Assessee was entitled to GST exemption on renting of residential dwelling as hostel to students and working professionals
In a recent judgment, Hon’ble Supreme Court has held that the assessee was entitled to GST exemption on renting of residential dwelling as lessee in turn leased out the property as hostel to students and working professionals.
ABCAUS Case Law Citation:
4906 (2025) (12) abcaus.in SC
In the instant case, the GST Department had challenged the order passed by the High Court which set aside the order passed by the Appellate Authority for Advance Ruling (AAAR) which affirmed the ruling of AAR that the services provided by the respondent in the form of leasing of residential premises as hostel to students and working professionals were not eligible for exemption of GST on renting of residential dwelling for use as a residence under Entry 13 of the Notification No. 9/2017 dated 28.06.2017.
The respondent was a co-owner of a residential property. The property consisted of several rooms and was a four storied building with terrace and common area. The respondent along with other the co-owners executed a lease deed in favour of a company (the lessee). The lessee in turn leased out the residential property as hostel to provide long term accommodation to students and working professionals with the duration of stay ranging from 3 months to 12 months.
The respondent sought Advance Ruling on his eligibility to exemption on the rent received by him from the lessee. The AAR inter alia held that the services viz. renting of residential dwelling for use as a residence did not fall under Exemption Notification as the lessee being a company was not itself using the premises in question.
On appeal, the AAAR while affirming the AAR’s ruling held that the property rented out was a hostel building which was more akin to a sociable accommodation rather than what is commonly understood as residential accommodation. It was further held that the benefit of Exemption Notification is available only if the residential dwelling is used as a residence by the person who has taken the same on rent/lease.
The High Court vide its impugned judgment and order allowed the writ petition of the respondent holding that Entry 13 of the Notification No. 9/2017 which provides for exemption with respect to ‘services by way of renting of residential dwelling by way of use as residence’ being clear and unambiguous, the petitioner was entitled to avail the benefit of exemption.
The Hon’ble Supreme Court noted that the term “residential dwelling” is not defined under the GST laws. Under the erstwhile Finance Act, 1994, an Education Guide dated 20.06.2012 issued by the CBIC explained it that phrase ‘residential dwelling’ has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp-site, lodge, house boat, or like places meant for temporary stay.
The Hon’ble Supreme Court observed judicial precedents laid down by various Courts and held that any residential accommodation meant for long term stay can be referred to as “residential dwelling”. Further, as per the Khatha Extract and layout plans and records available with the Mahanagara Palike, the plot and property was shown as residential in nature leading to only conclusion that the subject property was a “residential dwelling”.
The Hon’ble Supreme Court further observed that for exemption from payment of the GST the only condition was that “such residential dwelling must be given for use as a residence”. There is no further condition that the tenant or lessee must itself use it as a residence. It is well-settled that what is a lease between the owner of a property and a tenant becomes a sub-lease when it is entered into between the tenant and his sub-tenant.
The Hon’ble Supreme Court noted that the ultimate use of the property as residence remains unchanged. However, if GST was levied on this transaction between the respondent and the lessee, the same would ultimately be passed on to the students and working professionals which would lead to a situation where the legislative intent behind granting exemption for residential use is defeated.
The Hon’ble Supreme Court further noted that as held by it an exemption notification should be construed strictly at the threshold. But once the exception/exemption is applicable, then a liberal construction must be adopted.
The Hon’ble Supreme Court further observed that the statutory interpretation of a provision is never static but is always dynamic. Though literal rule of interpretation, till some time ago, was treated as the ‘golden rule’, it is now the doctrine of ‘purposive interpretation’ which is predominant, particularly in those cases where literal interpretation may not serve the purpose or may lead to absurdity.
The Hon’ble Supreme Court opined that viving Entry 13 a narrow interpretation by holding that it is available only when the property so rented is used by service recipient themselves would ultimately lead to legislative intent being defeated as the exemption is extended to cases wherein residential dwelling is rented out and ultimately used as residence, irrespective of the person using it.
The Hon’ble Supreme Court further observed that it is pertinent to note that exemption envisaged under Entry 13 is an activity specific exemption and not person specific exemption. There are many exemptions given under GST law which are person specific exemptions and are applicable only when service provider or recipient is among the notified category of persons. On the other hand, there are many exemptions which are activity specific exemptions whereby an activity is given an exemption, and such exemptions are not dependent on the person using the service that is exempt.
The Hon’ble Supreme Court also noted that Entry 13 was amended w.e.f. 18.07.2022 and exemption is not available where the residential dwelling is rented to a registered person. However, an Explanation was added to Entry 13 w.e.f. 01.01.2023 providing that that even if the rent is paid by a registered person, the exemption will be available if it is used for the purpose of own residence and is rented in the personal capacity. Therefore, the intention from the beginning was to ensure that rental agreements for use of the property for residential purposes are granted exemption from GST.
Accordingly, the appeal of the Revenue was dismissed.
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