Court’s Decision
The Karnataka High Court held that the amount received under a lease deed towards a refundable security deposit cannot be treated as “money advanced in addition to rent” for the purpose of Article 30(c) of the Karnataka Stamp Act, 1957. Consequently, stamp duty is chargeable only on the average annual rent, excluding the refundable security deposit. The Court dismissed the writ petition challenging the order of the trial court directing payment of deficit stamp duty of ₹9,35,000, observing that the respondent had already deposited the amount.
Facts
The respondent had instituted a civil suit before the I Additional Senior Civil Judge and Chief Judicial Magistrate, Mysuru, seeking specific performance of a lease agreement dated 28 January 2017. The agreement provided for a 30-year lease of an immovable property owned by the petitioner at a monthly rent of ₹75,000, subject to a 5% annual escalation, and included a refundable security deposit of ₹20,00,000.
During trial, when the certified copy of the lease deed was produced, the court found it to be insufficiently stamped. The trial court directed the plaintiff to pay ₹9,35,000 towards stamp duty and penalty to have the document admitted in evidence. The petitioner, being the defendant in that suit, challenged this order before the High Court under Article 227 of the Constitution, contending that the trial court had wrongly calculated the stamp duty.
Issues
- Whether the refundable security deposit stipulated under a lease deed is liable to stamp duty under Article 30(c) of the Karnataka Stamp Act, 1957.
- Whether the trial court erred in directing payment of ₹9,35,000 as deficit stamp duty and penalty for the said lease deed.
Petitioner’s Arguments
The petitioner contended that since the lease was for 30 years and the rent was ₹75,000 per month with a 5% annual increase, the average annual rent amounted to ₹20,39,600. Adding the refundable security deposit of ₹20,00,000, the total consideration for stamp duty computation should be ₹40,39,600. Applying 3% stamp duty on this amount would result in ₹1,21,188 as duty, and with ten times penalty, ₹13,11,068 should be payable.
The petitioner thus sought quashing of the trial court’s order, arguing that the trial court erred in ignoring the inclusion of the refundable deposit in the valuation for stamp duty purposes.
Respondent’s Arguments
The respondent countered that the security deposit was refundable upon termination of the lease or vacation of the premises and therefore could not be treated as “money advanced in addition to rent.” The respondent relied upon the Full Bench judgment in Chief Controlling Authority, Inspector General of Registration and Commissioner of Stamps v. Texas Instruments India Ltd., AIR 2004 Kar 70, which held that refundable security deposits do not attract stamp duty under Article 30(c) of the Karnataka Stamp Act. The respondent further stated that the amount directed by the trial court had already been paid.
Analysis of the Law
The Court examined Article 30(c) of the Karnataka Stamp Act, which governs stamp duty for leases granted for a fine, premium, or money advanced in addition to rent. It also referred to Section 34 of the Act, which provides for payment of deficit stamp duty along with up to ten times the amount as penalty.
The key issue revolved around the nature of the refundable security deposit — whether it constitutes a “fine, premium, or money advanced” within the meaning of Article 30(c). Relying on settled precedent, the Court emphasized that the nature of the payment — whether refundable or non-refundable — is decisive in determining stamp duty liability.
Precedent Analysis
The High Court extensively cited the Full Bench ruling in Texas Instruments India Ltd. (AIR 2004 Kar 70), which had settled the issue. The Full Bench held that:
- Refundable security deposits do not bear the characteristics of a fine or premium.
- Such deposits, being intended merely as security for due performance of the lessee’s obligations and refundable on compliance, are not “money advanced in addition to rent” under Article 30(c).
- Hence, duty is payable only on rent, not on refundable deposits.
The Full Bench had also relied upon an earlier judgment in Chief Controlling Revenue Authority v. Chandrashekar, AIR 1985 Kar 61, which clarified that security deposits made to ensure proper maintenance of the property are not to be treated as consideration for the lease attracting stamp duty.
Court’s Reasoning
Justice S. Vishwajith Shetty observed that the refundable nature of the deposit clearly excluded it from the purview of Article 30(c). The Court reiterated the principle from Texas Instruments that only non-refundable premiums or advances could attract additional duty.
The Court further clarified that the respondent was liable to pay stamp duty at 3% only on the average annual rent, which both parties agreed amounted to ₹20,39,600, making the stamp duty ₹61,188. Including ten times penalty under Section 34, the total payable was ₹6,73,068. Since the respondent had already paid ₹9,35,000 as directed by the trial court, no interference was warranted.
Conclusion
The High Court dismissed the writ petition, upholding the trial court’s order. It reaffirmed that refundable security deposits under lease agreements are not subject to stamp duty, and that the duty is payable only on the average rent under Article 30 of the Karnataka Stamp Act.
The judgment underscores the principle that stamp duty liability must be determined by the substance of the transaction, not merely by its form, and that security deposits refundable on completion of the lease cannot be equated with rent or advance consideration.
Implications
This ruling reiterates that lessors and lessees in Karnataka need not pay stamp duty on refundable security deposits, a common feature in long-term leases. It aligns with the settled position in Texas Instruments India Ltd. and provides much-needed clarity for real estate transactions, particularly in commercial leasing. The judgment safeguards lessees from excessive duty demands based on refundable deposits and ensures uniform application of Article 30(c) across Karnataka.
Judgments Cited
- Chief Controlling Authority, Inspector General of Registration & Commissioner of Stamps v. Texas Instruments India Ltd., AIR 2004 Kar 70 — Held that refundable security deposits are not money advanced in addition to rent and thus not liable for stamp duty under Article 30(c).
- Chief Controlling Revenue Authority v. Chandrashekar, AIR 1985 Kar 61 — Clarified that security deposits meant for maintenance or compliance cannot be treated as premium or fine under the Stamp Act.
FAQs
Q1. Is stamp duty payable on refundable security deposits under lease agreements in Karnataka?
No. The Karnataka High Court has held that refundable security deposits do not constitute “money advanced in addition to rent” and hence are not liable to stamp duty under Article 30(c) of the Karnataka Stamp Act.
Q2. What is the rate of stamp duty applicable to long-term lease agreements?
Stamp duty is payable at 3% on the average annual rent for the lease period, excluding any refundable security deposits, as per Article 30 of the Karnataka Stamp Act.
Q3. Can the court impose penalties for deficit stamp duty?
Yes. Under Section 34 of the Karnataka Stamp Act, the court may impose up to ten times the deficit stamp duty as a penalty for under-stamped documents before admitting them as evidence.
