Notional interest on refundable security deposit cannot be treated as rent under section 23(1)(b).

Under section 23(1)(b), only actual rent received or receivable can be taken into account, and notional interest on a refundable interest-free security deposit cannot be added to annual rent. A refundable deposit does not itself form part of rent, and any benefit from its use arises only on utilisation and, if taxable at all, at that stage under the appropriate charging provision. Treating estimated interest as rent would import a notional element into a provision concerned with actual rent and could lead to double taxation. The assessee therefore succeeded, and the addition was unsustainable.

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Issues: Whether notional interest on a refundable interest-free security deposit received from a tenant can be included in the annual rent received or receivable for the purpose of section 23(1)(b) of the Income-tax Act, 1961.

Analysis: The annual value under section 23(1)(a) is a notional concept, but section 23(1)(b) is directed to the actual rent received or receivable. A refundable security deposit does not itself form part of rent, and any benefit arising from the use of such deposit accrues only on utilisation and is taxable, if at all, under the appropriate charging provision at that stage. Treating the estimated benefit of an interest-free deposit as rent under section 23(1)(b) would introduce a notional element into a provision that speaks only of actual rent and would also risk double taxation. The definition of lease rent under section 105 of the Transfer of Property Act, 1882 does not justify treating the refundable deposit itself, or the notional interest thereon, as rent received or receivable for this purpose.

Conclusion: Notional interest on the refundable security deposit is not includible as part of the annual rent received or receivable under section 23(1)(b); the addition was unsustainable and the assessee succeeded.

Ratio Decidendi: For section 23(1)(b), only actual rent received or receivable can be considered, and a notional benefit arising from an interest-free refundable security deposit cannot be taxed as rent.

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