Substance over books: No tax on refundable advances & self-owned property

Commissioner CGST Vs Skylink Construction Private Limited (CESTAT Delhi)

CESTAT Dismissed Revenue Appeal Holding Refundable Deposits and Sale of Self-Owned Property Not Taxable 

Summmary: The CESTAT Delhi dismissed the Revenue’s appeal and affirmed the Order-in-Original, upholding the dropping of service tax demands on ₹3.61 crore treated by the Department as advances for construction services and ₹68.33 lakh relating to the sale of 300 Meerut Development Authority flats. The Tribunal held that the amounts received were refundable security deposits supported by agreements, customer-wise repayment details, balance sheets, bank statements and other records, and that, since no taxable service had been rendered, the refundable advances did not constitute taxable consideration. It also rejected the Department’s contention that classification of the amounts under “Current Liabilities” in the balance sheet altered their legal character. On the issue of the Meerut Development Authority flats, the Tribunal found that the assessee had acquired ownership before resale and that the subsequent transaction was a sale of its own immovable property, not a taxable service. The Tribunal also upheld the benefit of cum-tax value under Section 67(2) and accepted the completion certificate after noting that the original certificate had been produced, verified and returned during adjudication.

Brief facts:

In a significant judgment affirming foundational principles of indirect tax, CESTAT New Delhi ruled in Commissioner CGST v. M/s Skylink Construction Pvt. Ltd. that balance sheet entries placing receipts under “Current Liabilities” cannot create service tax liability where amounts are refundable security deposits. The Hon’ble Tribunal also held that resale of self-owned property constitutes transfer of immovable property, outside the tax net. This article analyses the ruling’s legal nuances and its practical applicability under GST.

1. Introduction

A recurring challenge in indirect tax litigation is the revenue Department’s tendency to rely on financial statements and accounting entries to allege tax evasions. Adjudicating officers frequently issue demand notices by matching figures directly from balance sheet heads like “Current Liabilities” or “Advances from Customers” with tax returns without analysing the underlying transactional reality.

In the recent decision of Commissioner CGST, Delhi South v. M/s. Skylink Construction Private Limited (Service Tax Appeal No. 52205 of 2018 dated 13.07.2026), the Principal Bench of CESTAT, New Delhi, held that accounting entries under GAAP/IndAS standards do not dictate indirect tax liabilities. The Tribunal firmly established that the true transactional character prevails over book entries, providing a strong precedent for indirect tax practitioners.

2. Overview of facts and procedural history

The respondent M/s Skylink Construction Pvt. Ltd. was registered under service tax for providing construction services and regularly filed ST-3 returns. Following an investigation, the Department issued a Show Cause Notice (SCN) dated 22.04.2016, demanding Rs. 5,29,39,121/- along with interest and penalties.

Upon adjudication, the Commissioner passed Order-in-Original No. 28/2017-18 dated 28.03.2018, confirming a demand up to Rs. 66,38,753/- and dropping major proposed demands exceeding Rs.4.62 Crore. The Revenue appealed before the CESTAT against the dropping of demands on two primary grounds:

1. Taxability of Rs. 3.61 Crore shown in the balance sheet under Current Liabilities as “advance against booking of property”.

2. Taxability of Rs. 68.33 Lakh on the resale of 300 Meerut Development Authority (MDA) flats under Real Estate Agent Services.

3. Adjudication Summary: SCN Demands vs. Final Holdings

4. Detailed findings of the Hon’ble CESTAT

After examination of the rival submissions, the Tribunal affirmed the Commissioner’s Order-in-Original in its entirety and dismissed the Revenue’s appeal.

A. Book entries Cannot transform refundable deposits Into consideration

The Revenue contended that because amounts were categorized under “Current Liabilities” rather than “Short/Long-term Borrowings”, they constituted taxable booking advances. By rejecting the said argument, the Tribunal held that accounting entries do not alter the legal character of a receipt. The respondent produced agreements, customer-wise refund charts, bank statements, and ledger entries proving that the funds were refundable security deposits received for locating suitable properties. When transactions failed to materialize, the deposits were fully refunded through bank accounts. Because no service was rendered, the deposits did not represent consideration under Section 67 of the Finance Act, 1994.

B. Resale of self-owned immovable property is outside tax ambit

Regarding the 300 MDA flats, the Revenue attempted to classify the transaction as Real Estate Agent Services. The Tribunal observed that Skylink had acquired title and ownership over the flats prior to reselling them. A property owner transferring their own immovable asset acts as a principal seller, not an intermediary or broker. Resale of self-owned property constitutes a transfer of immovable property and remains outside the service tax net.

