SDB DIAMOND BOURSE vs CGST & Central Excise Surat

Customs, Excise & Service Tax Appellate Tribunal
West Zonal Bench at Ahmedabad

REGIONAL BENCH-COURT NO. 2

SERVICE TAX APPEAL NO. 10004 of 2021-DB

(Arising out of OIO-SUR-EXCUS-000-COM-002-20-21 Dated 16/07/2020 passed by
Commissioner, CGST & Central Excise - Surat)
SDB DIAMOND BOURSE ……..Appellant
67, 1st Floor, Tapti Exports Patel Falia
Gotalawadi, Surat, Gujarat-395004
VERSUS

COMMISSIONER OF CGST & CENTRAL EXCISE –
CGST & Central Excise Surat …….Respondent
New Central Excise Building, Opp. Gandhi Baug,
Chowk Bazar, Surat, Gujarat- 395001

APPEARANCE:
Shri Shirish Shah with Ms. Raveena Narang, Chartered Accountant for the
Appellant
Shri M G Rayka, Additional Commissioner (AR) for the Respondent

CORAM:
HON'BLE Dr. AJAYA KRISHNA VISHVESHA, MEMBER ( JUDICIAL)
HON'BLE MR. SATENDRA VIKRAM SINGH, MEMBER ( TECHNICAL )

Final Order No. 10825/2026
DATE OF HEARING: 13.05.2026
DATE OF DECISION: 12.11.2026

SATENDRA VIKRAM SINGH
M/s SDB Diamond Bourse, Surat (Appellant) were issued a show cause
nd
notice dated 22 October 2019 proposing demand of service tax of Rs.
24,67,98,056/- under proviso to sub-section (1) of Section 73 of the Finance
Act, 1994 along with interest under Section 75 and penalty under Section 77
and Section 78 of the Finance Act, 1994. Their Directors namely; (a) Shri
Mathurbhai Madhabhai Savani, (b) Shri Manubhai Davariya, (c) Shri
Govindbhai Laljibhai Dholakia, (d) Shri Asitbhai Vasantlal Mehta, (e) Shri
Vallabhbhai Shamjibhai Patel, (f) Shri Laljibhai Tulsibhai Patel, (g) Shri
Jitubhai Babulal Shah and their CFO Shri Hareshkumar Chandrakant Pandya,
were also issued show cause notices proposing penalty on them under 78A
of the Finance Act, 1994.
1.1 As per the facts of the case, departmental officers conducted search at
the office premises of the appellant on 06.04.2016 and collected Balance
sheet for 2014-15 and list of prospective buyers. During further

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investigation, it was found that the appellant had entered into MOU dated
12.01.2015 with Gujarat Infrastructure Development Board for development
of Surat Diamond Bourse. The appellant had collected initial booking
expenses from members @ Rs. 600 per sq. ft. for space and Rs. 50,000/- for
4 wheelers and Rs. 5000/- for two-wheeler parking on which they were liable
to pay service tax as per the provisions of Rule 3 of Point of Taxation Rules
2011 and the Finance Act 1994. The appellant did not pay any service tax on
these amounts nor filed the ST-3 returns. During investigation, statements
of Shri Hareshkumar Chandrakant Pandya, Chief Financial Officer was
th th
recorded on 7 July 2016 and again on 30 March 2017, wherein he admitted
st
to have received an amount of Rs. 187.09Cr upto 31 March 2016 from the
enrolled members to meet the initial expenses required for the project i.e. to
enter into lease agreement with M/s Diamond Research and Mercantile City
Co. Limited (DREAM City Ltd.), a special purpose vehicle of the Government
of Gujarat. On being pointed out, the appellant paid service tax of Rs. 6 Cr
under protest vide challan dated 27.04.2016, challan dated 19.05.2016 and
challan dated 22.06.2016. The department alleged that as per Rule 3(b) of
the Point of Taxation Rules, 2011, appellant was liable to make payment of
service tax as soon as they had received advances from their customers for
construction service. The show cause notice also alleges that the directors of
the appellant company were fully aware of the advances received and liability
of payment of service tax thereon, but have knowingly evaded payment of
service tax.
1.2 The show cause notice was decided by the learned Commissioner vide
impugned order dated 16.07.2020 wherein he confirmed the demand of
service tax as proposed in the show cause notice along with applicable
interest under Section 75. He also imposed a penalty of equal amount on the
appellant under Section 78(1) of the Finance Act, 1994, penalty of Rs.
10,000/- under Section 77(1) for failure to obtain service tax registration,

