CESTAT Quashes Service Tax Demand Based Merely on Form 26AS; Renting of Residential Hostel Held Non-Taxable

Last updated: 22 September 2026

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The CESTAT has quashed a service tax demand, ruling that income from renting a residential hostel is not taxable. The Tribunal found that the department wrongly used Form 26AS alone to confirm the demand, without proving the nature of the service or intent to evade tax. Trading receipts were also deemed non-taxable as they didn't fall under the definition of 'service'.

Court :
New Delhi

Brief :
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, allowed the appeal filed by Ms. Anju Makhija and set aside the service tax demand of ₹19.72 lakh along with applicable interest and penalties. The demand for the period 2013-14 to 2015-16 was primarily based on income reflected in the appellant's Income Tax Returns/Form 26AS.

Citation :
Service Tax Appeal No. 51065 of 2021

The appellant had received income from two sources: ₹94.93 lakh from trading/sales and ₹57.50 lakh from renting of immovable property. The Tribunal observed that the trading receipts could not be attributed to the appellant because there was no evidence connecting her with M/s Shri Sawariya Traders. Further, trading/sale transactions fall outside the definition of "service" under Section 65B(44) of the Finance Act, 1994.

With regard to rental income, the appellant submitted that the property was rented for use as a hostel/residential accommodation. The Tribunal noted that a hostel can qualify as a residential dwelling, particularly where it provides accommodation for residents for a comparatively longer period. Since the period involved was the post-negative-listing era, Section 66D(m) specifically excluded renting of a residential dwelling for use as residence from taxable services. Accordingly, the rental income was also held to be non-taxable.

The Tribunal further held that the extended period of limitation was wrongly invoked. Mere non-payment of service tax or non-registration does not by itself establish wilful suppression or intent to evade tax. The department was required to establish a positive act indicating intentional suppression, which it failed to do.

Importantly, the Tribunal reiterated that Form 26AS or income-tax returns alone cannot be the basis for confirming a service tax demand. The department must establish the nature of the service, the service provider, the service recipient and the consideration received for the alleged taxable service.

Held: The receipts were not liable to service tax on the facts of the case, the extended limitation was not sustainable, and the demand was wrongly confirmed. The impugned order was set aside and the appeal was allowed.

This AI-generated summary is for informational purposes only. Please view attached original judgment for the complete text and authoritative interpretation.

FAQ :

No, the CESTAT has reiterated that Form 26AS or income-tax returns alone cannot be the basis for confirming a service tax demand. The department must establish the nature of the service, provider, recipient, and consideration.

No, the CESTAT held that renting a residential hostel for use as residence is not a taxable service, as it falls under the exclusion for renting of residential dwellings.

The trading receipts were held to be non-taxable because there was no evidence connecting the appellant to the alleged trading and because trading/sale transactions fall outside the definition of 'service' under the Finance Act, 1994.

The CESTAT found the extended period of limitation was wrongly invoked. Mere non-payment or non-registration does not automatically establish wilful suppression or intent to evade tax; the department must prove a positive act of intentional suppression.