2025 (12) TMI 505 - SC - GST

Hostel leases to students, professionals qualify as exempt residential use under Entry 13, Notification 9/2017; no retrospective withdrawal

The State of Karnataka & Anr. Versus Taghar Vasudeva Ambrish & Anr.

SC held that leasing of residential premises as a hostel to students and working professionals constitutes use of a 'residential dwelling' for residential ... Exemption from GST - leasing of residential premises as hostel to students and working professionals - Entry 13 of the Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017 - HELD THAT:- The High Court of Bombay in Bandu Ravji Nikam [2002 (9) TMI 897 - BOMBAY HIGH COURT] has explained “residential dwelling” in detail. In this case, a suit for eviction of a tenant was contested by the tenant saying that the landlord was attempting to evict him in order to lease out the premises to a hostel and that hostel accommodation amounted to ‘non residential accommodation’ which was impermissible under Section 25 of Bombay Rent Control Act. The High Court held that by the very nature of the use of students hostel, it is only a residential user as hostel, is a house of residence or lodging for students and that just because the hostel owners charge some amount from the students, such accommodation cannot be treated as commercial or non residential. In common parlance, ‘residential dwelling’ means any building, structure, or part of the building or structure other than offices or factories, that is used or intended to be used as a home, residence, or sleeping place by one person or by two or more persons maintaining a common household, to the exclusion of all others - Thus, any residential accommodation meant for long term stay can be referred to as “residential dwelling”. The materials on record further indicate that as per the Khatha Extract and layout plans and records available with the Bruhat Bangalore Mahanagara Palike, the plot and property is shown as residential in nature. In view of the aforesaid, we have no hesitation in reaching the conclusion that the subject property is a “residential dwelling”. In the case on hand, the ultimate use of the property as residence remains unchanged. However, if 18% GST is levied on this transaction between the respondent No. 1 and the lessee i.e. M/s DTwelve Spaces Private Limited, 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 - from 18.07.2022, there is no exemption available for respondent 1, as he has rented to a registered person. Through these appeals, the revenue is, in effect, trying to give retrospective application to the amendment made in 2022, which is impermissible - The Explanation clearly shows 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. Application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the leased hostel building qualifies as a 'residential dwelling' for purposes of Entry 13 of Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017. 1.2 Whether, under Entry 13, exemption for 'renting of residential dwelling for use as residence' requires that the lessee itself use the premises as a residence, or whether use by sub-lessees (students/working professionals) suffices. 1.3 How a beneficial, activity-specific exemption under Entry 13 is to be interpreted, including the relevance of purposive interpretation and the principle of strict vs liberal construction of exemption notifications. 1.4 Whether the amendments to Entry 13 with effect from 18.07.2022 and 01.01.2023 affect or control the availability of exemption for the period 2019-2022, including any question of retrospective application. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Qualification of the subject property as a 'residential dwelling' (a) Legal framework discussed 2.1 The Court noted that the term 'residential dwelling' is not defined in GST law. Reference was made to the CBIC Education Guide dated 20.06.2012 under the erstwhile Finance Act, 1994, which stated that 'residential dwelling' 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.' 2.2 The Court referred to pre-GST practice where only commercial properties let out attracted service tax, whereas rental income from residential properties did not, to highlight the consistent tax treatment of residential letting for dwelling purposes. (b) Interpretation and reasoning 2.3 The Court relied on judicial interpretations of 'dwelling house' and 'residential dwelling', including: (i) decisions stating that 'dwelling house' is synonymous with residential accommodation distinct from business/commercial premises; (ii) authority holding that even a single room can constitute a 'dwelling house'; and (iii) the Bombay High Court's ruling that a students' hostel is used for residential purposes and is not to be equated with hotel/lodging house. 2.4 The Court adopted dictionary meanings of 'residence' and 'dwelling' (Concise Oxford Dictionary, Black's Law Dictionary), emphasizing that a dwelling is a structure in which persons live as a place of habitation or home. 2.5 In common parlance, a 'residential dwelling' was construed as any building or part thereof (other than offices/factories) used or intended to be used as a home or sleeping place by persons maintaining a household, to the exclusion of others. 