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penalty of Rs. 10,000/- under same Section for failure to file ST-3 returns
during year 2014-15 and penalty of Rs. 1,00,000/- each on other co-noticees
namely Shri Mathurbhai Madhabhai Savani, Shri Manubhai Davariya, Shri
Govindbhai Laljibhai Dholakia, Shri Asitbhai Vasantlal Mehta, Shri
Vallabhbhai Shamjibhai Patel, Shri Laljibhai Tulsibhai Patel & Shri Jitubhai
Babulal Shah under Section 78 of the Finance Act, 1994. No penalty was
imposed on Shri Hreshkumar Chandrakant Pandya, Chief Financial Officer of
the appellant company, on the ground that there is no evidence against him.
1.3 Aggrieved with the above order, appellant filed the present appeal
before this Tribunal, enclosing copy of their service tax registration dated
16.03.2015 and copy of ST-3 returns filed for the period April to June 2017.
2. In their appeal, the appellant took the following grounds:-
• They approached Hon’ble Gujarat High Court against the impugned order
of the Learned Commissioner and as per the directions of Hon’ble High
Court, they filed the present appeal before the Tribunal.
• The show cause notice and the order passed by the learned Commissioner
is beyond the period of limitation as provided under Section 73(1) of the
Finance Act, 1994 as their case does not involve any fraud, collusion,
suppression of facts or wilful misstatement on the following grounds:-
(i) They were already registered with service tax even before the
search by department and were filing service tax return, in time
bound manner.
(ii) Applicable service tax has been paid on membership fee
collected from each prospective member. They had fully cooperated
during the search and submitted requisite documents/ information,
as and when desired by the department. Even after submission of
documents by them, department could not point out any suppression
of facts.

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(iii) The department could not point out any discrepancy in the
statements recorded of their authorised person. The company has
also filed audit report in a timely manner on MCA portal.
(iv) The appellant entered into lease agreement with DREAM City
on 13.04.2017 well after the search. As on the date of search, only
a memorandum of understanding dated 12.01.2015 existed between
SDB and Gujarat Infrastructure Development Board.
• MOU is executed for creating consensus between the contracting parties
for future contracts and is usually not intended to have created any
obligation upon the parties. MOU is thus, non-binding and legally non-
enforceable and is only an “agreement to agree” and highlights business
relationship, which are likely to result in some contract or any formal
agreements between the parties. A contract to enter in a contract is bad
and not valid from the point of view of law as held by Hon’ble Calcutta
High Court in Jyoti Brothers case reported at AIR 1956 Cal 280.
• MOU made with DREAM City Ltd was not a formal document to fulfil any
condition or promise to each other. As per Section 2(h) of the Indian
Contract Act, 1872, contract is defined as an agreement enforceable by
law. Therefore, MOU in their case has no legal enforceability in the court
of law.
• In the case of Kay Kay Press Metal Corporation Vs. Commissioner of
Central Excise (2013) 32 taxman.com 15, Cestat Ahmedabad, held that
extended period of limitation cannot be invoked for not paying tax if there
was divergence of opinion during the relevant period and some
judgments were in favour of the appellant as there could be no
suppression/wilful misstatement by the appellant.
• Vide Resolution dated 06.02.2015, Gujarat Government had formed
DREAM City Company Ltd a Special Purpose Vehicle with an objective of
acquisition/transfer of land for construction of smart city which may
house other building and infrastructure along with aforesaid proposed

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Diamond Bourse. To demonstrate commitment of the diamond industry
for construction of bourse, 11 active industry leaders became members
of SDB Diamond Bourse in addition to 8 subscribers vide resolution dated
11.04.2015. They paid refundable EMD as part of expression of interest,
in acquiring offices space in proposed bourse.
• In March 2016, it was decided to accept membership application along
with expression of interest for space from prospective members of the
trade for sending final request to the Government for allocating requisite
land. They started collecting refundable EMD of Rs. 600/- per sq. ft. from
the members and further amount of Rs. 50,000/- for parking of four-
wheeler and Rs. 5000/- for parking of two-wheeler.
nd
• A member’s agreement dated 22 March, 2016 covering all the terms
related to collective initiative of development of the bourse and related
matter was executed. It clearly states that if SDB fails to get the requisite
allocation of land from Government of Gujarat at acceptable conditions,
EMD would be refunded without any interest. Clause 8.1 of the
agreement clearly mentions that development and creation of proposed
diamond bourse largely depend on allotment of land at favourable terms
and conditions by the Government of Gujarat. If issues arise about
availability or title to the land, whether in nature of any delay in
approvals/ change in policies, norms, conditions for the allotment of the
land, the out come of the project may get affected.
• The appellant had accepted EMD in refundable form only and where
members withdrew their expression of interest, it was refunded to them.
Total 13 applicants who withdrew their requisition, were refunded Rs 2.80
cr.
• They were allotted land vide lease deed dated 13.04.2017 and possession
was also given for starting the construction. Therefore, liability to pay
service tax would be crystallised in April 2017 only, as per the point of
Taxation Rules, 2011. Regarding amount of Rs. 3.40crs shown under the

