Facts of the Case

1.Lease Agreement: The petitioner, Sham Lal, entered into a contract to lease a vacant piece of land located at the Bus Stand, Karnal, for the purpose of operating a cycle/scooter parking facility. The lease spanned from October 4, 2011, to March 31, 2012, and was subsequently renewed for the financial year 2012–2013.

2.Security Deposit: Under the terms of the tender, the petitioner was required to deposit a refundable security amount of ₹1,56,000 alongside the mutually agreed rental charges. The petitioner consistently cleared all rental obligations during the lease periods.

3.The Dispute: Following the completion of the lease term, the respondent department served a notice to the petitioner demanding the payment of service tax on the transaction. The respondent authorities subsequently withheld the petitioner's security deposit, claiming that the applicable service tax liabilities under Clause 11 of their agreement had not been settled.

4.Legal Action: After multiple legal notices went unanswered or failed to resolve the issue, the petitioner approached the High Court seeking a writ of mandamus for the release of his security deposit with accrued interest.

Issues Involved

1. Whether the renting of vacant land specifically utilized for cycle/scooter parking falls within the taxable definition of "Renting of Immovable Property Services" under Section 65(105)(zzzz) of the Finance Act, 1994.

2. Whether the transport authorities (Respondents No. 2 and 3) were legally justified in withholding the petitioner’s refundable security deposit on account of un-assessed service tax liability.

Petitioner’s Arguments

1.The petitioner’s counsel argued that the collection of parking fees on vacant land does not attract service tax liabilities under the legislative scope of Section 65(105)(zzzz) of the Finance Act, 1994.

2.It was emphasized that the petitioner fulfilled all primary contractual obligations, and the retention of the security deposit without a valid legal mandate or tax demand note was arbitrary and illegal.

 

Respondent’s Arguments

1.Respondents No. 2 & 3 (Haryana Roadways Authorities):** Argued that Clause 11 of the signed lease agreement strictly bound the petitioner to pay all applicable statutory taxes. They maintained that since the petitioner failed to clear the service tax, the security deposit (pledged in the form of a Fixed Deposit) was rightfully withheld to safeguard state revenue.

2.Respondents No. 5 & 6 (Central Excise / Revenue Department):** Contradicted the transport department's stance. The revenue department formally clarified via an internal communication that service tax was *not applicable* to vacant land used for cycle parking under the prevailing statutory definition of Section 65(105)(zzzz) during the period in question. They further confirmed that no tax demand or Show Cause Notice (SCN) had ever been issued to Haryana Roadways concerning this specific parking land lease.

 

 Court Findings & Judgment

Court Order / Findings

1. The Hon’ble High Court took notice of the clear stand taken by the Central Excise/GST department, which explicitly stated that service tax was non-leviable on the disputed activity and that no tax liability existed.

2.The Court observed that the retention of the petitioner's security deposit by the state authorities was entirely *per se* unjustified, given that the competent tax authority had raised no demand.

3.Final Decision- The High Court allowed the writ petition and directed the respondents to expeditiously release/refund the ₹1,56,000 security deposit within four weeks. Furthermore, since the money was held in a Fixed Deposit pledged to the department, the Court ordered that all interest accrued on the deposit must also be released to the petitioner.

 Important Clarification

This judgment establishes a clear boundary that public authorities or lessors cannot arbitrarily withhold security deposits over speculative or un-assessed tax liabilities. When the competent revenue department confirms that an activity is non-taxable under the Finance Act, 1994, the contracting state department cannot independently enforce or retain funds under the pretext of tax recovery.

Section Involved

Section 65(105)(zzzz) of the Finance Act, 1994** (Renting of Immovable Property Services)

Link to download the order-https://mytaxexpert.co.in/uploads/1783322168_1307compressed.pdf

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