2024 (1) TMI 221 - HC - Income Tax

Income from other sources - interest free refundable security deposit for due completion of the project by the developer - argument of the Standing Counsel is that the said amount was received by the MD on behalf of the petitioner and retained by him though it was stated to be the sum held as security deposit against the construction of commercial complex and which work has not yet started - HELD THAT - As discernable from the Development Agreement that the disputed amount of Rs. 50.00 lakhs is only an interest free security deposit lying in the hands of the petitioner. The Department, it appears, proposes to treat it as a revenue receipt on the main ground that the said amount was not shown by the petitioner in its accounts as a liability. However, the Department does not appear to challenge the genuinity of the Development Agreement. Considering all these aspects, we are of the view that it is not apposite on the part of the Department to treat the aforesaid amount of Rs. 50.00 lakhs as receipt for the AY 2019-20 to impose tax. Accordingly, this Writ Petition is allowed with a direction that the petitioner shall hereafter show the amount of Rs. 50.00 lakhs as interest free security deposit in its books of accounts till the same is refunded to the builder viz., M/s. Royal Mindz Infra Pvt. Ltd. and respondent Department is directed to drop the proceedings against the petitioner to collect tax in respect of the said amount.

Summary

Issues involved:
The main issue in this case is whether a sum of Rs. 50.00 lakhs received as a refundable security deposit should be treated as revenue for tax purposes under the head "Income from other sources" for the Assessment Year 2019-20.

Summary of Judgment:

Issue 1: Interpretation of Development Agreement
The Development Agreement-cum-GPA revealed that the petitioner, as the owner, entered into an agreement with the builder, M/s. Royal Mindz Infra Pvt. Ltd., where the builder agreed to pay Rs. 50.00 lakhs as an interest-free refundable security deposit. The agreement specified that this amount was repayable to the builder within two months after the completion of the commercial units. The court found that the disputed amount was indeed an interest-free security deposit, as per the terms of the agreement.

Issue 2: Tax Treatment of the Amount
The petitioner argued that the sum of Rs. 50.00 lakhs should not be treated as revenue for tax purposes, as it was a refundable security deposit. The Department contended that since the amount was not shown as a liability in the petitioner's accounts, it should be considered as income from other sources for the Assessment Year 2019-20. However, the court held that based on the terms of the Development Agreement and the genuineness of the transaction, the amount should not be treated as taxable income. The court directed the petitioner to reflect the amount as an interest-free security deposit in its books until refunded to the builder and ordered the Department to cease tax collection proceedings against the petitioner regarding this amount.

This judgment clarifies the tax treatment of a refundable security deposit received by the petitioner and emphasizes the importance of analyzing the terms of agreements in determining the nature of receipts for tax purposes.