Income Tax Act, 1961, Section 23(1)

Annual value--Determination--Notional interest on interest free security deposit

Conclusion: Notional interest on interest free security cannot form part of actual rent under section 23(1).

A search was conducted in the case of a group, wherein some rent agreements were seized. From the seized documents, it was found that assessee-company entered into rent agreement with a society, named 'T' for renting of ground floor of a colony. Further, rent was fixed at Rs. 5,000 per month and 'T' had earlier paid Rs. 4,00,00,000 as security deposit to assessee. AO was of the view that rent Rs. 5,000 for such luxurious property was far less than actual fair rent. Accordingly, he added notional interest on interest free security deposit as deemed rent under section 23(1). CIT(A) observed that rent agreement was getting renewed at regular intervals. Thus, each time same security deposit given originally was made part of rent agreement, which clearly established that apart from monthly rent, the interest amount on security deposit was tacitly construed to be income of assessee by way of colorable device in the form of rent agreement. Further, AO clearly pointed out comparative rentals in the said colony and it was found that rent of Rs. 2.50 to 3 lakhs per month for such size of property could be fetched. Thus, AO was reasonable in taking interest rate of SBI in arriving at income not offered to taxation by rental agreement and hence, addition was upheld. Held: Revenue added notional interest on assessee's interest free security deposit as deemed rent under section 23(1), which was over and above the actual rent agreed between parties. That being the case, Revenue could hardly dispute that case law CIT v. Moni Kumar Subba 2011 TaxPub(DT) 0989 (Del-HC) already settled the very issue in the favour of assessee favour and against the Department, wherein High Court held that notional interest on interest free security deposit cannot form part of actual rent under section 23(1). Hence, impugned addition under section 23(1) was deleted.

Decision: In assessee's favour

Followed: CIT v. Moni Kumar Subba (2011) 333 ITR 38 (Delhi) (FB) : 2011 TaxPub(DT) 0989 (Del-HC)

IN THE ITAT, DELHI BENCH 'SMC'

SATBEER SINGH GODARA, J.M.

Idhayam Infraheights Pvt. Ltd. v. DCIT

ITA No. 6778/Del/2025

A.Y. 2020-21

ITA No. 6779/Del/2025

A.Y. 2021-22

4 December 2025

Assessee by: Nikhil Sharma, Adv.

Revenue by: Manoj Kumar, Sr. DR

ORDER

These assessee's twin appeals in ITA Nos. 6778 & 6779/Del/2025 for assessment years 2020-21 & 2021-22, arise against the Commissioner (Appeals)-3, Gurgaon's in Case Nos. 10948/2019-20 and 10308/2020-21 both dated 11-8-2025, in proceedings under section 147/143(3) of the Income Tax Act, 1961 (in short, "the Act"), respectively.

2. Heard both the parties at length. Case files perused.

3. It emerges during the course of hearing that the assessee/appellant herein is aggrieved against the learned Commissioner (Appeals) action upholding the assessment findings adding notional rent(s) of Rs.34,00,000 and Rs.29,12,000; respectively, reading as under:

“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 assessment year 2020-21 and 2021-22 respectively. There was a search in the case of VDM group on 09-2-2022 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 assessment years 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

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 Principal Commissioner 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.

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 with effect from 1-4-2019 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 assessing officer 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 assessing officer 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 under section 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. v. DCIT (2016) 76 taxmann.com 275 (Bangalore - Trib.) : 2016 TaxPub(DT) 4974 (Bang-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 v. ITO (2009) 27 SOT 133 (Mum) : 2009 TaxPub(DT) 1033 (Mum-Trib) 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 assessing officer as justified in making such addition.

Thus, the addition made by the assessing officer 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 rent amounting to Rs.34,00,000 and Rs. 29,12,000 is hereby confirmed for assessment years 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 under section 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  CIT v. Moni Kumar Subba (2011) 333 ITR 38 (Delhi) (FB) : 2011 TaxPub(DT) 0989 (Del-HC) 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 under section 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.

6. These assessee's twin appeals ITA Nos. 6778 & 6779/Del/2025 are allowed in above terms. A copy of this common order be placed in the respective case files. Order Pronounced in the Open Court on 4-12-2025.