The Hindu Business Line : Use of interest-free deposit from tenant = rent

But the case of Tivoli Investment and Trading Co P Ltd, that came up before the Mumbai Bench of Income-tax Appellate Tribunal was different. The Tribunal held that the use or enjoyment of deposit could be considered rent where no rent was paid or where excessive deposit was made.

The case assumes importance because of a new fiction introduced in the computation of rental income, and also because such deposits are only all too a norm. Tracing the case, you'd learn that Tivoli rented out its premises in the seventh floor of a building in Nariman Point to Citibank for a period of 10 years "on leave and licence basis". Licence fee or compensation was agreed as Rs 9,825 per month and that was to include "all present taxes and outgoings".

A deposit agreement was also executed to run concurrently with the lease, and as per that Citibank was to pay Tivoli Rs 1.54 crore "by way of security deposit", interest-free.

Tax provisions on computation of income from house property speak of `annual value' as the basis. For this, the company's counsel Mr S.E. Dastur produced a letter given by the builders that the rateable value was Rs 10,200.

It was also argued on behalf of the company that the `licence fees' or Rs 9,825 could be treated as income, instead. The Tribunal observed that for the purpose of determining annual value, one had to compute the notional income the property might fetch in a year. For this, the material presented was not `cogent' stated the Tribunal. And the `rateable value' of Rs 10,200 was "ridiculously low".

Therefore, using as input the rate at which rent was paid in the ground and first floors of the same building, the Assessing Officer had computed the rental income to be Rs 19.65 lakh.

To decide the case the Tribunal considered whether there was any benefit in lieu of rent - a question that became necessary because the `Rs 9,825 per month' was "towards the payment of taxes and outgoings," and as the Tribunal noted, "no separate amount of licence fee or rent was anywhere stipulated in the agreement." The rateable value of Rs 10,200 was also too `ridiculously low' to be relied upon. As if to constrain, there was a judgment of the Bombay High Court in the J.K. Investors case that notional interest would not form part of actual rent received or receivable.

However, the Tribunal stated: "The facts of the present case are totally different from the facts of the cases referred."

Rationale of the ruling is this: "But if there is no rent paid and in lieu of that rent excessive deposit is being made, the usufructus of the said deposit may be considered as rent."

In retrospect, therefore, it may seem that a carefully crafted lease agreement to avoid taxes failed merely because of shaving off rent totally in the monthly payments by Citibank. Perhaps, it would have made significant difference if only some amount had been shown as rental payment.

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Use of interest-free deposit from tenant = rent