2.6 The Court emphasized that any residential accommodation meant for long-term stay can be regarded as a 'residential dwelling'. The property in issue, consisting of 42 rooms in a building shown in municipal records and layout plans as 'residential' in nature, was used for long-term accommodation of students/working women (average stay around eight months). (c) Conclusions 2.7 The Court held that, having regard to its character, purpose and official classification, the subject property is a 'residential dwelling' within the meaning of Entry 13. 2.8 The contention that the size and structure (42 rooms with attached washrooms) makes it akin to excluded categories like hotel or lodge was rejected; the dominant and actual use as long-term residence for students/working professionals was determinative. Issue 2: Requirement that the residential dwelling be 'used as a residence' and whether the lessee must personally reside (a) Legal framework discussed 2.9 Entry 13 of Notification No. 9/2017-Integrated Tax (Rate) grants exemption for 'services by way of renting of residential dwelling for use as residence.' The Court proceeded on the basis (as argued by both sides) that three conditions must cumulatively be met: (i) there must be a supply of service of renting; (ii) the property must be a residential dwelling; and (iii) such residential dwelling must be used as a residence. (b) Interpretation and reasoning 2.10 The Court found the first two conditions clearly satisfied: the transaction was renting, and the property was a residential dwelling. 2.11 On the third condition, the Court examined the lease deed, which showed that the premises were taken by the lessee for the purpose of providing long-term accommodation to students and working professionals by sub-letting/sub-licensing. The ultimate and exclusive use was therefore residential. 2.12 The Court held that Entry 13 does not impose any additional requirement that the immediate lessee (here, a company) must itself physically occupy and reside in the premises. To read such a requirement would be to add words not found in the notification (i.e., 'by the lessee'), which is impermissible. 2.13 The Court rejected the revenue's contention that only the facts of the first supply (lessor-lessee) could be considered, and that the use by sub-lessees/end-users was irrelevant. It held that the test under Entry 13 is whether the rented residential dwelling is used as a residence in fact; such use by sub-lessees (students/working women) equally satisfies the condition. 2.14 The Court regarded the lessee's status as an aggregator/sub-lessor as not changing the essential character of the activity: the property remains used as residence by its occupants, and the rental is for residential use. 2.15 The argument that allowing reliance on sub-lessees' use would 'rewrite' the notification or violate its supply-specific nature was rejected. The Court held that the exemption turns on the nature and end-use of the activity of renting, which can be ascertained by looking at the entire arrangement, including sub-letting where it is integral to the transaction. (c) Conclusions 2.16 The residential dwelling in question was taken on rent and sub-let solely for use as a residence by students/working women; therefore, the third condition under Entry 13 is fulfilled. 2.17 The exemption under Entry 13 does not require that the lessee itself personally reside in the premises; residential use by sub-lessees/end-users is sufficient where the transaction as a whole is for residential use. 2.18 Consequently, all three conditions for exemption under Entry 13 were satisfied for the period 2019-2022, and GST at 18% was not payable on the rent for that period. Issue 3: Nature and interpretation of Entry 13 as a beneficial, activity-specific exemption (a) Legal framework discussed 2.19 The Court referred to the jurisprudence on interpretation of exemption provisions, particularly: * The distinction between general exemption provisions and beneficial exemptions, as recognized in decisions holding that beneficial exemptions are to be construed in favour of the beneficiary where ambiguity exists. * The principle laid down that an exemption provision is construed strictly at the threshold to determine applicability, but once the subject is found to fall within it, the provision is thereafter to receive a liberal construction. 2.20 The Court also discussed the doctrine of purposive interpretation, under which statutory language is construed in light of the object, values, interests and aims the provision is designed to achieve, rather than in a purely literal or formalistic manner. (b) Interpretation and reasoning 2.21 The Court identified the clear legislative object behind Entry 13: to exempt from GST the renting of residential dwellings where the property is used as a residence, so that residential use of rented property does not bear an 18% GST burden. 