Notional interest on security deposit received from lessee is not taxable even during the period when the property was sold, but the deposit continued with the lessee as the lease agreement had lock-in clause Only the incomes which fall under the deemed provisions which have been explicitly mentioned in the Act can be brought to tax under the deeming provisions but not any other notional or hypothetical income not envisaged by the Act

8. Harvansh
Chawla vs. ACIT (Delhi) Sushma Chowla (V.P.) and Dr. B.R.R. Kumar (A.M.) ITA No.
300/Delhi/2020 A.Y.: 2017-18 Date of
order: 3^rd June, 2020

Counsel for Assessee / Revenue: Rohit Tiwari / Anupam Kant Garg

Notional interest on security deposit received
from lessee is not taxable even during the period when the property was sold,
but the deposit continued with the lessee as the lease agreement had lock-in
clause

Only the
incomes which fall under the deemed provisions which have been explicitly
mentioned in the Act can be brought to tax under the deeming provisions but not
any other notional or hypothetical income not envisaged by the Act

FACTS

The assessee
owned a property in DLF, Phase-II, Gurgaon against which he received a security
deposit of Rs. 5,29,55,200 for leasing the same. During the year, no rent was
offered to tax and on inquiry it was found that the said property had been sold
for Rs. 2.75 crores in the year 2013-14, hence no income from rentals was
offered. However, the assessee continued to hold the security deposit of Rs.
5.29 crores as the lease agreement had a lock-in period.

The A.O.
charged to tax a sum of Rs. 63,54,632 under the head ‘Income from Other
Sources’ being the amount deemed to have been derived from such security
deposit.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who confirmed the action of the
A.O. on the ground that the assessee is benefited by way of having the deposit
still lying with him.

The assessee
then preferred an appeal to the Tribunal.

HELD

The Tribunal
observed that –

(i)   the issue before it is whether notional
interest is taxable as per the provisions of the Act or not;

(ii)  the issue as to how to treat the security
deposit after the completion of the lock-in period is not the issue
before it;

(iii) the A.O. has not brought forth anything about
earning of interest by the assessee which has not been offered to tax;

(iv) the addition was on the sole premise that the
assessee having the security deposit must have earned the interest.

The Tribunal
held that in order to tax any amount, the Revenue has to prove that the amount
has indeed been earned by the assessee. Only the incomes which fall under the
deemed provisions which have been explicitly mentioned in the Act can be
brought to tax under the deeming provision but not any other notional or
hypothetical income not envisaged by the Act. The Tribunal directed that the
addition made by the A.O. on account of notional income on the security deposit
cannot be held to be legally valid.