2025 (10) TMI 394 - AT - Service Tax

Appellate order quashes service-tax demand against alleged AOP where co-owners paid individually and no AOP proof

M/s Chander Sharma Ashok Sharma and Associates Versus Commissioner of Central Excise and Service Tax, Chandigarh-I

CESTAT CHANDIGARH - AT set aside the impugned order and allowed the appeal, holding that co-owners who receive rent in their individual capacities cannot ... Taxability - co-owners of immovable property, who receive rent in their individual capacities - Association of Persons (AOP) - HELD THAT:- It is found that the rent is being received by the individual co-owners separately. The premises rented out is not registered in the name of the alleged AOP; Revenue has not brought any evidence to indicate even the existence of the AOP. The only reliance placed by the Revenue appears to be the statement of Shri Chander Sharma, which only goes to prove that the individuals came together and approached the bank for a loan. It is not coming forth if the said AOP has been registered. The individual co-owners obtained central excise registration and started paying service tax from October 2011 whereas the show cause notice was issued on 17.10.2013. Under the circumstances, it is not understood as to how Revenue attempted to tax the AOP. Interestingly, it appears that the adjudicating authority or the Revenue were not clear in their approach. On the one hand, they seek to recover service tax from a non-existent AOP and other hand, seek to appropriate the service tax paid by the individual owners. Thus, no case has been made by the Department to demand service tax from the alleged AOP. The Co-ordinate Bench of this Tribunal in Mumbai held in the case of Deoram Vishrambhai Patel [2015 (9) TMI 790 - CESTAT MUMBAI], which was followed by this Bench in the case of Anil Saini [2017 (1) TMI 101 - CESTAT CHANDIGARH] held that 'It can be seen from the above reproduced findings of the first appellate authority, the conclusion arrived at is very correct, as coowners of the property cannot be considered as liable for a Service Tax jointly or severally as Revenue has took identify the service provider and the service recipient for imposing service tax liability, which in this case, we find our individual. The conclusion arrived at by the first appellate authority is correct and he has confirmed the demand raised on the respondents by extending the benefit of Notification No. 6/2005-S.T.' The impugned order is set aside and the appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether co-owners of immovable property, who receive rent in their individual capacities, constitute an 'Association of Persons' (AOP) such that service tax liability can be imposed on the AOP as a single taxable person under the service tax provisions governing renting of immovable property. 2. Whether the Department discharged the evidentiary burden to establish existence of an AOP (including any registration or formal constitution) distinct from individually co-owning lessors. 3. Whether service tax demand for periods prior to 01.10.2011 (and/or earlier financial years) is time-barred or otherwise excluded from recovery by application of statutory exemptions (Notification No. 6/2005-S.T.) and provisions limiting issuance of notices and imposition of penalty where tax was paid with interest before service of notice. 4. Whether, having accepted and deposited service tax by individual co-owners (and produced registrations), the Department could both sue an alleged AOP and appropriate amounts paid by individuals, and whether penalty/extended period provisions are invocable on the facts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether co-owners constitute an AOP for service tax on renting of immovable property Legal framework: Service tax liability attaches to the provider of taxable services; the definition of 'business entity' and the concept of AOP are relevant in determining the taxable person for renting of immovable property under the service tax statutory scheme (including definitions and Notification No. 6/2005-S.T. applicable exemption thresholds in relevant years). Precedent Treatment: The Tribunal relied on co-ordinate decisions (notably Deoram Vishrambhai Patel and Anil Saini) which treated jointly owned property provided by co-owners in their individual capacities as attracting individual, not collective (AOP) liability; other High Court decisions (Home Solutions Retail (Del.) and Kuthuparmba Municipality (Ker.)) were invoked on related temporal and interpretive points. Interpretation and reasoning: The Court examined ownership records, lease agreements and tax registrations. It found rent receipts were distributed and received by each co-owner separately; lease agreements were entered by individuals; central excise registrations were obtained individually and tax paid by individuals. There was no evidence of registration or formal constitution of an AOP; the only departmental averment was an informal statement by one individual that they had 'floated a firm' to obtain a loan - which, on analysis, related to financing arrangements, not to formation of an AOP to provide taxable services. The tribunal emphasized the requirement to identify the service provider for imposition of service tax and held that co-owners acting in individual capacities cannot be treated as a single taxable person without supporting evidence of an AOP. Ratio vs. Obiter: Ratio - co-owners receiving rent in distinct individual capacities and producing individual lease/registration records are to be assessed individually; in absence of evidence of an AOP, the Department cannot aggregate their receipts and treat them as a single taxable entity. Obiter - the observation that approaching a bank for loan jointly does not, without more, create an AOP liable for service tax. Conclusion: The Department failed to establish existence of an AOP; the co-owners are taxable individually and cannot be jointly taxed as an AOP on