TaxTMI 
TaxTMI 
A Deposit Is Not Taxable Merely Because Money Has Changed Hands
Tax disputes often begin with a simple accounting entry. Money has been received, and the Department asks whether tax should be paid on that receipt. But taxability does not depend merely on the movement of money. It depends on the legal character of the receipt. A receipt may be consideration for a supply. It may be reimbursement. It may be a statutory levy. It may also be a refundable security deposit held only as a safeguard. Each category has different tax consequences.
This distinction was central to M/s Unmesh Properties Pvt. Ltd. Versus Commissioner of CGST & Central Excise, Kolkata - 2026 (6) TMI 1474 - CESTAT KOLKATA. The Tribunal dealt with two issues. The first concerned the service tax on electricity charges recovered from occupiers. The second, more practically important for GST, concerned service tax on refundable maintenance or security deposits collected from occupiers.
The Tribunal held in favour of the appellant on both issues. It held that electricity is goods and its sale or redistribution cannot be taxed as a service. It further held that refundable deposits collected as a financial safeguard cannot be treated as taxable consideration unless they are actually adjusted, used or applied towards a taxable service. This second principle is highly relevant under GST because Section 2(31) of the CGST Act, 2017 contains a similar conceptual safeguard for deposits.
The Commercial Background: Property, Electricity and Security Deposits
The appellant had acquired a commercial property known as Centre Point. Most units were sold, while the remaining units were rented out. The appellant was registered under service tax for Management, Maintenance or Repair Service and Renting of Immovable Property. Service tax on rent was discharged wherever applicable.
To ensure an uninterrupted electricity supply to occupiers, the appellant entered into an arrangement with CESC Limited. Under that arrangement, high-tension electricity was received, converted into low-tension electricity, and distributed to occupiers. The appellant recovered electricity charges from occupiers for such redistribution or sale of electricity.
The appellant also collected refundable maintenance deposits from occupiers at Rs.12 per square foot of super built-up area. These deposits were collected as a financial safeguard against possible default in payment of monthly maintenance, electricity charges, or common expenses. The appellant's case was that these deposits were refundable and could be adjusted only if an occupier defaulted. Since no such adjustment was made during the relevant period, the deposits remained as security and did not become taxable consideration.
Electricity Remains Goods Even When Distributed Through a Property Manager
The first issue before the Tribunal concerned electricity charges. The Department sought to tax the amount recovered from occupiers under the Management, Maintenance or Repair Service. The appellant argued that electricity is goods and that recovery for the sale or redistribution of electricity cannot be converted into service consideration merely because the appellant managed the commercial property.
The Tribunal followed its earlier order in the appellant's case, Final Order No.75606/2026 dated 18.05.2026, reported as M/s Unmesh Properties Pvt. Ltd. Versus Commissioner of CGST & Central Excise, Kolkata - 2026 (5) TMI 1165 - CESTAT KOLKATA It also relied on Commissioner of CGST & Central Excise, Kolkata Versus M/s DLF Infocity Developers (Kolkata) Limited - 2025 (8) TMI 1658 - CESTAT KOLKATA, where the supply of electricity to tenants or occupiers was treated as a sale of goods, not as a taxable service. A further supporting reference may also be made to 2026 (7) TMI 461 - CESTAT CHENNAI, where it was again recognised that electricity is goods and cannot be treated as a taxable service merely because it is supplied or recovered through a property-related arrangement. This reinforces the settled position that recovery of electricity charges, in substance, relates to supply of goods and should not be artificially converted into consideration for a service.
The principle is straightforward. Electricity, though intangible, has long been recognised as goods. The Madras High Court treated electricity as goods. in Kumbakonam Electric Supply Corporation Ltd. Versus Joint Commercial Tax Officer, Esplanade Division Madras - 1963 (9) TMI 43 - MADRAS HIGH COURT . The aforesaid decision has also been reaffirmed by the Supreme Court. Once electricity is treated as goods, the same transaction cannot be taxed again as a service merely by changing the label.
A Refundable Deposit Is Security, Not Price
The second issue is central to the judgment. The appellant collected maintenance deposits as a safeguard against possible defaults. The Department treated these deposits as advance consideration for taxable maintenance services. The Tribunal rejected this approach because the receipt was not the price for a service. It was a refundable deposit held as security.
A refundable security deposit serves a protective function. It protects the property manager or service provider against future default by the occupier. If the occupier pays all monthly maintenance, electricity and common expenses, the deposit remains untouched. It is not earned by the recipient. It is not appropriated as income. It is not applied towards a monthly service charge. It remains returnable.
This is different from an advance. An advance is received towards an identified supply and is intended to be adjusted against the price of that supply. A refundable deposit is different. It may never be adjusted at all. Its tax character changes only if it is later applied, adjusted or forfeited in relation to a taxable supply. Until then, the mere fact that money is held by the service provider does not make it consideration.
Taxable Consideration Requires a Link With the Service
The Tribunal's reasoning rests on a basic tax principle. For an amount to be taxed as consideration, there must be a real connection between the amount received and the taxable service supplied. The amount must be paid for the service, or at least applied towards it. A deposit held only as security lacks this immediate connection.