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head “advance against office booking”, it is merely for reporting purpose
in line with requirement of presenting a financial statement as per
Schedule 3 of the Companies Act, 2013. It cannot be treated as amount
received towards services supplied or to be supplied.
• They have not provided any service to the members who have merely
expressed interest in the proposed project of the appellant, which did not
exist even on any legally binding document. The prospective members
have not deducted any tax on the refundable EMD paid to the appellant
as required under Section 194-IA of the Income Tax Act, 1962. This is
substantial evidence to indicate that all the prospective members were
aware that the proposed bourse is uncertain and subject to statutory
approval of various departments.
• They rely on the decision of Cestat Mumbai in the case of Cricket Club of
India Ltd Vs. Commissioner of ST (2015) 62 taxman.com 2, wherein it
was held that “where collection of entrance fee by club from its members:
(a) did not confer members any access to services, facilities or
advantages; and (b) was to meet expenses necessary for sustenance and
survival of club and maintenance of its assets, then, entrance fee, not
being consideration, was not chargeable to service tax"
• It has been held by Cestat Mumbai in the case of Vikhroli Corporate Park
Vs. Commissioner of Service Tax reported in (2017) 78 Taxman.com 12
that “Where the appellant had constructed commercial building for
renting and had taken interest free security deposit from customers and
forfeited amount of advance given by customers on relegation of contract
by customer, interest free security deposit and forfeited amount were not
liable to service tax under 'renting of immovable property”.
• In the case of State of West Bengal and others Vs. Calcutta Club Ltd,
Hon’ble Supreme Court ruled that supply/sale of goods is rendering of
service to their members and is not liable to sales tax/service tax by
application of principles of mutuality. It held that the judgment in Young

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Men’s Indian Association (1970) 1 SCC 462 which applied the doctrine of
th
mutuality continues to hold the field even after 46 amendment in the
Constitution.
• They collected the amount from prospective buyers in the nature of
refundable EMD on which liability of service tax if any, would arise from
the date of execution of land lease agreement and grant of legal
possession to enable the appellant convert refundable EMD into non-
refundable advance towards allotment of office space in the proposed
bourses.
• They had submitted application for advance ruling on 20.05.2016 for
clarification regarding applicability of service tax and time and point of
taxation on refundable Earnest Money Deposit. No decision was conveyed
by the Advance Ruling Authority.
• It has been held by AAR New Delhi in the case of Emerald Laser Ltd Vs.
Commissioner of ST (2015) 64 Taxman.com 398 that refundable deposit
is not a consideration for service provided or to be provided as the same
would be refunded. As soon as, lease agreement was executed by DREAM
City Ltd and formal legal possession was granted, they lifted the protest
and reported the entire amount of applicable service tax liability in ST-3
returns. They have already paid an amount of Rs. 26,96,00,000/- to the
Government against alleged liability of service tax of Rs. 24,67,94,056/-
hence, excess amount paid by them be refunded.
• They had not carried out any construction activity for the members before
the execution of above land lease deed. Therefore, whatever deposit
taken by them, would not be termed as consideration for providing
construction service in absence of provision of such service till the date
of allotment of land to the appellant. They rely on the decision of CESTAT
Bangalore in Canara Bank Vs. Commissioner of Central Excise and
Customs, 72 taxman.com 52 wherein it was held that "If differential
service tax is paid prior to finalization of provisional assessment, no

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interest can be demanded under rule 6(4) of Service Tax Rules read with
rule 7 of Central Excise Rules"
They also rely on the decision in the case of Mahadev Logistics Vs.
•
Customs and Central Excise Settlement Commission wherein it was held
that "If there is no wilful suppression of facts to evade tax on the part of
the petitioner and it was bonafide act, not deliberate and in absence of
finding relating to mens rea recorded by the Settlement Commission,
penalty imposed upon the petitioner under Section 78 of the Finance Act,
1994 deserves to be quashed"
• As they have not done anything wrong or suppressed anything from the
department, extended period as per proviso to Section 73(1) of the
Finance Act, 1994 is not invocable in their case. They are also not liable
to any penalty under Section 77(1) and Section 78(1) of the Finance Act,
1994. Similarly, other co-noticees who are Directors of the appellant
company, are also not liable to any penalty under Section 78A of the
Finance Act, 1994.
The appellant prayed for setting aside the impugned order by allowing their
appeals.
3. During arguments, Shri Shirish Shah and Ms. Ravina Narang, both
Chartered Accountants appeared on behalf of the appellant. They submitted
that the company by accepting the service tax liability, has already paid the
service tax on the consideration amount which they are not disputing. As
such, they are only contesting levy of interest and penalty. Learned CA
pleaded that the amount was collected from the members initially in the form
of EMD to assess requirement of land for construction of Bourse and the
same was shown as liability in their books of accounts. The said EMD was
converted as advance only after execution of land lease deed with DREAM
City Ltd in April 2017. He produced copy of the relevant schedule of the
balance sheet as on 31.03.2018, to indicate that they have showed the
amount of Rs. 554.98crs collected by them as EMD against office space till

