Income Tax Not Leviable On Interest-Free Refundable Security Deposit For Due Completion Of Project By Developer: Andhra Pradesh High Court

The Andhra Pradesh High Court at Amaravati has held that income tax is not leviable on an interest-free refundable security deposit for the due completion of a project by the developer.

The bench of Justice U.Durga Prasad Rao and Justice Venkata Jyothirmai Pratapa has observed that, as per the development agreement, the disputed amount of Rs. 50 lakhs is only an interest-free security deposit lying in the hands of the petitioner. It is not appropriate on the part of the department to treat the Rs. 50 lakhs as receipts for the AY 2019-20 to impose tax.

The petitioner received Rs. 50 lakhs as a refundable security deposit from M/s. Royal Mindz Infra Pvt. Ltd. (the developer) via a development agreement for the construction of a commercial complex at Rajahmundry. As the amount is an interest-free refundable security deposit for the due completion of the project by the developer, the amount in the hands of the petitioner cannot be treated as revenue for levying tax under the heading “Income from other sources” for the assessment year 2019–20.

The department contended that the amount of Rs. 50 lakhs were received by the Managing Director on behalf of the petitioner and retained by him, though it was stated to be the sum held as a security deposit against the construction of a commercial complex, and work has not yet started. Therefore, the sum of Rs. 50 lakhs received by the petitioner was held to be revenue receipt and brought to tax as income for AY 2019-20 under the heading “Income from other sources." The amount is to be treated as income for the petitioner, having been received and consumed as an undisclosed receipt. The petitioner did not disclose it in the books of accounts as a liability, and it was on account of the search that the deposit was unearthed by the department. Hence, the receipt is an undisclosed receipt in the hands of the petitioner and is liable for tax.

As per the development agreement, the builder has agreed to pay a sum of Rs. 50 lakhs towards an interest-free refundable security deposit to the owner. It was agreed between the parties that the interest-free refundable security deposit of Rs. 50 lakhs paid by the developer shall be repayable to him by the owner within two months after the handover of commercial units is completed in all respects.

The court has allowed the writ petition with a direction that the petitioner shall show the amount of Rs. 50 lakhs as an interest-free security deposit in its books of accounts till it is refunded to the builder and directed the department to drop the proceedings against the petitioner to collect tax in respect of the amount of Rs. 50 lakhs.

Counsel For Petitioner: N.Vijay

Counsel For Respondent: M.Kiranmayee

Case Title: M/s Coastal Ceramics and Clay Works Private Ltd. Versus UOI

Case No.: Writ Petition No: 15833 Of 2023

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