C. Verification of completion certificates

The Revenue raised hyper-technical objections claiming the assesses produced an occupancy certificate instead of a completion Certificate during investigation. The Tribunal noted that the original completion certificate issued by MCD, Delhi, was subsequently produced, verified, and returned during adjudication. The Tribunal affirmed that once factual compliance is verified, procedural rigidities cannot override substantive statutory benefits.

5. Key takeaways

A. A critical nuance established in this ruling is the legal boundary between financial accounting standards and statutory indirect tax liability. Tax authorities routinely issue automated demand notices during audit reconciliations by treating balance sheet entries as tax triggers. The Tribunal’s decision clarifies that ledger entries under accounting standards do not create tax liability without an underlying supply or service. Practitioners can leverage this principle to defend against automated ASMT-10 or GSTR-9C notices by demonstrating that unapplied deposits lack the character of consideration.

B. Another pivotal nuance lies in protecting back to back property transfers from artificial recharacterization. The Revenue frequently attempts to reclassify property transactions as intermediary services. This ruling confirms that once title in an asset vests in the assesse, any subsequent transfer is a principal to principal sale of property. Under GST, this aligns directly with Paragraph 5 of Schedule III of the CGST Act, 2017, which excludes the sale of land and completed buildings from the definition of supply. A property owner reselling an asset cannot be treated as an intermediary.

C. Furthermore, this decision reinforces the statutory mechanics of Section 2(31) of the CGST Act regarding security deposits. Security deposits received in business transactions do not attract indirect tax unless applied as consideration for a supply. By establishing that a refundable deposit remains non-taxable as long as no service is performed, this ruling reinforces that tax liability arises solely from the execution of a taxable supply, not from the preliminary receipt of refundable funds.

6. Conclusion

The CESTAT Delhi judgment in M/s Skylink Construction Pvt. Ltd. serves as a decisive precedent against automated tax assessments based solely on financial accounting disclosures. It re-establishes that transactional reality and underlying statutory provisions must prevail over ledger entries, a principle that continues to remain foundational for tax litigation under the GST regime.

FULL TEXT OF THE CESTAT DELHI ORDER

The present appeal has been filed by the Revenue, challenging the demand of service tax dropped by the impugned order¹.

2. M/s. Skylink Construction Pvt. Ltd.² is registered with the Service Tax Department for providing services of construction services other than residential complex, including commercial/industrial buildings or civil structures and construction of residential complex services and is regularly filing ST-3 Returns. On the basis of investigation carried out by the Department, show cause notice dated 22.04.2016 was issued raising demand of ₹5,29,39,121 along with interest and penalty. On adjudication, the learned Commissioner confirmed the demand limited to ₹66,38,753 only and dropped the remaining demand. The details thereof are as under:

3. Ms. Jaya Kumari, learned Authorised Representative for the Revenue made the following submissions:

“i The AA has erred in extending the benefit of the cum-tax value by simply relying on the submission of the respondent without examining the relevant financial records. The respondent was paying service tax on the taxable values earlier as reflected in their ST–3 returns filed for the corresponding period and had admitted their liability on initiation of investigation against them. Some projects were inclusive of service tax and some exclusive.

ii. The completion certificate produced by the respondent is not completion certificate but an occupancy certificate and the statutory provisions only take cognizance of the completion certificate and not occupancy certificate.

iii. The AA has erred in dropping the demand on the issue of ‘advances.’ These ‘Advances’ were reflected under ‘Current liabilities’ instead of Short/Long term borrowings.

iv. The AA has erred in dropping the demand pertaining to the 300 houses at Sainik Vihar related to Meerut Development Authority without any scrutiny of the completion certificate.”

4. Mr. Siddharth Malhotra, learned Counsel for the respondent has raised preliminary issue that the appeal has been filed beyond the period of four months which is time barred being beyond the period specified under Section 86 of the Finance Act, 1994 read with Section 35B of Central Excise Act, 1944 and no application for condonation of delay has been filed. Thus, the present appeal cannot be entertained by the Tribunal. On merits, with respect to the ‘advances’ received by the appellant, he submitted that the receipt of refundable advances does not constitute taxable consideration and no taxable service had been rendered. With regard to Real Estate Agent Service relating to Meerut Development Authority flats, it was submitted that the assessee had already acquired these flats and had become owner thereof. Therefore, subsequent sale was sale of his own property on which no tax was payable.

