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Facts
The assessee filed appeals against reassessment orders that added notional rent based on interest from security deposits. A search revealed rent agreements for properties with very low rent compared to market rates, suggesting a colorable device to reduce tax liability.
Held
The Tribunal held that notional interest on interest-free security deposits cannot be considered as part of the actual rent under Section 23(1) of the Income Tax Act. Therefore, the lower authorities' action of adding this notional interest as income from house property was reversed.
Key Issues
Whether notional interest on interest-free security deposit can be treated as deemed rent under Section 23(1) of the Income Tax Act.
Sections Cited
147, 143(3), 23(1), 28, 24
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Income Tax Appellate Tribunal, DELHI BENCH ‘SMC’, NEW DELHI
Before: Sh. Satbeer Singh Godara
Asstt. Year : 2020-21 : Asstt. Year : 2021-22 Idhayam Infraheights Pvt. Ltd., Vs DCIT, Shop No. 2, Second Floor, Lajpat Central Circle, Nagar-II, New Delhi-110024 Faridabad, Haryana-122001 (APPELLANT) (RESPONDENT) PAN No. AAACD9391G Assessee by: Sh. Nikhil Sharma, Adv. Revenue by : Sh. Manoj Kumar, Sr. DR Date of Hearing: 27.11.2025 Date of Pronouncement: 04.12.2025 ORDER These assessee’s twin appeals in & 6779/Del/2025 for Assessment Years 2020-21 & 2021-22, arise against the CIT(A)-3, Gurgaon’s in case Nos. 10948/2019-20 and 10308/2020-21 both dated 11.08.2025, in proceedings u/s 147/143(3) of the Income Tax Act, 1961 (in short “the Act”), respectively.
Heard both the parties at length. Case files perused.
It emerges during the course of hearing that the assessee/appellant herein is aggrieved against the learned CIT(A)’s action upholding the assessment findings adding notional rent(s) of Rs.34,00,000/- and Rs.29,12,000/-; respectively, reading as under:
& 6779/Del/2025 Idhayam Infraheights Pvt. Ltd. “4. The above-mentioned appeals have been filed by the appellant in connection with reassessment orders passed by Dy. Commissioner of Income Tax, Central Cir- 2, Faridabad making addition on account of notional rent of Rs.34,00,000 and Rs 29,12,000/- for AY 2020-21 and 2021-22 respectively. There was a search in the case of VDM group on 09.02.2022 and during search in the office premises of Shri Rohit Jain at 11A-11B, Atmaram House, Tolstoy Marg, New Delhi, rent agreements were seized as Annexure A-7. The society M/s Takshila Education Society had rent agreement with M/s Idhayam Infraheights Pvt Ltd (for rent of Basement, C-404, Defence Colony) and also with M/s Harmonia Consultants Pvt Ltd (the appellant) (for rent of Ground floor, C-404, Defence Colony), both companies having common addresses C- 404, GF, Defence Colony, New Delhi- 110024 and common issues are involved vide separate appeals for AYs 2020-21 and 2021-22. I have carefully examined the various orders, submissions and material available on record.
5. Ground of appeal no. 1 and 2 4.1 The appellant had a rent agreement with M/s Takshila Educational Society commencing from 01.04.2019 @ Rs 5,000/- per month and had earlier paid Rs.4,00,00,000/- as security to the appellant, M/s Idhayam Infraheights Pvt. Ltd. The appellant has argued non applicability of the section 23(1) for calculation of annual value of property and also section 28 as business income. The appellant further states that order is arbitrary and illegal based on jurisdiction also. The case was centralized by PCIT-1, Kolkata as per powers as per law and signatures of ACIT [Hqrs] for PCIT-1, Kolkata is valid in the eyes of law and no infirmity is found on this ground. Moreover, the appellant participated in the reassessment proceedings without raising any sort of objection. Further, the issue of validity of the communications by PCIT not containing DIN number if any has been stayed by Hon'ble Supreme Court in the case of Brandix Mauritius Holding Ltd. 4.2 Regarding basis of making addition, it is seen that department has unearthing the transaction through a rent agreement, which was seized during the search and the transaction mentioned in the agreement itself prove that it is very much incriminating in nature. The AO has incorporated pictures of luxurious property measuring 325 sq. yards situated in Defence Colony, New Delhi fetching merely Rs.5,000/- which is far less that the actual fair rent.
