Interest-free deposit in lieu of rent

Interest-free deposit in lieu of rent
T.C.A.RAMANUJAM
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T.C.A.RAMANUJAM Related
PHOTOS
Rent Rs 90,000; Security deposit: Rs 8.58 crore. This is becoming
more and more common in matters concerning lease agreements for house
properties. Is it possible to understate the monthly rental and get
compensated by taking interest-free deposits from the tenant? Moni
Kumar Subha let out the property in New Delhi for a rent of Rs
90,000/- after taking a security deposit of Rs 8.58 crore which was
interest-free.

The tenant had given the security deposit on the understanding that no
interest was payable by the landlord to the tenant. While taking up
the case for assessment of income from property, the Assessing Officer
came to the conclusion that interest on interest-free security deposit
was an important fact for consideration while determining the fair
rent within the meaning of Section 23 (1) (a) of the Income tax Act,
1961.

He calculated the notional interest on the deposits at Rs 30.41 lakh.
This would have been earned by the assessee on the security deposit
kept with him by the tenant. He included this amount as income for
purposes of taxation.

The Tribunal and the first appellate authority decided the matter in
favour of the assesee landlord. The Revenue took up the matter in
appeal. A Division Bench of the Delhi High Court referred the matter
to a Full Bench of three judges. The question posed was whether it was
proper for the Tribunal to hold that interest-free security deposit is
not rent liable to be included in the income from house property.

The Delhi High Court went into the methodology prescribed in Section
23 of the Act to determine the annual letting value (ALV) of the
property. It noted that the Assessing Officer had worked out the
notional interest at an amount equal to 12.5 per cent depending on the
prevailing bank rate to decide the ratable value of the premises.The
Appellate authority observed that the actual rent was more than this
rateable value and therefore only actual rent should be determined as
income from property without any further additions. The huge amount of
security deposit received by the landlord from the tenant gave the
impression that actual rent received is suppressed.

The Division Bench posed the question whether such a huge interest
free deposit can be totally ignored while determining the fair rent
for tax assessment. The Full Bench noted that the provisions of the
Delhi Rent Control Act did not apply to this case.

It agreed with the argument that the Assessing Officer made a mistake
in not addressing the issue of determining the fair rent. In a taxing
statute, it will be unsafe for the court to go beyond the letter of
the law and try to read into the provision more than what is provided
for.

The High Court dismissed the Revenue appeal and held that notional
interest on security deposit cannot be added in computing property
income. The DTC has done away with the concept of ALV. This reduces
the scope for litigation after April 1, 2012 in the computation of
property income.