Refunded Security Deposit not taxable under section 56(2)(vii)(a)

Chandarani N. Goyal Vs ITO (ITAT Mumbai)

Chandarani N. Goyal contested an order by the Income Tax Department, challenging the taxability of a security deposit refund under section 56(2)(vii)(a) of the Income Tax Act. The Mumbai Income Tax Appellate Tribunal (ITAT) addressed this issue.

The case revolved around a security deposit received by Chandarani N. Goyal from a developer as part of a development agreement. The Income Tax Officer (ITO) treated this deposit as taxable income under section 56(2)(vii)(a). However, the ITAT ruled that the refund of this deposit is not taxable, emphasizing that the crucial factor for taxability under this section is the receipt of money without consideration.

The ITAT examined the transaction closely, noting that the deposit was received in the context of a development agreement for non-agricultural land. As the deposit was made as security for the agreement, it did not qualify as money received without consideration, as required by section 56(2)(vii)(a).

The tribunal further considered evidence provided by Goyal, including bank statements and confirmations from the developer, which indicated that the deposit was indeed refunded. This, combined with the nature of the transaction, led the ITAT to conclude that the deposit refund should not be taxed.

In the case of Chandarani N. Goyal Vs ITO, Mumbai ITAT clarified that money received as a security deposit, if subsequently refunded, is not taxable under section 56(2)(vii)(a) of the Income Tax Act. This ruling provides important guidance on the interpretation of tax laws regarding such transactions and underscores the significance of considering the context and purpose of payments in determining tax liability.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee challenging the impugned order dated 16/08/2023 passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2011-12.

2. In this appeal, the assessee has raised the following grounds:-

“1. In the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in enhancing the retuned income by Rs. 25,00,000/- in utter contravention of the provisions of sub-section (2) of section 251 of the Income Tax Act, 1961; accordingly the impugned enhancement is ultra vires to the express provisions of the Act and bad in law

2. In the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in enhancing the income of the Appellant by Rs. 25,00,000/- and directing the Ld. Assessing Officer to tax the same under the provision of clause (vii) of sub-section (2) of section 56 of the Act; disregarding the factual and legal matrix of the case.

3. The appellant craves leave to add, alter, delete or modify all or any of the above grounds of appeal. All the above grounds are without prejudice to each other.”

3. The first issue raised by the assessee pertains to the enhancement of assessment by the learned CIT(A) in contravention of the provisions of section 251(2) of the Act. In the next ground, the assessee has challenged the addition of Rs.25 lakh made by the learned CIT(A) under section 56(2)(vii) of the Act.

4. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case, as emanating from the record, are that the assessee is an individual and is engaged in the business of stitching work at home. For the year under consideration, the assessee filed her return of income on 30/03/2013 declaring a total income of Rs.1,75,660. The return filed by the assessee was selected for scrutiny through CASS to verify the large investment in property as compared to the total income. During the assessment proceedings, it was observed that the assessee jointly with her husband owned non-agricultural land measuring 84915.02 sq.yd. The assessee jointly with her husband entered into a development agreement with M/s Indus Colonisers Pvt. Ltd., under which the developer agreed to develop the said land as per the sanctioned plan and hand over the possession of 15 bungalows in favour of the assessee upon completion of the project. Under the aforesaid agreement, the developer also paid an advance of Rs.25 lakh to the assessee. Accordingly, during the assessment proceedings, the assessee was asked to show cause as to why the capital gain arising out of the transaction entered into with the developer for the intended development of the land should not be taxed. After considering the submissions of the assessee, the Assessing Officer (“AO”) vide order dated 27/03/2014 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that there is a written agreement for transfer/creation of interest in favour of the transferee, under which the transferee has taken over the possession and transferor has handed over the possession for an agreed consideration of 15 constructed bungalows apart from the assessee receiving Rs.25 lakh from the transferee, which constitutes transfer within the meaning of the Transfer of Property Act, 1882. The AO further held that the assessee has not submitted any proof, either in the form of any correspondence with the transferee or in the form of any cancellation agreement to support her argument that the agreement is going to be cancelled. Accordingly, in view of the aforesaid facts, the AO came to the conclusion that the receipt is taxable in the hands of the assessee and computed the long-term capital gains of Rs. 95,69,037 taxable in the hands of the assessee.

5. In further appeal, the learned CIT(A), vide impugned order, allowed the ground raised by the assessee and deleted the addition on account of long­term capital gains made by the AO on the basis that the terms and conditions of the development agreement were not acted upon by the developer and the assessee has cancelled the development agreement, since the developer neither started any construction on the land owned by the assessee nor did it hand over 15 bungalows as agreed in the development agreement resulting in violation of terms of the agreement.

