Delhi HC Upholds Addition since Security Deposit Received in absence of Contractual Clauses to Exercise Control, used as a Camouflage to Postpone Tax Liability [Read Judgment]

The Delhi High Court in the case of Commissioner of Income Tax v. M/s. Ansal Properties and Industries has upheld an addition made by the Revenue by finding that a security deposit where there was no term in the agreement which entitled the assessee to exercise any manner of control over the performance of this obligation was to postpone tax.

The assessee entered into an agreement with Mr. R for development of property in 1971 which was furthered by his heirs and assessee and the property was assigned for consideration to the assessee for construction of a commercial complex. The assessee had a 40% share in the multi-storeyed complex. In 1995, the assessee entered into an agreement with a Company (VIPL) whereby the latter acquired the right of 40% in the built-up area along with the obligation to develop and constitute complex for a total consideration of Rs. 42 Crores. In 2000 a search was carried out on Ansal Group of Companies whereby a ‘Note’ was found and was made a basis for the proceedings.

The Revenue contended that the ‘Note’ was planned for tax point of view on lt to defer the tax liability. Out of total consideration of Rs. 42 Crores, the assessee had already received an amount of Rs. 40 Crores in the year 1995-96 and the remaining amount of Rs. 2 Crores was also received M/s Ansal Buildwell Ltd. as the interest-free inter-corporate deposit to be paid to the assessee at a later date. The Assessing Officer (AO) on the basis of the above added the amount of Rs. 42 Crores in the block assessment. The Commissioner of Income Tax (Appeals) however, reversed the order stating that the cheque of Rs. 2 crores was in mutually agreed terms towards the earnest money and intention of the parties was to show the amount as a part of the sale consideration. The Income Tax Appellate Tribunal held a different interpretation of the ‘Note’ holding that the real nature of the amount received was the consideration, ignoring the plain terms of the document, which revealed the intention of the parties unambiguously and hence the present appeal.

The issue before the present Court is with respect to the treatment of the amount of Rs. 42 Crores which was taken by the assessee as security,

After giving due attention to the facts of the case, the division bench comprising of Justice S. Ravindra Bhat and Justice A.K. Chawla held that the security deposit of Rs. 40 Crores for a consideration of Rs. 42 Crores was a mere camouflage to postpone tax liability towards the uncertain date. It asserted that “The Revenue would have continued to remain in the dark and eventually the assessee would not have paid any tax towards the amount which was plainly received as consideration. The note, in fact, admitted the correct position that the tax liability had to be postponed for business reasons.”

The Court also held that the terms of the contract was to be completed in a 7 year period failing which the assessee was at liberty to forfeit the amount. Further, there was no term in the agreement which entitled the assessee to exercise any manner of control over the performance of this obligation.