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Non refundable security on immovable property

vanisha mittal (CA) (88 Points)

09 November 2012  



My query is, non refundable security deposit taken by landlord is forfeited on account of termination of tenancy contract even before the occupation of the property by tenant. Is that non refundable security is liable for Service Tax or not? please substantiate the answer with the provisions or judicials.- Urgent


thanx in advance

 6 Replies

CA Sahil Singla.. (Service Tax ) (3745 Points)
Replied 09 November 2012

Not at all. Since no service provided

Vikas (CA) (1135 Points)
Replied 10 November 2012

My views differ from that of Sahil.

Its similar to the notice pay issue.

When an employee leaves the company earlier than promised, then he has to pay some compensation to the company. Therefore, such an act is not covered as employer-empoyee relationship and since the payment is flowing from employee to employer the said activity would amount to refraining from being an employee of the company. Hence, such an act is taxable.

Same way, when the deposit is given, the same is covered by negative list, but since, in this case, when the tenant is refraining from staying in the room, then breaking the agreement is refraining from doing such an act. Therefore, this will be again taxable under Service Tax Law.

People may have different opinions, but I am pretty sure on this, you may refer the Act.

CA Unnikrishnan Nair N (Chartered Accountant) (2083 Points)
Replied 10 November 2012

Refraining from an act is declared service . But the provider of auch service is the pseron refrainign from the act and the consideration shall be received by him. In this case the consideration flows in opposite direction. I feel that this is only a compensation for premature termination of an agreement and no service tax is payable. Anyway, matter is not free from doubt.

DDDDDD (.) (171 Points)
Replied 11 November 2012

Service: As per Section 66E of the Finance act, the activity of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" is a declared service

In your case the landlord is refrained from the activity of renting the property to some other person thus as per the above mentioned section it is considered as a declared service.

Consideration: For refraining from renting the property the landlord as got non-refundable deposit from the tenant which is a valid consideration as per Section 2(d) of Indian Contract act, 1872.

Thus as per my opinion the Non-refundable deposits received by the landlord is liable to Service tax.

Vikas (CA) (1135 Points)
Replied 12 November 2012

Mr. Dinesh & Nair,

Thank you for your comments...

Yes, I would like to correct myself, here in this case, the landlord is bearing the pain from refrain to act as the landlord to the tenand and the hence this activity of not letting the property occupied shall be considered to be an activity for consideration and hence shall be taxable.

1 Like

Dipjyoti Majumdar (CA in service & CS. dipmaj@ rediffmail.com )   (3414 Points)
Replied 15 November 2012

Very nicely discussed and explained.


1 Like

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