New Delhi | The Supreme Court on Thursday held that leasing out of residential premises to an entity which is using it as hostel for students and working professionals is exempted from GST.

A bench of justices JB Pardiwala and KV Viswanathan upheld the verdict of the Karnataka High Court which said that leasing out of residential premises to an entity which is using it as hostel to students and working professionals is exempt under GST.

"In the case on hand, the ultimate use of the property as residence remains unchanged. However, if 18 per cent 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," the bench said.

The top court was hearing a plea filed by a co-owner of the residential property having 42 rooms in Bengaluru. The petitioner along with other co-owners executed a lease deed in favour of the lessee, namely M/s D Twelve Spaces Private Limited.

The lessee leased out the aforesaid residential property as hostel for long term accommodation to students and working professionals with the duration of stay ranging from three to 12 months.

The petitioner sought clarification with regard to its eligibility to seek exemption for the renting services provided and filed an application before the Authority of Advance Ruling, Karnataka.

The AAR, Karnataka held that the renting of residential dwelling for use as residence is not covered under entry 13 and the benefit of exemption according to notification is not available.

The petitioner filed an appeal before the Appellate Authority for Advance Ruling which held that the property rented out is a hostel and cannot be termed as residential accommodation or residential dwelling and denied the benefit of exemption.

The Karnataka High Court held that the leasing out of residential premises to an entity who is using it as 'hostel' to students and working professionals is exempt under GST.