the material on record. The demand premised on an AOP is therefore unsustainable. Issue 2 - Evidentiary standard to prove existence of an AOP and consequences of its non-proof Legal framework: Tax demands premised on characterization of the taxable person require Departmental proof of the factual foundation for that legal characterization; mere assertions or isolated statements are insufficient to displace documentary evidence showing individual ownership, individual leases, individual registrations and receipt of rents. Precedent Treatment: Followed Tribunal decisions (Deoram; Anil Saini) that scrutinized documentary indicia of ownership and receipt; these authorities refused to infer an AOP absent cogent proof. Interpretation and reasoning: The Court applied evidentiary scrutiny - city survey extracts, lease agreements showing payments to individuals, individual Central Excise registration certificates, and records of individual tax payments - and contrasted them with the sole departmental reliance on an oral statement about obtaining a loan. The Court concluded the departmental material did not meet the requisite standard to declare an AOP and to impose tax on that footing. Ratio vs. Obiter: Ratio - absence of corroborative documentary or statutory evidence of an AOP precludes treating co-owners as a single taxable person; Obiter - the Department cannot simultaneously pursue an alleged AOP and appropriate taxes paid by individual co-owners without explaining the legal basis for such duality. Conclusion: Evidentiary onus is unmet; demand against an alleged AOP fails for lack of proof. Issue 3 - Applicability of statutory exemption and limitation rules; effect of voluntary payment by individuals before issuance of show-cause notice Legal framework: Notification No. 6/2005-S.T. provided prescribed exemption thresholds for renting of immovable property in specified years; Section 73(3) (referred to in adjudicatory reasoning) and related provisions govern recovery, limitation and non-imposition of penalty where unpaid tax is paid with interest before service of notice; principles on extended period and limitation (including judicially considered standards) were addressed. Precedent Treatment: Tribunal decisions relied upon (Deoram and Anil Saini) applied the exemption notification and Section 73(3) reasoning to hold that where individual receipts fell below exemption thresholds for certain years, no tax was payable for those years, and where tax was paid with interest before notice, penalty and extended recovery were not sustainable. Interpretation and reasoning: The Tribunal found that when rent receipts are divided among co-owners, individual receipts for relevant years were below exemption limits for specified earlier years (hence no tax liability then). For later years where individual receipts exceeded exemption thresholds, the co-owners had already registered and paid service tax with interest prior to issuance of the impugned show-cause notice. The adjudicating authority had not demonstrated suppression or malafide evasion; there was no record of audit/inspection prompting recovery and the payments preceded the departmental statement relied on. Ratio vs. Obiter: Ratio - where individual receipts fall below the statutory exemption limit, no tax is payable for that period; where tax is paid with interest before service of notice and the statutory conditions of Section 73(3) are met, penalty and extended recovery (for that payment period) are not leviable. Obiter - references to case law on extended period were discussed but did not form basis to sustain extended recovery on these facts. Conclusion: For earlier years where individual receipts were below exemption thresholds, no service tax liability arose; for subsequent years where tax was payable, co-owners paid tax and interest before notice and thus were entitled to the statutory protections against penalty under the applicable provision. Consequently, extended period/penalty recovery as invoked was not sustainable on the facts. Issue 4 - Appropriateness of departmental approach in simultaneously seeking recovery from an alleged AOP and appropriating amounts paid by individual co-owners Legal framework: Tax administration cannot treat different legal persons inconsistently without legal basis; appropriation of amounts and determination of the taxable person must follow legal identification of the service provider and recipient. Precedent Treatment: The Tribunal relied on prior decisions holding that tax liability must be assessed against the legally identifiable service provider; arbitrary aggregation or appropriation without statutory or evidentiary foundation is impermissible. Interpretation and reasoning: The Tribunal criticized the Department's dual approach - pursuing recovery from a non-established AOP while appropriating sums paid by individually registered co-owners - as legally incoherent. The record lacked any legal basis for treating those sums as payments for an AOP's liability; the Department did not delineate how individual payments were attributable to an alleged AOP liability. Ratio vs. Obiter: Ratio - Departmental demands must consistently identify and apply liability to the proper legal person; absent proof, appropriation or aggregation is improper. Obiter - commentary that institutional clarity is required in framing show-cause notices and adjudication. Conclusion: The Department's dual approach was unsustainable; appropriation of individual payments to support an AOP demand fails without proof that such payments related to an AOP liability. Overall Disposition On the combined issues the Tribunal concluded that the Department failed to establish an AOP, the co-owners were correctly assessed (and had filed registrations/paid tax) in their individual capacities, statutory exemptions and pre-notice payments with interest eliminated liability and penalty for relevant periods, and therefore the impugned demand and penal consequences were set aside.