Security Deposit Taxable Upon Arbitration Award Due to Earlier Uncertainty: ITAT [Read Order]

The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that the refundable security deposit is taxable only after the arbitration award, due to earlier uncertainty regarding its treatment as income.

Govindappa Jayaram Doddiah (HUF),appellant-assessee,filed a return that included long-term capital gains. The case was selected for scrutiny to review the capital gains and exemption claim under Section 54 of the Act. The Assessing officer(AO) issued notices, and the assessee responded with the necessary documents. However, the AO disallowed the cost of improvement, stating the expenses were not capital in nature.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

For another property, the AO determined capital gains based on the super built-up area, despite the occupation certificate showing a smaller area. The AO also added the refundable security deposits from the developer under the Joint Development Agreement to the appellant-assessee’s income.

The assessee appealed to the Commissioner of Income Tax(Appeals)[CIT(A)] against the AO's order, arguing that the improvement costs were capital expenses and that the area used for determining the fair market value of another property was incorrect, as it exceeded the area in the occupation certificate.

The assessee also contested the inclusion of the refundable security deposit, claiming it was to be returned to the developer. However, the CIT(A) upheld the AO's decision to treat the refundable security deposit as income.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The assessee's counsel stated during the hearing that the assessee and developer had settled disputes through arbitration, allowing the assessee to retain the security deposit of Rs. 1,18,30,789/- for the shortfall in built-up and car park areas. The counsel confirmed that the amount would be added to the income for the assessment year(AY)2024-25 and requested the appeal be allowed. The Revenue counsel argued that the security deposit was treated as income, supporting the AO’s decision and seeking the dismissal of the appeal.

The two member bench comprising Soundararajan K(Judicial Member) and Waseem Ahmed(Accountant Member) reviewed the case and the arbitration award dated 01/07/2024, where the assessee and developer agreed on a compensation of Rs. 1,18,30,789/- for the shortfall in built-up and car park areas. The dispute over the security deposit was resolved on 01/07/2024, so the amount was considered income from that date. The assessee agreed to report this amount as income for the AY 2024-25.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The tribunal accepted the assessee's undertaking and sent the case back to the AO to include the amount in the income for the AY 2024-25 and proceed with the assessment.

In short,the appeal filed by the assessee was allowed for statistical purposes.

To Read the full text of the Order CLICK HERE

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