Refundable Deposits are Business Income but Share Capital is Capital Receipt
Recently, Supreme Court of India has held the point that refundable deposits should be assessed as business income but share capital should be as capital receipt.
Refundable Deposits – These deposits are the money collected by a company from its credit clients that is expected to be returned after some certain amount of time or when the predefined provisions of contract are satisfied. When the cash amount is received by the company, it should be classified as present liabilities on company’s balance sheet.
Share Capital – Share Capital is the fund raised by a company through the selling or exchanging the shares. The net worth of share capital, company possesses, may vary as per the time. If a company needs to raise funds then it can obtain the approval in order to issue and trade its shares.
Summary – As per the recent decision from the honorable Supreme Court of India, Refundable Deposits which are collected by a housing company in order to allot the apartments and for further maintenance, should be assessed as business income. Although, the Share Capital collected by the company for allotment of apartments should be assessed as Capital Receipt not as business income. In these conditions, the principles derived for mutuality are not applicable.
Karnataka High Court held following:
In reference to Shree Nirmal Commercials Verses CIT, the Karnataka High Court ordered:
- Both the Share Capital along with Refundable Deposits collected by the company from the shareholders for the allotment of space falls under business profits.
- Principles derived for mutuality are not concerned here.
- Money collected for further maintenance is also assessable as business income.
The Supreme Court held Following:
An appeal was filed in Supreme Court for the same and after hearing the proceedings from the lawyers of both parties; Supreme Court apprehended:
- The modification in the apprehensions by High Court.
- The funds received as Share Capital from different share holders should not be counted as business income.
- High Court’s decision to revert the order passed by Income Tax Tribunal was in err.
- Concerning Short Term Capital Gains, raised by the company with regard to the properties, as well as future maintenance issues – Supreme Court didn’t find any errors on the comprehensions held by High Court therefore these issues will be handled as per the Karnataka High Court’s apprehensions.