Tannia Rikhy & Ors. v. Sunrider India Pvt. Ltd.

What happened

By a lease deed of 28 August 2006 the plaintiff, a company, took the second floor of SMR House, Basant Lok, Vasant Vihar at a monthly rent of ₹1,75,000 for three years, paying an interest-free refundable security deposit of ₹10,50,000 and six months' rent in advance. The lease made the defendants (the landlords) liable for present and future rates, taxes, impositions and outgoings of whatever nature. The Finance Act, 2007 later made renting of immovable property subject to service tax. A legal notice of 24 February 2009 from the landlords asked the tenant to clear service tax arrears, which the plaintiff refused on 4 March 2009, saying section 68 of the Finance Act puts the liability on the service provider and section 67(2) deems rent to include the tax. A second lease dated 7 September 2009 was executed at ₹2,01,250 a month from 16 August 2009 'subject to deduction of tax as per law'. A further notice of 22 February 2012 demanded ₹11,85,361 with interest. The landlords reserved the right to claim by legal proceedings by a letter of 20 July 2012 but did not sue. The premises were vacated on 30 December 2013 and the landlords deducted ₹5,53,077 from the security deposit as service tax for 1 June 2007 to 15 August 2009. The plaintiff sued (CS 56966/2016, filed 21 July 2014) and the District Judge decreed it. The landlords said there was an oral understanding that the tenant would clear previous dues at the time of the second lease.

Questions before the court

• Could the landlords recover service tax for the period of the first lease from the tenant by deducting it from the security deposit?

Why the court ruled this way

The first lease contained no clause on service tax because the Finance Act, 2007 had not come into effect when it was made, and by its express terms all taxes were the landlord's liability (paragraph 47). The alleged oral understanding at the time of the second lease had no evidence, and if there had been one the parties could have included a clause, while the second lease mentioned service tax but made no reference to liability under the first (paragraph 51). By the letter of 20 July 2012 the landlords withdrew from pursuing the claim, reserving only the right to claim by proper legal proceedings, which they never started (paragraph 54). When the premises were vacated on 30 December 2013, service tax for the period up to 15 August 2009 was barred by limitation on the date of deduction, and the claim was also barred when the suit was filed on 21 July 2014 (paragraph 56). The landlords could not deduct the amount from the deposit when they had not proved that the tenant was liable and the claim was time-barred (paragraph 57), so the District Judge rightly decreed refund with interest at 9.03% per annum from 31 January 2014 (paragraph 58).

Controlling point

The deduction of service tax from the security deposit was unlawful and the refund decree stood.

Order and next steps

The appeal was dismissed along with pending applications.

Practical implications

A landlord who wants service tax from a tenant should provide for it in the lease; a tenant facing such a deduction can sue for refund of the deposit and rely on the lease's allocation of taxes and on limitation.

Limits of this ruling

• The ruling concerns the first lease, which preceded the levy of service tax on renting and contained no clause on it; it does not decide the position under leases that expressly pass the tax to the tenant.