodation to students and working professionals.

The petitioner with a view to seek clarification with regard to his eligibility to seek exemption on the rent received by him from the lessee by letting the property, filed an Advance Ruling application under Section 97 of the Act before the Authority for Advance Ruling, Karnataka. The AAR Karnataka held that services viz., renting of residential dwelling for use as a residence do not fall under Entry 13 of the Exemption Notification. It was further held that the lessee itself is not using the accommodation. Thus, it was held that the petitioner has to charge GST while issuing invoice to the lessee provided it is registered under the Act.

This order came to be challenged before the appellate authority which upheld the order of the AAR. It also held that the property rented out by the petitioner is a hostel building which is more akin to sociable accommodation rather than what is commonly understood as residential accommodation. Therefore, the property rented out by the petitioner cannot be termed as residential dwelling.

Petitioners submissions:

Senior Advocate Arvind Datar and Advocates Nayana Tara B.G and Rahul Unnikrishnan, appearing for the petitioner submitted that the expression 'residential dwelling' has not been defined anywhere in the Act. Therefore, its normal trade parlance meaning has to be taken into account. It is submitted that residential accommodation which is used for long term stay has to be construed as residential dwelling.

Further, it was said that zoning regulations of Bengaluru clearly provide that hostels are allowed to operate in residential category plots. It is contended that students use the Hostel for residential purposes. Therefore, the hostels have to be treated as residential accommodation.

It was also contended that in the exemption notification, no condition has been laid down that the tenant alone must occupy the building and therefore, no additional condition can be read into the exemption notification. The petitioner is not a business activity and the premises are used for residential purposes. Moreover, there is a perceptible difference between a hotel or lodging house and a student hostel.

Respondents Submissions:

It was said the expression used in the exemption notification is 'the residential dwelling' which cannot be construed as 'residence'. Further it was said that the expression 'residential dwelling' means an abode or habitat which has an element of permanency. 

Attention of the Court was also invited to trade licence issued by BBMP to the lessee and it was pointed out that the trade name has been described as boarding and lodging to which public are admitted or repose or let with or without consumption any food or drink.

Relying on the registration certificate of the lessee, to contend that lessee is registered as a commercial establishment under the Karnataka Shops and Commercial Establishment Act, 1961. While referring to the terms of the lease deed, it is contended that petitioner is engaged in the commercial activity. Finally it was said the exemption notification has to be strictly construed and any ambiguity in the exemption notification has to be construed in favour of revenue.

Court findings:

The bench noted, "It is well settled rule of Statutory Interpretation of fiscal statues that the words used therein if not defined in the statute have to be interpreted in their popular sense."

Then it said, "Entry 13 contained in the exemption notification is unambiguous and is clear. It provides for exemption from payment of Integrated Goods and Service Tax in respect of 'services by way of renting of residential dwelling by way of use as residence'. The burden is of course on the petitioner to show that his case comes within the parameters of the exemption notification. The expression 'residential dwelling' has not been defined."

Following which the court relief on an Education Guide dated 20.06.2012 which was issued by Central Board of Indirect taxes and Customs and said, "In the aforesaid education guide issued by Central Board of Indirect Taxes and Customs which contains clarifications, it is provided that in normal trade parlance residential dwelling means any residential accommodation and is different from hotel, motel, inn, guest house etc. which is meant for temporary stay. The aforesaid clarification which is issued by the Board, in the absence of anything to the contrary in the Act, binds the Respondent."

The court also took note of the fact that accommodation which is used for the purposes of the hostel of students and working women is classified in residential category in the Revised Master Plan 2015 of Bangalore City.

Referring to the meaning of the expression 'residence' and 'dwelling' as defined in Concise Oxford English Dictionary 2013 Edition as well as Blacks Law Dictionary 6th Edition.

The court observed, "Thus, it evident that the expression 'residence' and 'dwelling' have more or less the connotation in common parlance and therefore, no different meaning can be assigned to the expression 'residential dwelling' and it cannot be held that the same does not include hostel which used for residential purposes by students or working women."

The court then held,

"Firstly, the residential dwelling is being rented, as the hostel to the students and working women fall within the purview of residential dwelling as the same is used by the students as well as the working women for the purposes of residence. Secondly, the residential dwelling is being used for the purposes of residence. Thus, the aforesaid questions are required to be answered in favour of the petitioner."

It added, "It is also worth mentioning that the notification does not require the lessee itself use the premises as residence. Therefore, the benefit of exemption notification cannot be denied to the petitioner on the ground that the lessee is not using the premises."

The court also junked the contention of the revenue that petitioner is registered as commercial establishment under the Karnataka Shops and Commercial Establishment Act, 1961 or that a trade licence has been issued by BBMP. It said, "It is wholly irrelevant for the purposes of determining the eligibility of the petitioner under the exemption notification."

Accordingly it quashed the order issued by the AAAR.