2018 (2) TMI 1987 - AT - Income Tax

Income from House Property - Annual letting value of a property let out to a company where she is the Managing Director - Whether the receipt of interest-free security deposit by a taxpayer can be ignored while computing ALV of a property let out? - HELD THAT - The transactions must be viewed as a whole. It is not enough to examine the separate ingredients of a transaction; for the totality of a transaction may be different from the sum of its parts. Viewed as a whole, the transaction adopted by the assessee in the instant case was a device to reduce the tax burden. This is the germ of the pre-ordained series of transactions . The two issues i.e. Leave and License Fee and Security Deposit in the instant appeal are interconnected and part of the same transaction. To persuade the Tribunal to adopt, in relation to closely integrated situation, a step by step, dissecting approach, would be a denial rather than an affirmation of the true judicial process. We find from the list of Directors of Asit C. Mehta Investment Intermediates Ltd, given to us by the Ld. counsel in response to a query by us, that the assessee (Licensor) is the Managing Director in Asit C. Mehta Investment Intermediates Ltd (Licensee). The receipt by the assessee as interest-free security deposit from the licensee-company in which she herself is the Managing Director cannot be ignored while computing the annual letting value. Security deposit in the instant case is to circumvent real rent and the same shall fall within the ambit of Income from House Property . Taking into account the facts and circumstances of the case against the backdrop of interest rate on term deposits offered by Public Sector Banks during the relevant period, we direct the AO to estimate interest on security deposit @ 9% in place of 10% on the amount done by him and bring the resultant amount as well as the leave and license fees to tax under the head Income from House Property . - Decided partly in favour of assessee.

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 Value
The 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 ?2,75,00,000/- for the office premises let out. The AO calculated notional interest at 10% on this deposit, adding ?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 Tenant
The 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 Deposit
The 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.

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