2017 (3) TMI 265 - AT - Income Tax

Adding notional interest on the interest free deposit received from the tenant in order to determine annual value of the property for the purposes of section 23 - Held that - Section 23(1)(a) of the Act relates to the manner of determination of annual value of the property for the purpose of section 22 of the Act. Section 23(1)(a) relates to the determination of the annual letting value of such property and speaks of the sum for which the property might reasonably be expected to let out from year to year. Quite clearly what is envisaged in section 23(1)(a) of the Act is the probable rent which the property is expected to earn but certainly it does not envisage consideration of any notional interest on any security deposit that may be placed by tenant with the landlord as a part of the terms and conditions of letting out of such a property. In the facts of the present case before us, it is clear that the deposit received from the tenant has been kept in fixed deposit by the assessee which has yielded interest income of ₹ 10,28,644/- and such sum is lying credited to the Profit and loss account of the assessee, therefore, the benefit derived from the deposit received from the tenant is very much part of the total income declared by the assessee. Hence, there is no scope for making any addition on account of so called notional interest on the deposit while determining the annual value of the property for the purpose of section 23 of the Act. Delete the impugned addition and accept the income as declared by the assessee under the head income from house property on account of rent earned on the property leased to Deutsche Bank. - Decided in favour of assessee Nature of interest income earned by the assessee - Held that - The orders of the authorities below do not require any interference in as much as factually it has been made out by the AO that no activity of giving loans and advances has indeed been carried out and, therefore, the impugned interest income has been correctly taxed as income from other sources . Notably interest has been earned on the fixed deposit kept with the bank and the source of such deposit is the security deposit received from the tenant. Under these circumstances, we confirm the stand of the AO that interest income is liable to be taxed as income from other sources . - Decided against assessee Expenses local travel and conveyance and commission expenses - Held that - The expenses in question are necessary to sustain the corporate entity and, therefore, the same deserve to be allowed while computing the total income. Accordingly, we direct the AO to allow the aforesaid expenses while computing the total income. - Decided in favour of assessee

Summary

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 ?14,81,130/-. The appellant company had leased its premises to Deutsche Bank and credited rental income of ?2,58,667/-. The AO noted a low monthly rent of ?40,000/- and an interest-free deposit of ?4,28,29,693/- from the tenant. The AO added notional interest on the deposit to the rent, resulting in a gross rent of ?22,21,694/- and an income of ?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 ?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.