Can Corporations Levy Commercial Tax on Hostels? Madras HC Clarifies

The Madras High Court has ruled that hostels providing accommodation to working men and women must be treated as residential units for tax purposes, not as commercial establishments, quashing multiple demand notices issued by local municipal and water authorities in Chennai and Coimbatore.

The bench of Justice Krishnan Ramasamy held that the nature of activity carried out in such hostels was purely residential and not commercial, as the inmates use the premises as living quarters and sleeping apartments after work. Court directed that property tax, water tax, and electricity charges for such hostels be levied only at residential tariffs.

The order came in a batch of petitions led by M. Divya and several other hostel owners who had challenged the conversion of their properties from residential to commercial category. The petitioners argued that they were running hostels for economically weaker sections and lower-middle-class individuals who cannot afford private houses or apartments, and that the local bodies had reclassified their properties without prior notice, violating principles of natural justice.

The respondents, including the Greater Chennai Corporation, Coimbatore City Municipal Corporation, and the Chennai Metro Water Supply and Sewerage Board (CMWSSB), contended that hostel owners were engaged in commercial activity by leasing rooms and collecting rent, and hence should pay higher tariffs applicable to business establishments. They further claimed that classifying such properties as residential would cause significant revenue loss to the civic bodies.

Rejecting these arguments, Justice Ramasamy observed that taxation must reflect the use of the property and not merely the ownership or income derived from it. “If hostels for working women and students are treated as commercial units, it would result in discrimination against the poor and middle class, who would end up paying more than those living in bungalows or apartments,” the court noted.

The judge referred to the earlier Madras High Court decision in W.P. No. 28486 of 2023, which had similarly ruled that hostels should be regarded as residential premises for the purpose of Goods and Services Tax (GST). Applying the same reasoning, the court said that authorities must assess such properties from the perspective of the occupant rather than the service provider.

Finding that no prior notice had been issued to the petitioners before converting the tariff category, court held that the action of the municipal bodies violated the principles of natural justice. Consequently, all impugned demand notices were quashed.

“The respondents are directed to treat the petitioners’ properties as ‘residential units’ and levy the taxes, such as property tax, water tax, and electricity charges, accordingly,” the court ordered. However, it clarified that the judgment will apply only to cases where the hostel inmates use the premises exclusively for residential purposes, subject to verification by the authorities.

The batch of petitions was accordingly allowed, with no order as to costs.

For the petitioners, Advocates Aparna Nandakumar, T. Saikrishnan, S. Senthil, N.K. Ponraj, Kingston Jerold appeared in their respective petitions.

For the respondents, Advocates P. Prithvi Chopda, D. Ferdinand, K.N. Umapathy, Najeeb Usman Khan, N. Velmurugan, V. Vijayalakshmi, D.R. Arunkumar appeared, and C. Selvaraj, AGP appeared for the municipal and government authorities.

Case Title: M.Divya vs. The Senior Revenue Officer, Revenue Department, Greater Chennai Corporation with connected matters

Judgment Date: November 7, 2025

Bench: Justice Krishnan Ramasamy