6. The learned CIT(A), after deletion of the aforesaid addition, noted that at the time of execution of the development agreement, the developer made a payment of Rs.25 lakh to the assessee as a security deposit which was retained by the assessee and there is no documentary evidence to prove that this amount was returned to the developer. The learned CIT(A) further noted that the AO has not made any addition on this account as the AO computed the long-term capital gains on the entire transaction. Accordingly, vide impugned order, the learned CIT(A) came to the conclusion that the amount of Rs.25 lakh received by the assessee as deposit is taxable in the hands of the assessee as per the provisions of section 56(2)(vii)(a) of the Act. Accordingly, the learned CIT(A) directed the AO to tax Rs.25 lakh in the hands of the assessee as “income from other sources” under section 56(2)(vii)(a) of the Act. Being aggrieved by the aforesaid addition made by the learned CIT(A), which was not made in the assessment order, the assessee is in appeal before us.

7. During the hearing, the learned Authorised Representative (“learned AR”) submitted that while making the aforesaid addition under section 56(2)(vii)(a) of the Act, the learned CIT(A) did not comply with the provisions of section 251(2) of the Act and did not grant reasonable opportunity to the assessee of showing causes against the aforesaid enhancement.

8. Section 251 of the Act deals with the powers of the learned CIT(A) and provides that in disposing of an appeal against an order of assessment, the learned CIT(A) shall have the powers to confirm, reduce, enhance, or annul the assessment. Section 251(2) further provides as under:-

“2) The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.”

9. Therefore, from the perusal of the provisions of section 251 of the Act, it is pertinent to note that though the statute has conferred the power of enhancement on the learned CIT(A) while disposing of an appeal against an order of assessment, however, as per the provisions of sub-section (2) the learned CIT(A) is required to grant reasonable opportunity of showing cause against such enhancement to the assessee prior to making any such enhancement. Ostensibly, in the present case, no such opportunity was granted by the learned CIT(A) to the assessee while making the aforesaid enhancement and directing the AO to tax Rs.25 lakh in the hands of the assessee under section 56(2)(vii)(a) of the Act. Therefore, we are of the considered view that the learned CIT(A), while directing the impugned addition under section 56(2)(vii)(a) of the Act, did not comply with the provisions of section 251(2) of the Act.

10. Now the question arises as to whether such a contravention is an illegality or irregularity. As if it is considered as an illegality then the entire addition is void ab initio. However, we are of the considered view that the non-grant of a reasonable opportunity to the assessee to show cause against the proposed enhancement results in an irregularity, as the learned CIT(A) failed to comply with the procedure laid down under section 251(2) of the Act prior to making the impugned enhancement. In any other case, in the aforesaid scenario, the issue should be restored to the file of the learned CIT(A) for de novo adjudication after granting the opportunity to the assessee to show cause against such an enhancement as per section 251(2) of the Act. In respect of our aforesaid view, we find support from the recent decision of the Hon’ble Uttarakhand High Court in Meetu Bansal v/s DCIT, [2023] 151 taxmann.com 524 (Utt.). However, during the hearing, the learned AR also placed his arguments on the merits of the addition made under section 56(2)(vii)(a) of the Act. Therefore, before taking the aforesaid course of action, we deem it appropriate to deal with the merits of the impugned addition made under section 56(2)(vii)(a) of the Act

11. On merits of the addition, the learned AR submitted that the amount of Rs.25 lakh received by the assessee from the developer as a security deposit was repaid by the assessee on 10/10/2023. In this regard, the learned AR referred to the bank statement of the assessee’s account in SVC Co-operative Bank Ltd. The learned AR further submitted that the developer has also issued a confirmation in this regard and also issued a no objection certificate, which forms part of the paper book on pages 43-44. In the present case, it is pertinent to note that the impugned addition of Rs.25 lakh, received by the assessee as a security deposit under the development agreement entered with the developer, is made under section 56(2)(vii)(a) of the Act, which reads as under:-

“(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;”

12. Therefore, as per the provisions of section 56(2)(vii)(a) of the Act, any sum of money, the aggregate of which exceeds Rs.50,000, received by an individual without consideration is taxable as income from other sources. Thus, under section 56(2)(vii)(a) of the Act, the incidence of taxation is at the stage of receipt of money. The fact that the money received as a security deposit was subsequently refunded by the assessee to the developer is not relevant for the determination of taxability under section 56(2)(vii)(a) of the Act. However, under section 56(2)(vii)(a) of the Act, one of the preconditions for the taxability of the money received by the assessee is that the same should have been received without consideration, which, in our considered view, is not fulfilled in the present case, as the amount of Rs.25 lakh was received by the assessee as a security deposit towards the development agreement entered into by the assessee with the developer for development of non-agriculture land. Since one of the conditions for applicability of section 56(2)(vii)(a) of the Act is not satisfied in the present case, we are of the considered view that the impugned enhancement directed by the learned CIT(A) under section 56(2)(vii)(a) of the Act is not sustainable. Therefore, the impugned addition under section 56(2)(vii)(a) of the Act is directed to be deleted. Since the relief has been granted to the assessee on merits, the course of action as noted above in case of non-compliance with the procedure prescribed under section 251(2) of the Act is now rendered to be merely an academic exercise and thus not required in the facts of the present case.

13. In the result, the appeal by the assessee is allowed.

Order pronounced in the open Court on 21/03/2024