Service tax cannot be levied on notional interest calculated on security deposits collected from tenants for rental properties

CESTAT NEW DELHI held that service tax cannot be levied on notional interest calculated on security deposits collected from tenants for rental properties. Following the Division Bench decision in Murli Realtors, the tribunal determined that only rent constitutes consideration for property leasing and is subject to service tax, while notional interest on security deposits falls outside the tax levy scope. The Commissioner (Appeals) orders imposing service tax on notional interest for April 2007 to September 2012 were set aside, and the appeals were allowed.

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Issues involved: Whether service tax can be charged on notional interest towards security deposit taken by the appellant against rental property.

The issue in these four appeals is whether the Department could have charged service tax on the notional interest towards security deposit taken by the appellant against the rental property. The appellant had rented out immovable properties and collected interest-free security amount from tenants, which was required to be refunded when tenants vacated the property. The Department believed that the notional interest earned by the appellant on the refundable deposit was liable to be included in the taxable value of services provided by the appellant u/s 67 of the Finance Act, 1994. The appellants contended that notional interest should not be considered as a consideration for service tax purposes. The Commissioner (Appeals) upheld the Department's decision, leading to the filing of appeals by the appellants.

The appellant argued that the advances received were interest-free security deposits and did not impact the rental charges collected. They relied on the provisions of section 67 of the Finance Act and a Division Bench decision of the Tribunal to support their contention. The authorized representative for the Department supported the decision of the Commissioner (Appeals) and argued against interference in the appeals. The Tribunal considered the submissions of both parties and examined section 67 of the Finance Act, which defines "consideration" for taxable services.

A Division Bench of the Tribunal in a similar case held that only consideration received in money for the service rendered is liable to service tax. The security deposit serves a different purpose and is not a consideration for leasing the property. Therefore, notional interest on the security deposit cannot be subject to service tax. Based on this precedent, the Tribunal concluded that service tax could not be levied on the notional interest calculated by the Department on the security deposit collected by the appellant. Consequently, the orders passed by the Commissioner (Appeals) were set aside, and the appeals were allowed.

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