Tribunal decision: Notional interest struck, interest income upheld, travel expenses allowed

The Tribunal partially allowed the appeal, setting aside the addition of notional interest for determining the annual value of the property, upholding the classification of interest income as "income from other sources," and allowing the deduction of expenses for local travel, conveyance, and commission. The decision was pronounced on 3rd March 2017.

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Issues Involved:
1. Determination of income under the head "income from house property."
2. Nature of interest income earned by the assessee.
3. Deduction of expenses related to local travel, conveyance, and commission.

Issue-wise Detailed Analysis:

1. Determination of income under the head "income from house property":
The primary issue concerns the determination of income under "income from house property," where the AO assessed the income at Rs. 14,81,130/-. The appellant company had leased its premises to Deutsche Bank and credited rental income of Rs. 2,58,667/-. The AO noted a low monthly rent of Rs. 40,000/- and an interest-free deposit of Rs. 4,28,29,693/- from the tenant. The AO added notional interest on the deposit to the rent, resulting in a gross rent of Rs. 22,21,694/- and an income of Rs. 14,81,130/- after statutory deductions. The CIT(A) upheld this decision. However, the Tribunal found that section 23(1)(a) of the Act does not envisage notional interest on security deposits for determining annual value. The Tribunal referenced judgments from the Hon'ble Delhi High Court and Hon'ble Bombay High Court, which supported this view. The Tribunal concluded that the AO's action was unjustified and directed the deletion of the impugned addition, accepting the income as declared by the assessee.

2. Nature of interest income earned by the assessee:
The second issue pertains to the nature of interest income, which the AO taxed as "income from other sources" instead of "business income." The AO noted that no business activity of advancing loans was carried out, and the income was primarily from interest on bank deposits. The CIT(A) upheld this view. The Tribunal agreed with the lower authorities, noting that the interest was earned on fixed deposits from the tenant's security deposit, thus confirming the AO's stand to tax the interest income as "income from other sources."

3. Deduction of expenses related to local travel, conveyance, and commission:
The final issue involves the deduction of expenses amounting to Rs. 2,95,174/- for local travel, conveyance, and commission. The AO denied these deductions, stating they had no direct nexus with earning interest income, and the CIT(A) confirmed this. However, the Tribunal found these expenses necessary to sustain the corporate entity and directed the AO to allow these expenses while computing the total income.

Conclusion:
The appeal resulted in a partial allowance. The Tribunal set aside the addition of notional interest for determining the annual value of the property, upheld the classification of interest income as "income from other sources," and allowed the deduction of expenses for local travel, conveyance, and commission. The order was pronounced on 3rd March 2017.

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