5. Considering the rival submissions and also the impugned order of the learned Commissioner evaluating the documentary evidence with reference to the statutory provisions, we do not find any error. The issues which have been the subject matter before the Commissioner were as follows:

“i. Service Tax liability on construction activities carried out in collaboration with landowners during the period 2013-14 upto 12.05.2015;

ii. Service Tax liability on income shown under the head “advance against Booking of Flats” in balance sheet. Demand on these advances were raised treating the income against the construction activities rendered by the Noticee;

iii. Service Tax liability on Real Estate Agent Services rendered by the Noticee in respect of Flats pertaining to Meerut Development Authority;

iv. Service Tax liability on Real Estate Agent Services rendered by the Noticee in respect of Flats other than Meerut Development Authority;”

6. The Revenue has limited the arguments to the issues as specified in the synopsis as under:

“Whether the party is chargeable to service tax on advances received which are mentioned in balance sheet as “advances against booking of property” under the category of “construction of Residential Complex Service” and whether the completion certificate produced by the respondent can be considered valid calculating service tax liability.”

7. In the show notice, the allegation is that advances were received for various purposes and towards development or construction of the residential properties. We find that the Commissioner has considered the agreement, the chart reflecting the customer-wise and year-wise receipts, or repayments, the balance sheet for the FY 2010–11 to 2014–15, and also the bank statement. On the basis of these documents, it was concluded that the agreement specifying the conditions provided for payment of refundable security deposited for finding suitable property.

The chart reflected the repayment/refund of these loans/advances in large number of cases with categorical details of year wise and customer wise advances received and refunds made which are duly substantiated by the balance sheet and the bank statements. We do not find any error in the findings recorded and the Department has not substantiated anything contrary to it. It is a clear case, where the advance has been received by the assessee on account of providing the service of finding a property for their customers and in the event of non-fulfilment thereof, the amount received as advance was refunded back to the clients. Thus, no taxable service had been rendered and the amount received as refundable advance does not constitute taxable consideration. The submission of the Department that these ‘advances’ were reflected under ‘current liabilities’ instead of short/long-term borrowing does not have any merit. We, therefore, uphold the findings of the Commissioner on the said issue and reject the department’s appeal on that ground.

8. The challenge to the benefit of cum-tax value extended to the appellant is also not sustainable in view of the provisions of Section 67(2) of the Act which specifically provides that where tax is not separately recovered, the gross amount shall be treated as inclusive of tax. It is not the case of the Revenue that separate recovery of tax has been made by the appellant.

9. The next issue raised by the Department is that the certificate relied upon by the assessee is merely an occupancy certificate and not the completion certificate. In this regard, we find that the learned Commissioner has specifically observed that the copy of the completion certificate issued by MCD, Delhi was rejected by the investigating officer only on the ground of not producing the original certificate. Further, it has been noted that vide letter dated 25.03.2018, the appellant had produced the original certificate which was verified and thereafter it was returned. Therefore, it was rightly concluded that the benefit cannot be denied to the assessee.

10. The Revenue has challenged the demand being dropped towards 300 flats relating to Meerut Development Authority, which were classifiable under Real Estate Agent Service. The Revenue has completely ignored the transaction where the flats had already been acquired by the assessee and thereby become the owner of the said flats. The subsequent sale was not in the nature of any service but was sale of immovable property on which service tax is not leviable. Considering the agreement entered between the assessee, M/s SGC Engineers (I) Pvt. Ltd and M/s Core Builders (P) Ltd, the impugned order observed that it is a purchase agreement under which the assessee had purchased 300 flats of MDA from SGC Engineers and Core Builders since the flats were originally allotted in favour of SGC Engineers. The allotment cum instalment letter dated 20.11.2016 allotting 346 flats to SGC Engineers has been placed on record. In that view, it has been rightly concluded that the flats were first purchased by the assessee and thereafter being the owner, the flats were put for sale. The transaction being one of sale and purchase of one’s own immovable property, the same does not fall within the ambit of service tax and, therefore, the demand has been rightly dropped.

11. In view of the above findings, we do not find any error in the impugned order and the same is hereby affirmed. The appeal filed by the revenue is, accordingly dismissed.

[Order pronounced on 13.07.2026]

Notes :

1 Order-in-Original No. 28/PP/COMMR./CGST/AUDIT–II/2017–18 dated 28.03.2018

2 the respondent/assessee