2020 (9) TMI 86 - AT - Income Tax

Taxability of notional interest - Income from House Property - Rental income - Taxability under Income tax Act - HELD THAT - The issue of as to how to treat the security deposit after the completion of the lock-in-period is not the issue before us. AO has not brought anything about earning of the interest by the assessee which has not been offered to tax. The addition was on the sole premise, that the assessee having the security deposit must have earned the interest. In order to tax any amount, the revenue has to prove that the amount as indeed been earned by the assessee. Only the incomes fall under the deemed provisions which have been explicitly mentioned in the Income Tax Act can only be brought to tax under the deeming provision but not any other notional or hypothetical income not envisaged by the Act. Hence, we hereby direct that the addition made by the Assessing Officer on account of notional income on the security deposit cannot be held to be legally valid. Appeal of the assessee is allowed.

Summary

Issues:
1. Validity of the order passed by the Ld. Commissioner of Income Tax (Appeals)
2. Taxability of notional interest on security deposit
3. Approval of Addl. CIT u/s 153BD of the Income Tax Act
4. Charging of interest u/s 234A, 234B, 234C, and 234D of the Act
5. Penalty proceedings u/s 271AAB of the Act

Analysis:

1. The appeal was filed against the order of the Ld. CIT (A), with the assessee challenging several grounds. The Ld. AR submitted that only one substantial ground, related to the addition of notional interest on a security deposit, would be argued, while other grounds were not pressed.

2. The case revolved around the tax treatment of a security deposit received by the assessee for leasing a property. The Assessing Officer added a deemed interest amount derived from the security deposit to the assessee's income under the head "income from other sources." The Ld. CIT (A) upheld the addition, stating that the assessee benefited from retaining the deposit.

3. During the Tribunal hearing, the Ld. AR argued against taxing notional interest on the security deposit, citing legal precedents. The Ld. Departmental Representative contended that the addition was justified due to the benefit received by the assessee from the deposit, linking it to a search and seizure operation.

4. The Tribunal deliberated on whether notional interest on the security deposit was taxable under the Income Tax Act. It emphasized that the revenue must prove actual income earned by the assessee to tax it, not hypothetical or notional income. The Tribunal ruled that the addition of notional income on the security deposit was not legally valid, as it was not explicitly provided for in the Act.

5. Consequently, the Tribunal allowed the appeal of the assessee, setting aside the addition of notional interest on the security deposit. The judgment highlighted the necessity for income to fall under explicit deeming provisions in the Act to be taxable, rejecting the taxation of hypothetical income.

This detailed analysis of the judgment provides a comprehensive overview of the issues raised, arguments presented, and the Tribunal's decision in the case.