2023 (6) TMI 1216 - AT - Income Tax

Interest-free security deposits for maintenance not taxable as income under consistency principle.

SGDC India Pvt. Ltd. Versus DCIT Circle – 23 (2) New Delhi

The Tribunal held that the interest-free security deposits were refundable and used for maintenance purposes, not taxable as income. The Tribunal ... Nature of receipts - non-refundable security deposits received by appellant - nature of security deposits - revenue or capital receipt - As per AO security deposits are not shown as advance receivables at the asset side nor shown as liability towards customers in the balance-sheet of M/s Silver Line Holdings Pvt. Ltd. and that without passing the amount through its account M/s Silver Line Holdings Pvt. Ltd. transferred the same to the assessee, thus has to be considered to be non-refundable - HELD THAT:- In the light of various clauses of Tripartite agreement and the agreement between the assessee and SHL discussed above it is established that both the companies were operating in different fields of the project. The rights in the land vested with SHL along with other subsidiaries and they were transferred in favour of any buyer of Villa/ Units and qua service or amenities of Gold Course, SHL was separately charging non-refundable deposits. It was responsibility of SHL to account for the same in books for which assessee cannot be faulted. Ld. tax authorities below have completely ignored the corrigendum agreement dated 29.09.2009, considering the same to be self serving ignoring that other clauses of tripartite Buyer’s agreement and agreement between assessee and SHL dated 24.12.2008 were themselves clear of the fact that what assessee was getting was something in the form of refundable deposit . CIT(Appeals) has rightly concluded non-refundable security deposits received by appellant has nexus with O&M services provided to the clients. However, he failed to appreciate that in the hands of assessee the same were refundable and merely as means to finance O&M services. Thus, the same were not of revenue nature receipts. Apart from above, there is also force in the contention of learned AR that the Coordinate Bench in assessee’s own case, [2019 (7) TMI 1434 - ITAT DELHI], has considered the nature of deposits in the hands of assessee as refundable security deposits, as one of the possible view as decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the sums shown as interest-free security deposits (IFSD) in the assessee's books constitute taxable revenue receipts in the hands of the assessee or are refundable/custodial liabilities held for operation & maintenance (O&M) purposes. 2. Whether the developer's characterisation of the deposits as non-refundable and the manner of collection through the developer amounts to a colourable device or 'conduit' arrangement attracting lifting of the corporate veil and treating the deposits as assessee's income. 3. Whether the principle of consistency/precedent (including findings in earlier assessment years and Coordinate Bench decisions) precludes a contrary tax treatment in the assessment year under appeal. 4. Whether the reopening/reassessment on the basis of the AO's contrary view (treating deposits as income) constituted change of opinion or was founded on tangible material justifying reassessment. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of receipts: IFSD as revenue receipt or refundable/custodial liability Legal framework: Income arises where there is accretion to wealth or a receipt of revenue nature; liabilities/amounts held as refundable deposits are not ordinarily taxable as income. Accounting treatment in audited financials and contractual terms are material in determining the character of receipt. Precedent treatment: Coordinate Tribunal decisions and settled principles on characterisation and treatment of deposits and receipts were relied upon by the assessee; relevant Supreme Court dicta on consistency of treatment were referenced by the Tribunal. Interpretation and reasoning: The operation & maintenance agreement (24.12.2008) and the tripartite buyer's agreement were examined in detail. Key contractual clauses establish that the developer collected IFSD from buyers and entrusted those deposits to the operator as custodian for investment and use exclusively for O&M of the golf course; revenue/interest from investments was to be applied to O&M with a mechanism to bill buyers for any shortfall. A subsequent corrigendum (29.09.2009) expressly provides for refund of deposits to the developer with accounting of interest earned and expenditures upon termination. The assessee's audited financials recorded IFSD as liabilities and interest earned as other income. These consistent documentary and accounting indicia support the conclusion that the deposits were held as custodial/refundable liabilities to finance O&M, not as the assessee's own non-refundable receipts. Ratio vs. Obiter: Ratio - where detailed contract terms and accounting treatment demonstrate that amounts are held as custodial/refundable deposits for O&M and not as the recipient's own receipts, such amounts are not taxable as revenue in the hands of the custodian operator. Obiter - observations on commercial rationale for long-term agreements (allowing amortisation of investments) are explanatory. Conclusion: IFSD in the hands of the assessee are liabilities held as custodian for financing