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st
31 March 2017 and it was converted into advance amount in April 2017 and
st
shown as such in their balance sheet. As on 31 March, 2018, their account
shows advance of Rs. 769.47crs from the members for office space.
3.1 Learned Counsel pleads that they have already paid the following
service tax amount and therefore, no interest liability arises on them as the
consideration of Rs. 554 Cr has been shown by them in their ST-3 return for
the period April 2017 to June 2017.
Details of Service Tax paid in advance
Sr.
No.
Challan
Service Tax SBC KKC Total
date
1. 27-04-16 28,000,000 1,000,000 1,000,000 30,000,000
2. 19-05-16 18,666,666 666,667 666,667 20,000,000
3. 22-06-16 9,333,334 333,333 333,333 10,000,000
4. 24-09-16 4,666,666 166,667 166,667 5,000,000
5. 21-02-17 32,293,334 1,153,333 1,153,333 34,600,000
6. 27-03-17 130,666,666 4,666,667 4,666,667 140,000,000
7. 30-03-17 28,000,000 1,000,000 1,000,000 30,000,000
Total 251,626,666 8,986,667 8,986,667 269,600,000

3.2 He also pleads since service tax has already been deposited more than
the demanded amount, they are not liable to any penalty under Section 78
or under Section 77 of the Finance Act, 1994. Learned Counsel relies on the
decisions in the case of Murli Realtors Pvt Ltd Vs. CCE, Pune- 2015 (37) S.T.R.
618 (Tri. - Mumbai) and M/s Elite Buildcon Pvt ltd Vs. Commissioner
(Appeals) CE & CGST, Jaipur- 2025 (8) TMI 171 - Cestat New Delhi, to
support his case where it has been held that there is no provision in service
tax law for demanding notional interest on security deposit taken as
consideration for leasing of the immovable property.
4. Arguing on behalf of Revenue, learned AR reiterated the findings of the
Learned Commissioner. He mentioned that the advance amount taken by the
appellant in this case came the knowledge of revenue only during search
conducted by the officers. The appellant had suppressed the fact of taking
advances from their members for the construction services to provided, and
therefore, they are not only liable to pay service tax but also the interest and

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penalty. He pleaded that Hon’ble Supreme Court in the case of Videocon
Properties Ltd Vs. Bhalchandra Laboratories reported at (2004) 3 SCC 711
has distinguished the term “Advances” and the “Earnest money deposit”. It
held that :-
“that the words used in the agreement alone would not be determinative of
the character of the "earnest money" but really the intention of the parties and
surrounding circumstances. It held that the earnest money serves two
purposes of being part payment of the purchase money and security for the
performance of the contract by the party concerned.
12. It is not the description by word used in the agreement only that would be
determinative of the character of the sum but really the intention of the party
have to be looked into and what may be called as an 'advance money may
really be a deposit or earnest money and what is termed as a deposit or earnest
money "may ultimately turn out to be really an advance or part of purchase."

4.1 Citing the provisions of Rule 3(b) of the Point of Taxation Rules, 2011
and explanation thereto, Learned AR submits that whenever any advance by
whatever name known, is received by the service provider towards the
provision of taxable service, the point of taxation is the date of receipt of
each such advance. He pleads that as and when earnest money or advance
amount was collected by the appellant, same was to be considered as point
in time when service is deemed to have been provided and accordingly
service tax is leviable. He supports his say from the statements of Shri
Hareshkumar Chandrakant Pandya, Chief Financial Officer of the company,
wherein he had accepted that collection of advances for development of
property appears to acceptable and service tax at the appropriate rate
appears to be payable by them. He also defends invocation of extended
period and imposition of penalty under Section 78 on the ground that the
appellant failed to show receipt of advance amounts in ST-3 returns and also
failed to pay appropriate service tax in time. Learned AR also relied upon the
decision dated 13.12.1994 of Hon’ble Supreme Court in the case of V.
Lakshmanan Vs. B R Mangalagiri & Ors.

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5. We have heard both sides and also seen the records. We find that the
appellant has accepted service tax liability of Rs. 24,67,98,056/- on the
amount collected from their members and in fact, have already deposited
more than the liability confirmed against them. In their submissions during
hearing, appellant has only disputed the interest liability, penalty of Rs.
24,67,98,056/- under Section 78(1), penalty of Rs. 10,000/- under Section
77(1) of the Finance Act, 1994 and penalties imposed upon each of the
directors of the appellant. The department has alleged suppression in the
case on the ground that the appellant had received advance amounts much
earlier but failed to show the same in their ST-3 returns and pay appropriate
service tax. The department supports above charges on the basis that receipt
of huge amount by the appellant towards construction service came to the
knowledge of the department only when search was conducted in their office
premises which otherwise would have gone unnoticed.
5.1 The facts show that the appellant wanted to make a Diamond Bourse
at Surat for development of Diamond trade. To make above project a reality,
they required suitable piece of land, which appellant did not possess. Before
approaching the State Government for allotment of a suitable piece land in
Surat, they required data regarding-
(a) Number of members willing to take office space.
(b) Requirement of parking space for four wheelers and two wheelers.
(c) Size of plot required to be acquired.
For this data, initially, 6 subscribers showed expression of interest and paid
refundable earnest money. Later, 11 active industry leaders became
members of SDB Diamond Bourse and joined hands for the project.
Communication was made with other members for Expression of Interest
(EOI) in acquiring the offices space and/or parking space. For having serious
response to EOI, they decided to collect Entrance fees, Membership fees and
deposit of certain amount from the applicants @ Rs. 600/- per sq. ft for office
space and a fixed amount Rs. 50,000/- towards parking space for four-

