Exemption on “Renting of Residential Dwelling for use as Residence”

-By Adv. Kuntal Parikh

1. In case of The State of Karnataka and another versus Taghar Vasudeva Ambrish and another, Civil Appeal No. 7846/2023 & 7847/2023, reported in (2025) 37 Centax 102 (S.C.), the respondent, assessee is the co-owner of four storied residential property, consists of 42 rooms, terrace and common area and he executed a lease deed in favour of one private limited company (for short, ‘the lessee’). The lessee sub-leased this residential property as hostel to provide long term accommodation to students and working professionals. The issue before the Supreme Court was whether the service of leasing of residential premises provided by the respondent to the lessee is exempted under Entry 13 of the Notification 9/2017 – Integrated Tax (Rate), dated 28.06.2017, i.e., “services by way of renting of residential dwelling for use as residence”.

2. On seeking clarification from AAR and in subsequent appeal before AAAR, with regard to claim exemption on first transaction between the respondent/the lessor and the lessee, it was held that the lessee being a company is not itself using the premises in question, that a hostel building which more akin to a sociable accommodation rather than what is commonly understood as residential accommodation, hence exemption is not available to the respondent/assessee.

3. The legality and validity of the order passed by the AAAR was challenged before the High Court under writ jurisdiction by the assessee. The High Court has held that the leasing of residential premises as hostel to students and working professionals would not attract GST. It is also held that the hostel accommodation is more akin to a sociable accommodation and that the assessee is registered as a commercial establishment under the Karnataka Shops and Commercial Establishment Act are not relevant in any manner for the purpose of determining the eligibility of the assessee for exemption under the said entry.

4. The revenue challenged this judgment and order of the High Court before the Supreme Court mainly on the ground that the lessee being the party to the first transaction cannot be said to be using the property as residence and thereby rendering the first transaction ineligible for exemption under the said exemption entry. The revenue also submitted that the property in question does not qualify as a residential dwelling by applying common parlance test because the property comprises of 42 rooms, each attached with its own washroom. The classification as to whether the property in question would qualify as a residential dwelling or not must solely depend on the nature of the property and not on its ultimate use.

Analysis:

5. The Supreme Court interpreted the term ‘residential dwelling’ to determine whether the subject property can be termed as ‘residential dwelling’ or not. Referring to various judgments and dictionary meanings of terms ‘residence’ and ‘dwelling’ and considering the common parlance test, the Supreme Court held that any residential accommodation meant for long term stay can be referred to as ‘residential dwelling’ and subject property is a ‘residential dwelling’.

Exemption entry cannot be interpreted in a manner which would add an additional condition thereto:

6. It is further held that since, the property was taken on rent only 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 sub-lease when it is entered into between the tenant and his sub-tenant. Therefore, it is held that Entry 13 of the Exemption Notification does not mandate that the lessee must use the residential dwelling as its own residence and giving any other interpretation would mean adding an additional condition to Entry 13.

Legislative intent behind the exemption entry should not be defeated:

7. Giving 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 the legislative intent being defeated as the exemption is extended to cases wherein residential dwelling is rented out and ultimately used as residence even for the purpose of the person it. The ultimate use of the property as residence remains unchanged. However, if 18% GST is levied on this transaction between the respondent and the leassee, 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 legislative intent behind this exemption clause is that a rented property that is used as residence should not suffer 18% GST or IGST.

Purposive Interpretation:

8. The principle of purposive interpretation is based on the understanding that the Court is supposed to attach that meaning to the provisions which serve the ‘purpose’ behind such a provision. The basic approach is to ascertain what is it designed to accomplish? By interpretative process the Court is supposed to realise the goal that the legal text is designed to realise. 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.

Activity specific exemption vis-à-vis Person specific exemption:

9. It is held 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 dependant on the person using the service that is exempt.

10. Amendment acts as a guide to interpret law:

With effect from 18.07.2022, entry 13 has been amended as under:

“Services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person.”

Thus, from 18.07.2022, there is no exemption available for respondent as he has rented to a registered person. Though, the revenue is, in effect, trying to give retrospective effect to the amendment made in 2022, which is impermissible.

Conclusion:

11. The Supreme Court has interpreted the said exemption Entry 13 of Notification no. 9/2017 – IT (Rate), dated 28.06.2017 (similar to Entry 12 of Notification no. 12/2017 – CT (Rate), dated 28.06.2017) in above manner for the period prior to 18.07.2022 involved in the said case. The said exemption entry has undergone an amendment and subsequently explanations have been added thereto and it reads as under:

“Services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person.

Explanation 1: For the purpose of exemption under this entry, this entry shall cover services by way of renting of residential dwelling to a registered person where,

(i)    the registered proprietor of a proprietorship concern and rents the residential swelling in his personal capacity for use as his own residence; and

(ii)   such renting is on his own account and not that of the proprietorship concern.

Explanation 2: Nothing contained in this entry shall apply to

(a)   accommodation services for students in student residences;

(b)   accommodation services provided by Hostels, Camps, Paying Guest accommodations and the like.

Thus, the Government has narrowed down the scope of exemption granted on “renting of residential dwelling for use as residence” with effect from 18.07.2022 by making above stated amendment and insertion of explanations.

(Author is an Advocate Practicing in Gujarat High Court)