The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai has allowed Service Tax Appeal Nos. 40776 & 40777 of 2016 filed by R. Rajinikanth and set aside the service tax demand on lease rentals received for a building leased to M/s. Vasantha Bhavan Hotels India Pvt. Ltd. for running a hotel. The Tribunal held that the premises continued to qualify as a “building used by a hotel” and therefore fell within the specific exclusion under Section 65(105)(zzzz) of the Finance Act, 1994, even though the hotel had facilities such as a restaurant, banquet hall, conference hall, bar and health club.
The Bench of Hon’ble Shri M. Ajit Kumar (Member–Technical) and Hon’ble Shri Ajayan T.V. (Member–Judicial) delivered Final Order Nos. 40317 & 40318/2026 on March 4, 2026 (hearing held on October 14, 2025).
Case Background
The appeals arose from Order-in-Appeal Nos. 27 & 28/2016 (STA–II) dated 23.02.2016, passed by the Commissioner of Service Tax (Appeals–II), Chennai.
The department alleged that the appellant owned a multistorey building and leased it to Vasantha Bhavan Hotels India Pvt. Ltd. for commercial use as a hotel. It claimed the appellant did not pay service tax on the activity. The department treated the leasing as taxable under “Renting of Immovable Property Service for furtherance of business or commerce” under Section 65(105)(zzzz).
Accordingly, it issued a show cause notice and statement of demand for:
- June 2007 to December 2011: Rs. 46,81,870/-
- January 2012 to June 2012: Rs. 10,02,705/-
The notice also proposed interest and penalties. After adjudication, the authorities confirmed the demand with interest. They also imposed penalties under Sections 77 and 78 of the Finance Act, 1994.
In appeal, the Commissioner (Appeals) dismissed the challenge but set aside the penalty under Section 77. This led to the present appeals before CESTAT.
Appellant’s Submissions
Shri T.T. Ravichandran, Advocate appeared for the appellant.
He argued that the dispute arose from a lease deed executed in favour of Vasantha Bhavan Hotels India Pvt. Ltd. for running a hotel. He also submitted that renting of immovable property for use as a hotel fell within the specific exclusion under Section 65(105)(zzzz).
Further, he contended that the authorities wrongly invoked Explanation II to Section 65(105)(zzzz). He relied on CESTAT decisions including:
- Jai Mahal Hotels Pvt. Limited v. Commissioner of C. Ex., Jaipur [2014 (36) STR 669 (Tri.–Del.)]
- Orient Express Co. (Final Order No. 54918/2016 dated 20.10.2016)
- Grand Royale Enterprises Ltd. v. Commissioner of S.T., Chennai-I [2019 (31) G.S.T.L. 453 (Tri.-Chennai)]
He sought setting aside of the demand and also requested refund of the pre-deposit.
Department’s Arguments
Smt. O.M. Reena, Authorised Representative appeared for the department.
She argued that the appellant could not claim the exclusion by reading clause (d) of the exclusion to Section 65(105)(zzzz) in isolation. She relied on Explanation 2 to Section 65(105)(zzzz), which deems a property used partly for business/commerce and partly for residential/other purposes as used in the course of or furtherance of business/commerce.
She further submitted that the leased premises did not function solely for hotel accommodation. According to her, the premises also supported commercial activities such as running a restaurant, banquet hall, conference hall, bar and health club. Therefore, she argued, the renting attracted service tax under clause (90a) of Section 65, read with Section 65(105)(zzzz).
Issue Before The Tribunal
The Tribunal identified the key issue as whether a building leased for use as a hotel—along with facilities like a restaurant, banquet hall, conference hall, bar and health club—still qualified for the specific exclusion under Section 65(105)(zzzz) for buildings used as hotels.
The Bench referred to the relevant statutory framework, including:
- Section 65(90a) defining “renting of immovable property”
- Section 65(105)(zzzz) defining the taxable service
- Explanation 1, including clause (d) excluding buildings used for accommodation, including hotels
- Explanation 2 dealing with deemed partial business use
Tribunal’s Findings
The Tribunal noted that the Finance Act, 1994 did not define the term “hotel.” However, it observed that in trade parlance, hotels offering facilities such as restaurants, banquet halls, conference halls, bars and health clubs are recognised as “full-service hotels.”
The Bench held that these facilities do not operate as stand-alone establishments in such settings. Instead, they remain integral and incidental to running a hotel. It observed that hotels provide such facilities to cater to guests and to improve commercial viability depending on the category or class of the hotel.
Importantly, the Tribunal noted that the record did not show any bifurcation of use of the premises. It also found no basis to infer that the property was partly deployed for independent or distinct commercial activities. Therefore, the Bench concluded that these facilities formed part of the hotel.
On this reasoning, the Tribunal held that Explanation 2 to Section 65(105)(zzzz) did not apply. It further held that the premises continued to qualify as a building used by a hotel, and therefore fell within the exclusion in Section 65(105)(zzzz).
Reliance On Precedents
The Tribunal relied on the Chennai Bench decision in Grand Royale Enterprises. It also referred to the reasoning in Jai Mahal Hotels, and noted that the decision in Jai Mahal Hotels had been affirmed by the Supreme Court in [2022 (63) G.S.T.L. 412 (S.C.)].
It observed that it remained bound by the coordinate Bench decision, especially since no one distinguished it on facts.
Final Decision
CESTAT held that the impugned orders could not stand. It therefore set aside the orders and held that the appellant would be eligible for consequential relief as per law, thereby disposing of the appeals.