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wheeler and Rs. 5,000/- for two-wheeler. It is the contention of the appellant
that whatever amount they had collected from willing members, was towards
earnest money to be refunded in case Surat Diamond Bourse project does
not become reality. Due to this, they neither showed this amount in their ST-
3 returns nor paid the service tax, even though, they were registered with
service tax department. They constantly pursued with the State Government
for allotting them a suitable land, which fact is reflected from the chronology
of events as submitted by them. It can clearly be seen that the appellant
pursed this project since December 2014 till they finally got the land allotted
th
and entered in to Land lease agreement on 13 April 2017.
Sr.
No.
Date Chronology of Events
A Section 8 company (i.e., a non-profit organization) was
incorporated and duly registered in the name of “SDB Diamond
Bourse” (hereinafter referred to as the “Appellant” or “SDB”).
1 30-12-2014
A non-binding MOU was executed with the Government of Gujarat,
under which the Government agreed to facilitate the necessary
permissions for the proposed project, namely “SDB Diamond Bourse”
based on the needs of the G industry at large.
2 12-01-2015
Refundable Earnest Money Deposit (EMD) of Rs. 65 lakh was received
from six subscribers along with Expression of Interest (EOI) forms
for acquiring space in the proposed Diamond Bourse to be
constructed in Surat.
3 Jan-2015
The Government of Gujarat, for the first time, passed a resolution for
setting up a Special Purpose Vehicle (SPV) in the name of Diamond
Research and Mercantile City Company Ltd. (“DREAM City”), with the
objective of acquiring/transferring land for the development of a
Smart City, which could house various buildings and infrastructure,
including the proposed Bourse.
4 06-02-2015
The foundation stone of DREAM City was laid in the presence of the
Hon’ble former Chief Minister of Gujarat, Smt. Anandiben Patel.
5 15-02-2015
EOI forms along with refundable EMD of Rs. 2.75 crore were received
from members of SDB showing their interest in acquiring space in the
proposed Diamond Bourse to be constructed in Surat if it was suitable
for their trade needs. This was a non-binding expression of interest
and not a booking for any office since , till this time, no one knew
where, how, and at what cost the office space would be provided .
7 16-03-2015 SDB obtained a Service Tax registration.
Feb-2015
6
to Mar-
2015
Eleven active industry leaders became members of SDB Diamond
Bourse, in addition to eight subscribers for the proposed
development of the proposed Bourse.
8 11-04-2015
May-2015 to
9
More EOI forms with refundable EMD of Rs. 45 lakh were received
from more members showing their interest in the proposed Diamond
Bourse.
Dec-2015

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The audit report of SDB for 31-3-15 shows the amount received as
liability and this report was uploaded on MCA portal and available in
public domain and filled with IT department also. So there was no
suppression of facts about receipt of EOI-EMD as same was duly
disclosed in books of accounts and said information was available
with the Service tax authorities also. So extended limitation period
for issue of SCN cannot apply.
10 24-07-2015
A Board Resolution was passed calling for expression of interest from
11 05-02-2016
the G&J industry at large but duly backed by refundable Earnest
Money Deposits so that appropriate representation could be made
to the Govt of Guj, SMC, and DREAM City for appropriate space to
build the proposed bourse.
EOI forms with refundable EMD of Rs. 3.22 crore were received
12 Feb-2016
from more members.
A request letter was submitted to the Hon’ble Commissioner of
13 28-03-2016
Surat Municipal Corporation seeking allotment of approximately 39
acres of land for construction of the proposed Bourse.
EOIs with refundable EMD of Rs. 145.47 cr. were received from
14 Mar-2016
more members.
The Service Tax Officers of Surat searched their premises. The
respondent contended that since no land had been allotted till date
and no project had been designed, launched, or commenced, no
Service Tax liability arose at that stage.


15
06-04-2016
Another request letter was submitted to Hon’ble Commissioner of
16 21-04-2016
Surat Municipal Corporation seeking allotment of land for
construction of the proposed Bourse.
During this period, certain members withdrew their applications
whom SDB refunded EMD aggregating to Rs. 2.80 cr. This clearly
proves that EMD was refundable amount against an expression of
interest and not a binding booking for any office since no one would
book any office space without knowing where it would be built, or
without knowing the design, cost, etc.




