The Andhra Pradesh High Court has ruled that no income tax shall be levied on the interest-free refundable security deposit provided by the developer upon the due completion of the project. The High Court has instructed the income tax department to cease the tax proceedings.
The bench of Justice U.Durga Prasad Rao and Justice Venkata Jyothirmai Pratapa directed in the writ petition filed by the Petitioner M/s Coastal Ceramics and Clay Works Private Ltd 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 the respondent Department is directed to drop the proceedings against the petitioner to collect tax in respect of the said amount.”
The central issue revolves around a Rs. 50 lakh deposit, alleged by the petitioner to be a refundable security deposit from M/s. Royal Mindz Infra Pvt. Ltd., received for a commercial complex construction project in Rajahmundry. The petitioner argued that the interest-free refundable security deposit for the due completion of the project should not be classified as revenue for tax purposes under “Income from other sources” for the Assessment Year 2019-20.
In contrast, the Standing Counsel contended that the amount, received and retained by the Managing Director on behalf of the petitioner, should be treated as a revenue receipt. Despite being labelled as a security deposit for a commercial complex construction not yet initiated, the Standing Counsel argues that the sum of Rs. 50 lakhs is income and should be taxed for the Assessment Year 2019-20.
The dispute stemmed from the petitioner’s assertion that the amount was a legitimate interest-free security deposit, while the Department views it as an undisclosed receipt liable for tax. The Department’s claim rests on the fact that the petitioner did not record the amount as a liability in its books of accounts, and it was only unearthed during a search by the Department.
Examining the Development Agreement-cum-GPA (General Power of Attorney) No. 7592/2011, it is revealed that the builder, M/s. Royal Mindz Infra Pvt. Ltd., agreed to pay a sum of Rs. 50 lakhs as an interest-free refundable security deposit to the owner (petitioner). The agreement further stipulates that the deposit is repayable within two months after the completion of commercial units.
The Andhra High Court, considering the terms of the Development Agreement, concluded that the disputed amount of Rs. 50 lakhs is indeed an interest-free security deposit. Despite the Department’s argument regarding the non-disclosure in the petitioner’s accounts, the court opined that, based on the genuine Development Agreement, it is inappropriate for the Department to treat the amount as taxable income for the AY 2019-20.
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