The Delhi High Court has held that a landlord cannot deduct an amount claimed towards service tax for a prior lease period from a tenant’s refundable security deposit if the governing lease deed contains no covenant imposing such liability on the tenant, the subsequent lease deed only prospectively creates such liability, and the alleged past claim is unsupported by proved agreement and has become time barred.
In such circumstances, deduction of the amount from the security deposit is unlawful, and the tenant is entitled to refund of the deducted sum with interest. The Court accordingly upheld the Trial Court’s decree for refund of Rs. 5.53 lakhs with interest and dismissed the appeal.
A Single Judge Bench of Justice Neena Bansal Krishna observed that the controversy was confined to whether the defendants were entitled to deduct from the plaintiff’s security deposit the amount allegedly payable as service tax for the period June 01, 2007 to Aug 15, 2009 under the first Lease Deed.
The Bench first noted that the Lease Deed contained no covenant imposing service tax liability on the plaintiff and, according to its express terms, liability for leviable taxes was on the landlord. Secondly, although the second Lease Deed dated Sep 07, 2009 specifically introduced a service tax clause making such tax payable by the lessee, there was no reference therein to any liability under the first lease.
The Bench also found that the defendants’ plea of an oral understanding that the tenant would clear past service tax dues was unsupported by evidence; had such understanding existed, nothing prevented its incorporation into the second lease. Further, while the defendants had, by letter dated July 20, 2012, reserved liberty to claim service tax for the earlier period by appropriate legal proceedings, no such proceedings were ever initiated.
The Bench therefore held that, by the time the deduction was made on vacation of the premises, the claim for service tax for the earlier period had in any case become barred by limitation.
Briefly, the respondent/plaintiff, Sunrider India Pvt Ltd., had taken on lease the 2nd Floor of SMR House, Basant Lok, Vasant Vihar, New Delhi from the appellants/defendants under a registered Lease Deed dated Aug 28, 2006 for three years at a monthly rent of Rs. 1.75 lakhs, and had paid an interest-free refundable security deposit of Rs. 10.50 lakhs. Under the first lease, the liability for rates, taxes, impositions and outgoings was on the landlords, and there was no clause making the tenant liable for service tax, which was brought within the tax net subsequently with effect from June 01, 2007.
Disputes arose when the landlords demanded service tax for the period covered by the first lease, which the tenant denied. After expiry of the first lease, the parties executed a fresh Lease Deed dated Sep 07, 2009 for a further term, and Clause 7 therein specifically provided that if service tax on rental payments was imposed under prevailing law, such service tax would be the obligation of the lessee.
The tenant paid service tax for the period from Aug 16, 2009 onwards, vacated the premises on Dec 30, 2013, and on refund of the security deposit the landlords deducted Rs. 5.53 lakhs towards alleged service tax liability for the earlier period from June 01, 2007 to Aug 15, 2009. The plaintiff sued for recovery of that deducted amount, and the Trial Court decreed the suit with interest at 9.03% per annum from Jan 31, 2014 till realisation, leading to an appeal by the landlords.