17
10-05-2016
A further request letter was submitted to the Hon’ble Commissioner
18 04-07-2016
of Surat Municipal Corporation requesting the land.
An aggregate amount of Rs. 26.96 crore had already been paid by SDB
towards Service Tax under protest during the period from April 2016
to March 2017, i.e. prior to issuance of Show Cause Notice (SCN) and
was duly communicated to the concerned authorities.



Apr-16 to
March-17
19
More EOI forms with refundable EMD of Rs. 373.45 cr. were received.
20 April-16 to
March-17
Land was allotted vide Lease Deed dated 13th April 2017. It’s
possession was given to commence construction. It was only upon
execution of the Lease Deed that the Service Tax liability crystallized.
Same was accordingly reported in the Service Tax return for the
period of April 2017 to June 2017.


21
13-04-2017
Show Cause Notice proposing demand of Service Tax, along with
interest and penalty, was issued on 22.10.2019. All relevant facts and
records were already available with the learned authorities. So
extended period of limitation for issue of SCN cannot apply. Further,
SDB had already paid Rs. 26.96 crore towards Service Tax under
protest, which was higher than the amount of tax ultimately
proposed in the SCN.






22
22-10-2019

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Also, copy of the letter dated 21.04.2016 written to the Commissioner, Surat
Municipal Corporation intimating the requirement of land and request for it’s
allotment is reproduced below:-

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5.2 The sequence of events clearly indicates that the appellant had no
intention to hide the money collected from their members as earnest money
along with expression of interest. They have also shown the above amounts
as EMD against office space under the head “ other long term liabilities ” in
schedule 4 of the balance sheet for 2015-16 & 2016-17. Their intention
behind collection of EMD was to ensure that they get committed requests
from the members for calculating requirement of land and the likely size of
the project. In their support, they have also submitted copy of the minutes
of meeting No. 25/2017 dated 13.04.2017, wherein at item No. 1, it is
mentioned that Shri Mathurbhai Madhabhai Savani, Director of the company
is authorised to sign, execute and appear before the Registrar in connection
with lease agreement for land between SDB Diamond Bourse and M/s DREAM
City Ltd for the period of 99 years. Item No. 2 is reclassification of amount
collected as EMD. It says that once lease agreement is executed between the
company and DREAM City Ltd, title to the land for the proposed bourse shall
vest with the company and all uncertainties related to the project would end.
The work for various approvals as also the actual execution work on site can
also commence on full speed and therefore, EMDs collected from the
Members shall be classified as advance contribution from them for the office
space in the bourse and shall, no longer be treated as earnest money
deposits. It also states that whatever amount is standing to the credit of the
members in the books of the company as EMD, shall be transferred to the
advance members contribution for office space. At item No. 3, it also
approved transfer of 108 applications received from existing trade members
for office space as well as parking space to new members. The appellant has
submitted Notes Forming Part of the Audited Financial Statement of the
company for the year ending March 2018 which also incorporates
corresponding figures as on 31.03.2017. The schedule 4 dealing with “ other
current liabilities ” shows an amount of Rs. 5,54,97,61,000/- as EMD
against office space as on 31.03.2017 which after transfer plus some

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additional fresh deposits, has been shown as advance received from
members for office space - Rs. 7,69,47,12,007/-. The EMD which was
being shown in books up to 31.03.2017, has become nil. Schedule 4 is
reproduced below:-

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5.3 Above clearly shows that whatever earnest money deposit the
appellant was carrying in their books of account, has been converted as
advance received from the members for office space. The ST-3 return for the
period April-June 2017 submitted by the appellant also confirm that in the
month of April 2017, appellant has shown receipt of Rs. 5,54,97,61,000/- as
advance amount from the members on which, they after claiming the
abatement, have paid the applicable service tax. By submitting all these
documentary evidences, the appellant had shown their good intention to
plead that they had no reason and intention to hide the amount so received
from their members as earnest money deposit. They submitted that as they
have already paid the entire service tax amount much before the liability
arose on them in April 2017, they are neither liable to any interest on the
service tax amount nor any penalty under Section 78(1) of the Finance Act,
1994.
5.4 In view of above facts, entire dispute is whether the amount collected
by the appellant from their members along with expression of interest, is
“advance amount towards construction of office space” or a refundable
earnest money deposit. The sequence of events as per para 5.1 above,
clearly show that till 13.04.2017, the appellant were pursuing the State
Government, DREAM City Ltd, and the Commissioner of Surat Municipal
Corporation for allotment of approximately 39 acres of land for construction
of purposed Surat Diamond Bourse. Without getting the land allotted by the
Government, it cannot be said that the appellant was confident of
constructing the project. When a construction company announces a
residential or commercial project, they do so after acquiring piece of land
and after obtaining all necessary approvals like FSI, RERA, building plan
approval etc. There is certainty in the construction activity in such cases and
therefore, whatever amount they receive from the applicants, is treated as
advance for construction services. The case of the appellant is at different
footing. Even though, they had taken expression of interest from the