2.22 It held that Entry 13 is an activity-specific exemption: it attaches to the activity 'services by way of renting of residential dwelling for use as residence', and not to a specified class or category of persons. This was contrasted with person-specific exemptions elsewhere in GST notifications (e.g., exemptions tied to entities registered under Section 12AA of the Income-tax Act or electricity utilities). 2.23 Applying the strict-then-liberal construction principle, the Court reasoned that: (i) on strict construction, all three conditions of Entry 13 are satisfied in the present case; and (ii) once applicability is established, a liberal construction must be adopted, allowing the exemption to reach both the lessee and the sub-lessees where the activity is renting for residential use. 2.24 The Court rejected the revenue's reliance on decisions that emphasize strict interpretation of exemptions without distinguishing beneficial exemptions. It reaffirmed that beneficial exemption provisions are not to be interpreted narrowly in a way that frustrates their protective purpose. 2.25 The Court held that a narrow interpretation of Entry 13, requiring occupation by the immediate service recipient alone, would defeat the legislative purpose by denying exemption where the property is in fact used as a residence via sub-letting, and by passing the tax burden to students/working professionals. 2.26 The Court underscored that statutory interpretation is dynamic and that purposive interpretation now predominates over purely literal interpretation, particularly where literal reading would lead to outcomes inconsistent with the statute's purpose. (c) Conclusions 2.27 Entry 13 is a beneficial, activity-specific exemption designed to prevent GST from burdening residential use of rented dwellings. 2.28 After a strict assessment confirms that renting of a residential dwelling for residential use is involved, Entry 13 must be construed liberally so as to cover arrangements where residential use is achieved through sub-letting/aggregation models. 2.29 A restrictive reading that denies exemption because the lessee is a commercial entity, or because it sub-lets to end-users, is inconsistent with the purpose and impermissibly undermines the legislative intent. Issue 4: Effect of the 2022 and 2023 amendments to Entry 13 and possible retrospective application (a) Legal framework discussed 2.30 Entry 13 was amended with effect from 18.07.2022 to read: 'Services by way of renting of residential dwellings for use as residence except where the residential dwelling is rented to a registered person.' 2.31 With effect from 01.01.2023, an Explanation was added clarifying that for purposes of exemption under this Entry, it shall cover renting of residential dwelling to a registered person where: (i) the registered person is a proprietor of a proprietorship concern renting the dwelling in his personal capacity for his own residence; and (ii) such renting is on his own account and not that of the proprietorship concern. (b) Interpretation and reasoning 2.32 The Court held that, by virtue of the 18.07.2022 amendment, no exemption under Entry 13 is available prospectively where the residential dwelling is rented to a registered person such as the lessee in this case. 2.33 It found that the revenue's argument effectively sought to apply the 2022 amendment retrospectively to deny exemption for the period 2019-2022, by importing the 'rented to a registered person' exclusion into the pre-amendment period. Such retrospective application was held impermissible. 2.34 The subsequent Explanation added in 2023 was noted to reinforce that the legislative intent throughout has been to preserve exemption for genuine residential use, even where the payer of rent is a registered person, provided the renting is for personal residential use in specified circumstances. 2.35 The Court treated these later changes as confirming, rather than contradicting, the original objective of Entry 13 to protect residential letting from GST where the use is as a residence. (c) Conclusions 2.36 For the pre-amendment period (2019-2022) in issue, the original, unamended Entry 13 governs; under this regime, the respondent's transaction was exempt as all stipulated conditions were satisfied. 2.37 From 18.07.2022 onwards, exemption is unavailable where residential dwellings are rented to registered persons, and the respondent is therefore not entitled to exemption prospectively. 2.38 The 2022 and 2023 amendments cannot be used to retrospectively unsettle the exemption lawfully available under the unamended Entry 13 for the earlier period. Overall conclusion 2.39 The Court upheld the High Court's decision, holding that for the period 2019-2022 the leasing of the subject premises as a hostel to students and working professionals fell within Entry 13 as 'services by way of renting of residential dwelling for use as residence,' and was exempt from GST; the appeals of the revenue were dismissed.