2018 (2) TMI 1987 - AT - Income Tax

Tribunal allows appeal, adds notional interest to income from property, stresses transactional assessment for taxes.

Mrs. Deena Asit Mehta Versus DCIT-4 (1) (1) Mumbai

Mrs. Deena Asit Mehta Versus DCIT-4 (1) (1) Mumbai - TMI Issues Involved:1. Whether the receipt of interest-free security deposit by a taxpayer can be ignored while computing the annual letting value of a property let out to a company where she is the Managing Director.2. Whether the provisions of section 23 of the Income Tax Act are applicable to the assessee who is not the owner of the property but a tenant.3. Whether the notional interest on the interest-free security deposit should be added to the income of the assessee.Detailed Analysis:Issue 1: Interest-Free Security Deposit and Annual Letting ValueThe core issue revolves around whether the interest-free security deposit received by the assessee should be considered while computing the annual letting value of the property. The assessee received a security deposit of Rs. 2,75,00,000/- for the office premises let out. The AO calculated notional interest at 10% on this deposit, adding Rs. 27,50,000/- to the assessee's income. The CIT(A) upheld this addition, stating that the deposit was disproportionate to the leave and license fees received and lacked substantiation that it was used for business purposes. The Tribunal, referencing the case of CIT vs. Streetlite Electric Corporation, concluded that such deposits could be considered to circumvent real rent, thus falling under ‘Income from House Property’. The Tribunal directed the AO to estimate interest at 9% instead of 10% on the deposit amount.Issue 2: Applicability of Section 23 to a TenantThe assessee argued that since she was not the owner but a tenant of the premises, the provisions of section 23, which deal with the determination of annual letting value, were not applicable. The CIT(A) disagreed, stating that the assessee sub-let the property and received a significant security deposit, which should be considered for computing the annual letting value. The Tribunal upheld this view, emphasizing that the transaction must be viewed as a whole and that the security deposit and leave and license fees were interconnected.Issue 3: Notional Interest on Security DepositThe assessee contended that there are no provisions in the Income Tax Act, particularly in section 56, enabling the AO to work out notional interest on the security deposit. The Tribunal, however, found that the interest-free deposit was a device to reduce taxable income. It followed the precedent set by the Punjab and Haryana High Court, which held that where security deposits are used to circumvent real rent, notional interest should be included as income from house property. Consequently, the Tribunal directed the AO to estimate interest at 9% on the security deposit and include it in the taxable income.Conclusion:The appeal was partly allowed, with the Tribunal directing a revised calculation of notional interest at 9% on the security deposit, to be added to the income under the head ‘Income from House Property’. This decision underscores the importance of considering the totality of transactions and the interconnected nature of security deposits and rental income in tax assessments.