Tribunal rules notional interest on security deposits not includible in rental value calculation

The tribunal dismissed all appeals, upholding the decision that notional interest on an interest-free deposit is not includible in calculating the annual letting value of the property under section 23(1)(a) of the Income Tax Act. The judgment aligns with the Delhi High Court's decision, clarifying the treatment of notional interest on security deposits for determining fair rental value.

---

---

Issues:
- Deletion of addition of notional interest on security deposit for calculating fair rental value under section 23(1)(a) of the Income Tax Act.

Analysis:
The judgment involves three appeals by different but connected assessees arising from a common order passed by the CIT(A) for the assessment year 2004-05. The main grievance raised by the Revenue in its appeals is against the deletion of an addition of Rs.9,18,600/- towards notional interest on a security deposit for determining the fair rental value of the property under section 23(1)(a) of the Act. The assessees had rented a property and sub-let it to another concern. The AO deemed the assessees as owners under section 27(iiib) of the Act due to certain circumstances, and added notional interest on the security deposit to the annual letting value under section 23(1)(a). However, the CIT(A) concluded that the sub-lease income was assessable under the head 'house property' and that the notional interest on the deposit was not includible.

Upon considering the rival submissions and the precedent set by the Full Bench of the Delhi High Court in CIT vs. Moni Kumar Subba (2011) 333 ITR 38 (Del) (SB), which held that no addition for notional interest under section 23(1)(a) is sustainable, the tribunal approved the CIT(A)'s view. Therefore, the tribunal dismissed all the appeals, upholding the decision that notional interest on an interest-free deposit is not includible in the calculation of the annual letting value of the property under section 23(1)(a) of the Income Tax Act.

In conclusion, the judgment clarifies the treatment of notional interest on security deposits for determining the fair rental value of a property under the Income Tax Act, aligning with the decision of the Delhi High Court and supporting the assessees' position in this case.

---