Renting Vacant Land Not Service Taxable Before July 1, 2010: CESTAT Delhi Denies Extended Limitation

The CESTAT Delhi has ruled that renting of vacant land was not taxable for service tax before July 1, 2010.

It also held that one-time premium or salami received under a lease of immovable property was liable to service tax, but the extended limitation period could not be invoked against Madhya Pradesh Audyogik Kendra Vikas Nigam Limited without an intent to evade tax or positive evidence of suppression.

The tribunal observed, “the immovable property including the vacant land is leviable to service tax with effect from 01.07.2010. Prior thereto renting of vacant land was not taxable.”

It accordingly upheld the dropping of the demand for the period from June 1, 2007 to September 30, 2010.

The significance of July 1, 2010 lies in the change to the service tax provision governing renting of immovable property. Before that date, renting of vacant land was specifically excluded from the taxable service. From July 1, 2010, the provision was changed to bring renting of immovable property, including vacant land, within the taxable service

A Division Bench comprising Officiating President Dr. Rachna Gupta and Technical Member P.V. Subba Rao was hearing the Department's appeal against the Principal Commissioner's order. The Department had challenged the decision to drop part of the service tax demand against Madhya Pradesh Audyogik Kendra Vikas Nigam Limited.

Madhya Pradesh Audyogik Kendra Vikas Nigam Limited is a state government-owned company created to develop industrial growth centres and promote industries in Madhya Pradesh. It provides land on lease for establishing industries and collects yearly lease rent under the lease agreements. The Department treated the activity as taxable renting of immovable property.

The Department's inquiry covered the period from June 1, 2007 to March 30, 2014. Based on information furnished by the company, it was found that ₹55.89 crore had been received from renting land, shops and gomtees without payment of service tax. Four show cause notices proposed a total service tax demand of ₹6.40 crore, besides interest and penalties.

The Department argued that the company's government-owned status did not exempt its leasing activity from service tax. It also pointed to the profits earned while leasing land for industrial development. Since the company had not obtained service tax registration, the Department contended that the extended limitation period was justified.

The company submitted that although renting of immovable property became taxable from June 1, 2007, renting of vacant land was specifically excluded at that stage. It argued that vacant land became taxable only from July 1, 2010 when rented on lease or licence for construction of a building or temporary structure for business or commerce.

The tribunal accepted this distinction. Before July 1, 2010, the relevant provision covered renting, letting, leasing and licensing of immovable property for business or commerce, but vacant land was specifically excluded. From July 1, 2010, the statutory provision covered renting of immovable property in a manner that brought vacant land within the taxable service.

It therefore held that the demand for renting vacant land before July 1, 2010 had been correctly dropped.

The tribunal, however, rejected the company's argument that one-time premium or salami received under a lease was not taxable. Referring to Section 105 of the Transfer of Property Act, it explained that a lease involves transferring the right to enjoy immovable property for consideration. The upfront price is called premium, while periodic payments are called rent.

Relying on the Supreme Court's explanation in Panbari Tea, the tribunal noted that premium is the price paid for obtaining the right to enjoy the property, whereas rent is the periodic payment for its continued enjoyment. Since a lease includes both premium and periodic rent, and leasing falls within renting of immovable property, the premium was also taxable.

On limitation, the tribunal noted that the company was admittedly a governmental authority. It held that the extended period could be invoked only where there was an intent to evade tax. The suppression or misstatement relied upon for this purpose also had to be willful, with something more than mere inaction or failure on the taxpayer's part.

The tribunal found no such evidence in the case. It ruled, “the respondent had no intent to evade the tax” and added that the Department had not produced any positive evidence to establish such intent.

It therefore held that the show cause notices should not have invoked the extended limitation period. The adjudicating authority had correctly dropped the service tax demand for the extended period from June 1, 2007 to September 30, 2010.

The tribunal upheld the order under challenge and dismissed the Department's appeal

For Department: S.K. Meena, Authorised Representative

For Respondent: Advocate Rajat Dosi,