Refundable Security Deposit Not a ‘Money Advance’: Orissa High Court Slams Wrongful Stamp Duty Demand, Orders Refund

No Third Category of Lease Consideration Exists Beyond Rent and Premium - In a significant judgment interpreting stamp duty law in the context of commercial lease transactions, the Orissa High Court on 22nd April 2025 held that refundable security deposits do not constitute 'money advanced in addition to rent' and therefore cannot be subjected to stamp duty under Article 35(c) of Schedule-1A of the Indian Stamp Act as amended in Orissa. The Court directed the revenue authorities to refund the excess stamp duty and registration charges wrongfully collected from the petitioner.

Justice G. Satapathy, allowing the writ petition filed by KTI Logistics and Services Pvt. Ltd., made a categorical observation:
“By no stretch of imagination can it be said that the security deposit, being refundable and not a part of lease consideration, is a ‘money advance in addition to rent reserved’.”

“Security Deposit Held for Performance, Not Consideration: It’s Not Money Advanced”
The petitioner company had sub-leased industrial land to InstaKart Services Pvt. Ltd. for warehousing purposes. The sub-lease was executed for a monthly rent of ₹26,85,366 along with a security deposit of ₹1.61 crore, which was clearly refundable on completion or early termination of the lease. When the lease was registered, the Sub-Registrar, Jagatpur, Cuttack, included the security deposit while calculating stamp duty under Article 35(c), treating it as ‘money advanced’. The petitioner’s request for refund of this excess levy was turned down through a series of official communications, leading to the writ petition.

Challenging the basis of the stamp duty demand, the petitioner argued that “security deposit is not lease consideration but a refundable sum held in trust to ensure performance,” and therefore, it does not attract stamp duty under Article 35(c), which only applies when the lease is granted for premium or money advanced in addition to rent.

 “Rent and Premium — and Nothing Else — Are Consideration”
Relying on Section 105 of the Transfer of Property Act, the Court observed that “the consideration in a lease is of only two types — ‘premium’ and ‘rent’. There is no third category.”

Justice Satapathy added, “The premium is a one-time price; rent is recurring. A refundable security deposit — which is not consideration for the lease but merely a protective measure — cannot fall under either.”

The Court further underscored that the sub-lease agreement between the parties specifically treated the deposit as refundable, and it was only to be adjusted under contingencies such as premature termination or non-compliance, not as part of lease payment.

“Delhi High Court Had Already Clarified This: Refundable Deposits Not Taxable”
The Court found support in the Full Bench decision of the Delhi High Court in Chief Controlling Revenue Authority v. Marshal Produce Brokers Co. Pvt. Ltd., where it was held that
“duty is not chargeable under Article 35(c) on the amount of deposit which is refundable at the end of the lease.”

Justice Satapathy concluded that the levy of stamp duty on refundable security deposits under Article 35(c) was entirely misplaced and held that,
“the authorities should have applied Article 57 read with Section 5 of the Indian Stamp Act instead, which governs instruments executed as security for due performance.”

Refund Ordered, Misapplication of Stamp Law Corrected
In a strongly worded conclusion, the Court declared that
“the authorities committed an error in resorting to Article 35(c) for computing stamp duty on the refundable security deposit. The correct provision is Article 57, which deals with instruments executed by way of security for performance of a contract.”

Setting aside the impugned orders, the Court directed the concerned department to refund the excess stamp duty and registration charges to the petitioner.

Justice Satapathy’s judgment thus not only delivered relief in the present case but also set a clear precedent for similar disputes across Odisha.

Date of Decision: 22 April 2025