Sunday, July 10, 2011

Business Line : Industry & Economy / Taxation & Accounts : Interest-free deposit in lieu of rent

Business Line : Industry & Economy / Taxation & Accounts : Interest-free deposit in lieu of rent

The huge amount received as security deposit by the landlord from the tenant gives the impression that actual rent received is suppressed.

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.

(The author is a former Chief Commissioner of Income-Tax.)


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