O&M and are not taxable revenue receipts; addition disallowed. Issue 2 - Allegation of conduit/colourable device and lifting the corporate veil Legal framework: Lifting the veil or treating related-party arrangements as a conduit requires clear evidence that the form masks the real nature of the transaction and that the parties are not genuinely independent in function; commercial arrangements and contract substance govern whether veil should be lifted. Precedent treatment: Tribunal applied standard approach of examining substantive contractual rights and obligations rather than relying solely on inter-company movement of funds or absence of ledger entries in the developer's books. Interpretation and reasoning: The agreements show distinct and substantive roles: the developer/owners retained title/rights in land and the responsibility to collect deposits; the operator was separately contracted and given exclusive O&M responsibilities, with explicit mechanisms for use of deposits, investment of IFSD, sharing of other revenue, and reimbursement/recoupment provisions. The long term of the contract and the need to recoup O&M investments were commercially rational. The mere fact that deposits were not reflected as advances in the developer's balance sheet or were transferred without passing through the developer's bank account does not negate the tripartite contractual allocation of rights. On the record, lifting the veil was unwarranted. Ratio vs. Obiter: Ratio - absent clear evidence of sham or manipulation, a contractually documented allocation of custodial holding and O&M responsibility precludes treating the recipient as possessing the deposits as income. Obiter - comments on why long tenure of contracts by itself does not imply tax avoidance. Conclusion: No justification to treat the developer as a mere conduit or to lift the veil; deposits are not assessable as the assessee's income on that ground. Issue 3 - Consistency, Coordinate Bench findings and effect on present year Legal framework: Principles of consistency in tax treatment and reliance on earlier accepted positions in prior assessments or coordinate decisions inform whether a contrary departmental stance is permissible; Supreme Court authorities were cited in support of consistency where applicable. Precedent treatment: Coordinate Bench had examined earlier assessment years and recorded findings treating the deposits in the assessee's hands as refundable/custodial in substance. The assessee relied on those prior findings and on Supreme Court authority endorsing consistency of treatment. Interpretation and reasoning: The Tribunal found force in the contention that preceding assessments (some completed under s.143(3)) had accepted the non-taxable/refundable character of the deposits. The AO's later departure to tax the deposits constituted, on the facts, a change of opinion rather than a reopening founded on fresh tangible material. Given the contractual documentation and the Coordinate Bench's earlier findings recognizing custodial character, the Tribunal applied consistency and relied on the earlier view as one permissible and established treatment. Ratio vs. Obiter: Ratio - where earlier assessments and tribunal decisions have accepted a treatment on the same facts, absent fresh tangible material, a contrary departmental position may amount to impermissible change of opinion; such consistency is relevant to sustain the non-taxable character. Obiter - treatment of res judicata and estoppel principles as to their limits in tax reassessments. Conclusion: Coordinate Bench findings and prior acceptance weigh in favour of treating IFSD as refundable/custodial; the AO's contrary approach amounted to change of opinion and cannot sustain an addition. Issue 4 - Validity of reassessment/reopening on the basis of AO's contrary view Legal framework: Reassessment under s.147/148 requires that reasons to believe be based on tangible material or information extraneous to the record; mere reappraisal of the same material or a change of opinion is not a valid basis. Precedent treatment: Tribunal examined whether reassessment arose from fresh material or was a mere change of opinion driven by the AO's differing conclusion in AY 2013-14. Interpretation and reasoning: The assessments for prior years had examined and accepted the issue; the AO's subsequent reassessment relied on the assessment officer's own differing view in another year and on absence of entries in the developer's accounts. Tribunal concluded that the basis for reopening was not demonstrated as fresh tangible material but was rooted in reappraisal/change of opinion. Ratio vs. Obiter: Ratio - reassessment predicated on change of opinion, absent new tangible material, is invalid; assessment cannot be reopened merely to take a contrary view on the same facts. Obiter - none. Conclusion: Reassessment resulting in the addition was not sustainable; addition deleted. Overall Disposition The Tribunal concluded that (a) contractual terms and accounting treatment establish IFSD as refundable/custodial liabilities used to finance O&M and not taxable revenue in the hands of the operator; (b) there is no warrant to treat the developer as a conduit or to lift the veil; (c) prior acceptance/Coordinate Bench findings and absence of fresh tangible material make the reassessment impermissible as a mere change of opinion; accordingly the addition was deleted.