Can notional interest assessed by AO on interest free deposit received by an assessee in respect of a shop let out on rent be brought to tax as “Business income” or “Income from house property”?

Can notional interest assessed by AO on interest free deposit received by an assessee in respect of a shop let out on rent be brought to tax as “Business income” or “Income from house property”?

Case Law: CIT v. Asian Hotels Ltd. (2010) 323 ITR 0490 (Del.)

Facts

The assessee had received interest free deposit in respect of shops given on rent. The Assessing Officer added to the assessee's income notional interest on the interest free deposit at the rate of 18 per cent simple interest per annum on the ground that by accepting the interest free deposit, a benefit had accrued to the assessee which was chargeable to tax under section 28(iv).

The High Court held that section 28(iv) of Income-Tax Act is concerned with business income and brings to tax the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. Section 28(iv) can be invoked only where the benefit or amenity or perquisite is other than cash. In the instant case, the Assessing Officer has determined the monetary value of the benefit stated to have accrued to the assessee by adding a sum that constituted 18 per cent simple interest on the deposit. Hence, section 28(iv) is not applicable.

Section 23(1)(a) deals with the determination of the annual letting value of such property for computing the income from house property. It provides that the annual letting value is deemed to be the sum for which the property might reasonably be expected to be let from year to year. This contemplates the possible rent that the property might fetch and certainly not the interest on fixed deposit that may be placed by the tenant with the landlord in connection with the letting out of such property.

Thus, the notional interest is not assessable either as business income or as income from house property.