Notional interest on the interest free security deposit cannot be added to the value of taxable services

We are sharing with you an important judgment of Hon’ble CESTAT Mumbai in the case of Murli Realtors Pvt. Ltd. and others Vs. Commissioner of Central Excise Pune-II [2014-TIOL-1728-CESTAT-MUM]on the following issue:


Whether the notional interest on the interest free deposit can be added to the value of taxable services?

Facts and background:

Murli Realtors Pvt. Ltd. and others (“the Appellants”) are lessors of immovable property who have leased out their premises on long time lease ranging from 5 to 10 years and in consideration receiving lease rentals on a monthly basis. In addition to these rentals, they are also taking interest free security deposits from the lessees which vary from six months’ rent to one year’s rent (“security deposits”)to secure default in payment of rentals, default in payment of utility charges, if any, and damage caused to the property other than the usual wear and tear. These deposits are returned to the lessee at the end of the lease period.

The Department contended that the taking of security deposit has suppressed the lease rentals and, therefore, notional interest at the rate of 18% of the deposit should be added to the rent received and Service tax should be payable on the notional interest on the security deposit.

The Hon’ble CESTAT, Mumbai relied upon the following judgments:

  • Moriroku UT India (P) Ltd. Vs. State of UP [2008 (224) ELT 365 (SC)];
  • Commissioner of Income Tax Vs. J.K. Investors (Bombay) Ltd. [248 ITR 723 (Bom.)];
  • Central Excise, Mumbai -III Vs. ISPL Industries Ltd. [2003 (154) ELT 3 (SC)];
  • Intercontinental Consultants and Technocrafts Pvt. Ltd. Vs. Union of India &Anr. [2012-TIOL-966-HC-DEL-ST]


The Hon’ble CESTAT,Mumbai held that there is no provision in Service tax law for deeming notional interest on security deposit taken as a consideration for leasing of the immovable property. Therefore, in the absence of a specific provision in law there is no scope for adding any notional interest to the value of taxable service rendered. It was further held by the Hon’ble Tribunal that in the absence of any evidence being adduced by the Revenue to show that the security deposit taken has influenced the price i.e. the rent in any way, it is not possible to conclude that the notional interest on the security deposit would form part of the rent.

(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email:

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October 2020