A recent ruling by a Delhi tribunal confirms that hostels used for residential purposes can be classified as residential dwellings, exempting their rental income from service tax, marking a significant development in tax treatment of hostel accommodations.
A Delhi tribunal has ruled that a hostel used for residential stay can be treated as a residential dwelling, a finding that removed the rental income from service tax during the old negative-list regime.
The case involved Anju Makhija, against whom the tax department acted on information drawn from income tax records and Form 26AS statements. Officials said those figures showed taxable receipts and issued a notice seeking Rs 19,72,702 in service tax, plus interest and penalties. Makhija’s side argued that part of the money came from property let out for residential use and that the department had relied on numbers without properly examining what the payments were for.
Her counsel said the property had been rented as a hostel and that rent from accommodation used as a residence was outside the service tax net. The revenue argued that she had not produced enough supporting records, particularly rental agreements, to prove the properties were actually used for residential purposes. It also said passbooks and internal charts were not enough to establish the character of the receipts.
A two-member bench of the Customs, Excise and Service Tax Appellate Tribunal, comprising Dr Rachna Gupta and P.V. Subba Rao, said the Finance Act, 1994 did not define “residential dwelling”. The tribunal relied on a Bombay High Court ruling in Bandu Ravgi N v Acharya Ratna Desh Bhushan Shikshan Prasark Mandal, Kolapur, which had said that a hostel can qualify as a residential dwelling because it serves as a home for residents over a comparatively long period. On that basis, the bench held that rent from a residential property used as a hostel fell within the exemption in Section 66D(m) and was not taxable.
The ruling fits a wider pattern of disputes over whether hostel accommodation should be treated like ordinary housing for tax purposes. In another CESTAT case from Bangalore, the tribunal held that leasing a building to an educational institution for student and staff accommodation was exempt under the same provision. But advance ruling authorities in Tamil Nadu and Karnataka have taken the opposite view under GST, saying hostel and paying guest accommodation does not amount to a residential dwelling and is therefore taxable.
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