In the present case, there was no finding that the deposits were used for maintenance during the relevant period. There was no evidence that the deposits were adjusted against monthly maintenance charges, electricity dues or common expenses. There was no default by the occupiers that led to the appropriation of the deposit. Therefore, the deposit remained untouched, unadjusted and returnable.
This factual position was decisive. If the appellant had used the deposit for maintenance or adjusted it against dues, the tax result could have been different. But where the deposit remained only a security cushion, taxing it as service consideration would ignore its true nature. The Tribunal therefore held that the demand on refundable maintenance deposits could not survive.
The Maglam Build Principle: Custody Is Not Consideration
The Tribunal relied on The Commissioner, CGST & Central Excise, Jaipur (Raj.) Versus M/s Manglam Build Developers Ltd. - 2022 (4) TMI 255 - CESTAT NEW DELHI. In that case, maintenance deposits collected from buyers were held not taxable because the builder had not used those amounts for maintenance. The deposits were held in custody and were to be transferred to the society after its formation.
The principle from Manglam Build is simple but powerful. If an amount is merely held in custody for a future purpose, and no service is provided against that amount by the person holding it, the amount cannot be treated as consideration. The mere fact of custody alone cannot create a taxable event. There must be appropriation, adjustment, utilisation, or a direct link with a taxable service.
This principle fitted the facts of Unmesh Properties. The deposits were held as a financial safeguard. They were not spent on maintenance. They were not adjusted against monthly dues. They were not treated as non-refundable income. Therefore, the Tribunal treated them as deposits rather than taxable consideration.
GST Makes the Deposit Principle Even Clearer
Although the case arises under service tax, the principle is even clearer under GST. Section 2(31) of the CGST Act, 2017 defines consideration. Proviso to Section 2(31) provides that a deposit given in respect of a supply shall not be treated as payment for that supply unless the supplier applies it as consideration for the said supply. This statutory language directly supports the Tribunal's reasoning.
In simple terms, GST does not tax a deposit merely because it is received. The law waits to see what happens to it. If the deposit remains refundable and is not applied towards rent, maintenance, electricity, damages, or any taxable obligation, it does not become consideration. If it is later adjusted against taxable dues or forfeited as consideration for tolerating an act or for any taxable supply, GST consequences may arise at that stage, depending on the facts and the applicable provisions.
This distinction is particularly useful in property, leasing, warehousing, commercial complexes, co-working spaces, industrial parks, and infrastructure arrangements. Security deposits are common across these sectors. The GST treatment should follow the legal and accounting character of the deposit, not merely the fact that money has been received.
Documentation Decides Whether the Deposit Story Is Believable
The judgment provides a practical lesson: taxpayers should not just label an amount as a security deposit. The agreement must clearly state that the amount is refundable, collected as security, and only adjustable upon specific defaults. Records should show it as a liability, not income. Invoices should separately list actual taxable services, such as maintenance or rent, rather than merging these charges with the deposit. When adjustments are made, records should indicate the date, reason, and amount. Refunds should be traceable, and if retained due to default, the legal basis for retention must be clear. Proper documentation is crucial because taxability depends on what actually happened to the deposit.
For officers, inquiries should be factual and disciplined. The key question is not just whether a deposit was collected, but whether it was refundable, used, adjusted, forfeited, and linked to a taxable supply. A demand cannot rely solely on the existence of a deposit entry.
Tax Should Follow Character, Not Suspicion
The decision protects an important commercial distinction. Security deposits are not collected as immediate consideration. They are collected to protect against future risk. Tax law should not treat every risk-protection receipt as service income. If the amount is genuinely returnable and remains unadjusted, it lacks the character of taxable consideration.
At the same time, the decision does not create a blanket exemption for every amount described as a deposit. Substance will matter. If a so-called deposit is non-refundable, compulsorily adjustable, disguised as consideration, or used to reduce taxable charges, the Department may examine its true character. The protection applies where the deposit is genuine, refundable, and not applied as consideration.
This balanced approach is useful under GST as well. Section 2(31) does not ignore deposits. It simply postpones their treatment as consideration until they are applied as consideration. That statutory design respects commercial reality and avoids premature taxation.
Security Deposit Becomes Taxable Only When Its Character Changes
Unmesh Properties is a practical ruling because it draws a clear line between a refundable security deposit and taxable consideration. Electricity charges were not taxable as services because electricity is a good. More importantly, refundable maintenance deposits were not taxable because they were held as security and were not adjusted or utilised to provide a taxable service.
For GST professionals, the judgment's lasting value lies in the deposit principle. Receipt of money is not enough. The money must be consideration for a supply. A deposit becomes taxable only when it loses its deposit character and is applied, adjusted or forfeited as consideration, subject to the facts and the law.
For senior officers and taxpayers, the takeaway is direct. Tax should reflect the true nature of the receipt. A refundable security deposit kept untouched as a safeguard is not taxable merely on receipt. The taxable moment, if any, arises when the deposit is actually applied towards a taxable supply.
***