2015 (4) TMI 584 - AT - Income Tax

Income from house property - Deduction of Interest paid on security deposit received from the tenants - Interest bearing deposits - Held that - Generally under a lease agreement, the security deposits are taken as an advance of rent of a certain period which are generally not interest bearing. Here in this case the deposits received from various tenants are more than 100 times of the arrival rent amount. These deposits have been taken/accepted on a payment of interest @ 6% per annum and deposit is to be refunded back by the assessee. Now, whether such a deposit can be reckoned as borrowed capital within the meaning of section 24(b). The word borrow as defined in Law lexicon (2nd edition) means to take or receiving from another person as a loan or on trust money or other article of value with the intention of returning or giving an equivalent for. A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and is to be refunded back, then debt is created on the assessee which it is liable to be discharged in future. Here the concepts of debt has to be understood as per the terms of the parties. If the deposits had been security deposit simplicitor to cover the damage of the property or lapses on part of the tenant either for non-payment of rent or other charges, then such a deposit cannot be equated with the borrowed money, because then there is no debt on the assessee. A moment a deposit is accepted on interest, then it part takes the character of borrowed money. It is an undisputed fact here that, these interest bearing deposits has been utilized for repayment of borrowed capital. Accordingly, finding of the Ld. CIT(A) in this regard is affirmed. Ground raised by the Revenue are dismissed. - Decided against the revenue.

Summary

Issues:
- Deduction of interest claimed by the assessee u/s 24(b) on security deposits received from tenants.

Analysis:
1. The Revenue challenged the deduction of interest claimed by the assessee u/s 24(b) on security deposits received from tenants. The Assessing Officer (AO) disallowed the interest deduction, stating that security deposits cannot be considered as capital borrowed for the purpose of repayment of old loan. The AO examined the agreements between the assessee and tenants, noting the interest-bearing nature of the deposits. Consequently, the AO held that such interest is not allowable as a deduction u/s 24(b.

2. The assessee provided details of borrowings made in the Financial Year 2006-07, including loans and deposits. In the A.Y. 2008-09, the assessee accepted further deposits, which were utilized to repay the balance of the earlier loan. The Ld. CIT-(A) allowed the deduction of interest u/s 24(b) after considering the interest-bearing nature of the security deposits. The CIT-(A) emphasized that if interest is payable on an amount repayable, such interest expense is deductible u/s 24(b), regardless of the term used for the borrowed amount.

3. The Ld. CIT-(A) observed that the security deposits, being interest-bearing and utilized for the repayment of the original loan, constituted borrowed capital or loans. The balance sheet supported the claim that the deposits were used solely for loan repayment. The Ld. CIT-(A) concluded that interest paid on such deposits should be allowed as an expenditure u/s 24(b) of the Act.

4. The Revenue contended that the deposits received from tenants were not equivalent to loans, as they were in exchange for property usage. However, the Ld. CIT-(A) and the assessee argued that the deposits, being interest-bearing and utilized for loan repayment, should be treated as loans. The Tribunal affirmed the Ld. CIT-(A)'s findings, emphasizing that interest-bearing deposits utilized for loan repayment qualify as borrowed capital, warranting the allowance of interest deduction u/s 24(b).

5. The Tribunal upheld the Ld. CIT-(A)'s decision, noting that the interest-bearing security deposits, exceeding 100 times the monthly rent, were indeed borrowed capital. The Tribunal emphasized that when deposits bear interest and are to be refunded, they create a debt on the assessee, qualifying as borrowed money. As the deposits were utilized for loan repayment, the interest deduction u/s 24(b) was deemed allowable. Consequently, the Revenue's appeal was dismissed.

In conclusion, the Tribunal affirmed the allowance of interest deduction u/s 24(b) on interest-bearing security deposits received from tenants, emphasizing the borrowed capital nature of such deposits utilized for loan repayment.