& 6779/Del/2025 Idhayam Infraheights Pvt. Ltd. 4.3 The appellant is enjoying the fruits of security deposits year after year, which is refundable and not a onetime receipt or income of the appellant. The rent agreement is getting renewed at regular intervals since 2013 and latest agreement was renewed wef 01.04.2019 for two years period. Thus, each time same security deposit amount of Rs 4 crores given originally is made part of the rent agreement, which clearly establishes that apart from Rs 5,000 monthly rent as per agreement, the interest amount on security deposit is tacitly construed to be income of the appellant by way of a colourable device in the form of such agreement. The AO has clearly pointed out comparative rentals in Defence Colony area of New Delhi and a rent of Rs 2.50 to 3.00 lakh per month for the size of the property could be fetched. The AO has been reasonable in taking interest rate of SBI in arriving at the income not offered to taxation by this rental agreement. Further claim of deduction u/s 24 @ 30% cannot be allowed as the same was not claimed originally suo moto. 4.4 The appellant has relied on various case laws including Asian Hotels case, but appellant's facts are different as discussed above. I also place reliance on the decision in the case of Sobha Interiors (P.) Ltd Vs DCIT [2016] 76 taxmann.com 275 (Bangalore - Trib.), wherein the Hon'ble tribunal held that while computing ALV of house property let out by assessee, notional interest on interest free security deposit has to be taken into consideration - Held, yes [In favour of revenue]. Similarly, regarding adopting a colourable rent agreement, in the case of Pramila Estates (P.) Ltd Vs ITO [2009] 27 SOT 133 (Mumbai) the rent fixed in agreement was found to be abnormally low as compared to market rent and it was concluded that the rent agreement between assessee-company and 'R' was generated as a device not only to reduce tax liability of assessee- company but also with a view to allow 'R' to enjoy fruits of property of assessee-company and the addition made on account of deemed rent added was sustained. 4.5 The onus was upon the appellant to furnish a satisfactory explanation for the same; such onus has not been discharged during appellate proceedings as well. Therefore, it is held that the AO was justified in making such addition. Thus, the addition made by the AO on account of the interest on Rs.4,00,00,000/- based on prevalent SBI rates treating the same as the deemed rent received by the appellant, is held to be reasonable and fair and after adjusting rent already shown, the addition of notional & 6779/Del/2025 Idhayam Infraheights Pvt. Ltd. rent amounting to Rs.34,00,000 and Rs. 29,12,000/- is hereby confirmed for AYs 2020-21 and 2021-22 respectively.
5. Ground of appeal
No. 5 is general in nature.
6. In result, both the appeals are hereby dismissed.” 3.1 This is what leaves the assessee aggrieved.
I have given my thoughtful consideration to the assessee’s and the Revenue’s respective vehement submissions. It is made clear that what all both the learned authorities have done is to add notional interest on the assessee’s interest free security deposit(s) amounting to Rs.4,00,00,000/-, as deemed rent u/s 23(1) of the Act which is over and above the actual rent agreed between the parties amounting to Rs.5,000/- per month. That being the case, the Revenue could hardly dispute that case law (2011) 333 ITR 38 (Delhi) (FB) CIT Vs. Moni Kumar Subba has already settled the very issue in the assessee’s favour and against the department that such a notional interest could not form part of the actual rent u/s 23(1) of the Act. I accordingly draw strong support therefrom to reverse both the learned lower authorities’ action adding the impugned notional interest income as income from house property in the assessee’s hands.
No other ground or argument has been pressed.