By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi Chartered Accountants
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Section 24(b) of the Income-tax Act, 1961 – The interest bearing security deposits partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.
FACTS
During the year under consideration, the assessee, who was engaged in the business of builders and developers, had taken an interest-free loan of Rs. 11 crore from ‘R’ for a short period to purchase an immovable property which was then let out to various tenants. The assessee received deposits from them whereon it had to pay interest at the rate of 6% p.a. These deposits were utilised for the repayment of loan taken from the ‘R’. The assessee claimed deduction of interest u/s. 24(b).
The A.O. disallowed the deduction u/s. 24(b) on the grounds that interest should be payable on capital borrowed or the capital borrowed must be for the purpose of repayment of old loan. He held that the security deposits cannot be termed as capital borrowed for the purpose of repayment of old loan.
CIT(A) holding in favour of assessee stated that such deposits were in fact a kind of loan only, as they bore interest and were utilised for the purpose of repayment of original loan taken for the purchase of house property.
On Revenue’s Appeal-
HELD
It is an undisputed fact that interest at 6% is payable on these refundable deposits under consideration which were taken to repay the original loan. The controversy is whether these deposits can be considered as borrowed money and accordingly whether interest on the same should be allowed u/s 24(b) to the assessee or not.
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 the same. A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and are to be refunded, then a debt is created on the assessee which it is liable to be discharged in future.
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. However in the given case, it is clear that the intention of taking the deposit is not so.
It was held in favour of the assessee that the moment the security put is accepted on interest, it partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.