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members along with certain deposits, they were not sure about land
allotment for which they made untiring efforts with the State authorities as
indicated above. Therefore, appellant collected the amount from the
members as refundable EMD so that it could be refunded in case proposed
Surat Diamond Bourse does not see light of the day. We therefore, are of the
opinion that the said amount cannot be equated to advances because
construction of Bourses itself was uncertain in this case due to non-
availability of land with the appellant company.
5.5 We also find that Hon’ble Supreme Court in the case of K.R. Suresh Vs.
R. Poornima & Ors. reported at 2025 (5) TMI 311 has distinguished between
“Advances” and “Earnest Money”. Hon’ble Apex Court has mentioned that the
principles governing the scope of “earnest money” were succinctly explained
in the case of Shree Hanuman Cotton Mills Vs. Tata Air Craft Ltd., reported
in (1969) 3 SCC 522. Relevant paras of the decision of Hon’ble Supreme
Court in K R Suresh case are reproduced as under: -
“32. The principles governing the scope of “earnest money” were succinctly
explained in the case of Shree Hanuman Cotton Mills v. Tata Air Craft Ltd.,
reported in (1969) 3 SCC 522, reproduced as under:
“21. From a review of the decisions cited above, the following principles
emerge regarding ‘earnest’:
‘(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in other
words, “earnest” is given to bind the contract.
(3) It is part of the purchase price when that transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default
or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract, on
default committed by the buyer, the seller is entitled to forfeit the earnest.’”
(Emphasis supplied)
33. In the case of Videocon Properties Ltd. v. Bhalchandra Laboratories
reported in (2004) 3 SCC 711, while assessing the difference between
“advance” and “earnest”, this Court took the view that the words used in the
agreement alone cannot be determinative of the true nature of the amount
advanced. Instead, the intention of the parties and the surrounding

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circumstances serve as more apt indicators. Further, the Court observed that
earnest money fulfils a dual purpose: first, it operates as part-payment of the
purchase price and; secondly, as security for the performance of the
contractual obligations. Thus, its true character and purpose can only be
canvassed on a close reading of the agreement, and the relevant contextual
factors. The relevant observations are reproduced hereinbelow:
“14. […] Further, it is not the description by words used in the agreement
only that would be determinative of the character of the sum but really the
intention of parties and surrounding circumstances as well, that have to be
looked into and what may be called an advance may really be a deposit or
earnest money and what is termed as ‘a deposit or earnest money’ may
ultimately turn out to be really an advance or part of purchase price. Earnest
money or deposit also, thus, serves two purposes of being part-payment of
the purchase money and security for the performances of the contract by
the party concerned, who paid it.”
(Emphasis supplied)
34. In Satish Batra v. Sudhir Rawal, reported in (2013) 1 SCC 345, this Court
emphatically held that it is only the “earnest money”, paid as a pledge for the
due performance of the contract, that can be forfeited by the seller on account
of the buyer’s default. In the same vein, earnest money can also be doubled
and paid back to the buyer if the contract falls through due to the seller’s
default. An amount which is in nature of an “advance” or serves as part-
payment of the purchase price cannot be forfeited unless it is a guarantee for
the due performance of the contract. The Court further held that despite the
existence of an outright forfeiture clause, it shall not apply if the amount
stipulated in the contract is found to be only in the nature of part-payment of
the purchase price. Consequently, the forfeiture of “advance money” as part
of earnest money can only be justified if the terms of the contract are clear
and explicit to that effect. The relevant observations are reproduced
hereinbelow:
“6. […] In Chiranjit Singh v. Har Swarup [(1926) 23 LW 172 : AIR 1926 PC
1] it has been held that (LW p. 174) the earnest money is part of the
purchase price when the transaction goes forward and it is forfeited when
the transaction falls through, by reason of the fault or failure of the
purchaser. […]
xx xx xx
10. In DDA v. Grihsthapana Coop. Group Housing Society Ltd. [1995 Supp
(1) SCC 751], this Court following the judgment of the Privy Council in Har
Swarup [(1926) 23 LW 172 : AIR 1926 PC 1] and Shree Hanuman Cotton
Mills [(1969) 3 SCC 522], held that the forfeiture of the earnest money was
legal. In V. Lakshmanan v. B.R. Mangalagiri [1995 Supp (2) SCC 33] this
Court held as follows : (SCC p. 36, para 5)
“5. The question then is whether the respondents are entitled to forfeit the
entire amount. It is seen that a specific covenant under the contract was
that the respondents are entitled to forfeit the money paid under the
contract. So when the contract fell through by the default committed by the
appellant, as part of the contract, they are entitled to forfeit the entire
amount.”
xx xx xx

