Service Tax cannot be levied on Notional Interest calculated by Department on Interest Free Security Deposit: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Principal Bench at New Delhi has held that service tax cannot be imposed on a notional or hypothetical amount of interest that tax authorities compute on interest-free security deposits. The decision came in three linked appeals filed by Jaipur-based locker-rental operator, all disposed of by the Bench.

Between 2012 and 2015, the appellant Jyotsna Vaults charged its clients the agreed locker rent and collected refundable, interest-free security deposits. The Department issued multiple show-cause notices contending that, under Section 67 of the Finance Act, the taxable value of the service should include the “notional interest” the company could have earned on those deposits.

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Three orders-in-original confirmed demands totaling roughly ₹7 lakh, and a common order-in-appeal dated 20 February 2018 upheld them, prompting Jyotsna Vaults to approach the Tribunal.

Appearing for the appellant, Chartered Accountant Sanjiv Agarwal relied on a 2023 Delhi Bench ruling in Binani Safe Deposit Vaults and earlier CESTAT and Supreme Court precedents (Murli Realtors, Moriroku UT India) to assert that deposits taken for safeguarding rent recovery or potential damage are not consideration for the service itself. The Department’s representative Shashank Yadav conceded that the issue “is no more res integra” but nevertheless reiterated the lower-authority findings.

Writing for the two-member bench, Judicial Member Dr Rachna Gupta observed that Section 67 taxes only the amount actually charged for a service. Locker rent, not the security deposit, is the sole consideration for leasing the lockers. Citing Murli Realtors, the Bench noted there is “no provision in service-tax law for deeming notional interest on a security deposit as additional consideration.” In the absence of a specific statutory mandate—and because the Department had not demonstrated that the deposit influenced the rent—the attempt to add hypothetical interest was unsustainable.

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The CESTAT Bench thus set aside the Commissioner (Appeals) order in totality and allowed all three appeals, cancelling service-tax demands, interest and penalties.

The decision protects genuine security deposits from tax inflation. Many real-estate, warehousing and locker-service providers were facing similar disputes and the Tribunal has once again clarified that imaginary income cannot be taxed.

For businesses that collect refundable deposits, the decision offers a reasonable relief and firmer ground to contest pending notices.

To Read the full text of the Order CLICK HERE

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