The High Court of Delhi has ruled that notional interest on security deposit provided against a lease agreement cannot be taxed as perquisite in the hands of the employee.
Mr. Vijay Singh (“respondent”) was the Managing Director of M/s. Sony Music Entertainment (India) Ltd (“the Company”) during the tax year 2000- 01 relevant to Income-tax assessment year 2001- 02. The Company entered into a lease agreement with B.P. (India) Ltd for leasing a property owned by them and paid security deposit of INR 31 million besides providing additional guarantee. This property was given to the respondent as rent free accommodation.
Subsequently, the respondent purchased the property and leased it to the company while continuing to occupy the property as a rent free accommodation. The terms of the lease deed were similar to the earlier instance except that there was no additional guarantee provided by the company to the respondent.
Upon resignation from Sony India, the respondent repaid the security deposit to the Company.
The Assessing Officer (AO) treated the security deposit as loan, computed notional interest on the same at 10% per annum and added the amount as taxable perquisite while completing the respondent’s assessment. The respondent went in appeal against the order of the AO which was decided in his favor by the Commissioner of Income Tax (Appeals) [CIT (Appeals)]. The revenue took the matter to the Income-tax Appellate Tribunal (ITAT) which rejected the appeal and upheld the order of the CIT (Appeals).
Aggrieved by this, the revenue filed an appeal before the High Court.
Issue before the High Court
Whether the CIT (Appeals) and ITAT were right in holding that notional interest on security deposit is not a taxable perquisite?
Contentions of the Revenue
Contentions of the Respondent
Ruling of the High Court:- The High court agreed with the position taken by the appellate authorities that the security deposit did not constitute a loan since it was paid to the respondent in his capacity as the owner of the accommodation and in pursuance of a lease agreement. Further, the court agreed with the observation of the ITAT that the respondent did not get undue benefit/ advantage as the terms of the lease were similar to the earlier agreement though he had not received the additional guarantee.
Key takeaways:- The judgement of the Delhi High court is relevant as it indicates that unless there is undue benefit/ advantage, no additional income can be taxed in employee’s hands.
Source: CIT Vs Vijay Singh (ITA No. 214/2008)(2010-TIOL-284-HC-DEL-IT)