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15. The law is, therefore, clear that to justify the forfeiture of advance
money being part of “earnest money” the terms of the contract should be
clear and explicit. Earnest money is paid or given at the time when the
contract is entered into and, as a pledge for its due performance by the
depositor to be forfeited in case of non-performance by the depositor. There
can be converse situation also that if the seller fails to perform the contract
the purchaser can also get double the amount, if it is so stipulated. It is also
the law that part-payment of purchase price cannot be forfeited unless it is
a guarantee for the due performance of the contract. In other words, if the
payment is made only towards part-payment of consideration and not
intended as earnest money then the forfeiture clause will not apply.”
(Emphasis supplied)
35. A forfeiture clause identical to the one in the present ATS was found in the
case of Satish Batra (supra). It provided for the forfeiture of earnest money in
case of the purchaser’s default, as well as the payment of double the amount
of earnest money in case of the vendor’s default. This Court allowed the
forfeiture of the earnest money, which was held to be security for the due
performance of the contract, by the seller when the transaction fell through on
account of the purchaser’s fault. The relevant forfeiture clause and
observations are reproduced hereinbelow:
“5. […] The question whether the seller can retain the entire amount of
earnest money depends upon the terms of the agreement. The relevant
clause of the agreement for sale dated 29-11-2005 is extracted hereunder
for easy reference:
“(e) If the prospective purchaser fails to fulfil the above condition, the
transaction shall stand cancelled and earnest money will be forfeited. In
case I fail to complete the transaction as stipulated above, the purchaser
will get DOUBLE the amount of the earnest money. In both conditions, the
DEALER will get 4% commission from the faulting party.”
The clause, therefore, stipulates that if the purchaser fails to fulfil the
conditions mentioned in the agreement, the transaction shall stand
cancelled and earnest money will be forfeited. On the other hand, if the
seller fails to complete the transaction, the purchaser would get double the
amount of earnest money. Undisputedly, the purchaser failed to perform his
part of the contract, then the question is whether the seller can forfeit the
entire earnest money.
xx xx xx
17. We are, therefore, of the view that the seller was justified in forfeiting
the amount of Rs.7,00,000 as per the relevant clause, since the earnest
money was primarily a security for the due performance of the agreement
and, consequently, the seller is entitled to forfeit the entire deposit. […]”
(Emphasis supplied)
From the above, it is clear that earnest money is different from the advances
though, earnest money can be treated as part payment of the sale
consideration, if the contractual terms are duly honoured. In other words,

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earnest money is adjusted against the total sale consideration if the contract
goes through.

5.6 In the instant case, we find that what appellant had collected from the
willing members, was the earnest money refundable in case project does not
go through. At that point of time, appellants were basically conducting
demand survey for assessing requirement of land. Had they not been allotted
the piece of land, amount would have been returned to the members.
Therefore, considering all the facts, it would be incorrect to treat such
collected amounts as advances towards construction of office space. As has
been clearly brought out above, since appellant was not having required land
with them, the future of the project entirely depended upon allotment of land
by the State Government which finally happened in the month of April 2017
and then, by way of resolution, the appellant converted the earnest money
deposit into advances, shown in the ST-3 returns and made payment of
service tax. We therefore, hold that Rule 5 of the Point of Taxation Rules
2011, is applicable in this case w.e.f. 13.04.2017 because from this date, the
amount collected from the members towards confirmation of their requisition
has been transferred/ treated as advances towards construction of office
space. We also hold that the appellant has made timely payment of service
tax in this case and no interest amount is recoverable from them. There is
also no suppression of facts on the part of the appellant as they had already
shown the amount collected from the members in their books of accounts as
detailed in para 5.2 above. When the amount was transferred from EMD to
advances, they shown it in the ST-3 returns and paid the service tax. We
therefore, are of the view that Revenue has not brought out any cogent
reason for invoking suppression against the appellant and accordingly,
penalty imposed on the appellant under Section 78(1) is not maintainable.
The penalty under Section 77(1) is however upheld as ST-3 return for April-
June 2017 was admittedly filed late by 42 days.

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5.7 Accordingly, we allow the appeal filed by M/s SDB Diamond Bourse,
Surat by way of granting relief as indicated above.

5.8 As regards penalty imposed on other Directors of the company under
Section 78A of the Act, the appellant though, has prayed for relief to them
in this appeal but such prayer can only be considered if separate appeals are
filed by the respective persons challenging the order passed in their matter
and in this case, no separate appeals have been filed by them.


6. The appeal of the main party is allowed in above terms.

(Pronounced in the open court on 12.11.2026)




(DR. AJAYA KRISHNA VISHVESHA)
MEMBER ( JUDICIAL )



(SATENDRA VIKRAM SINGH)
MEMBER ( TECHNICAL )
Raksha