Monday, April 13, 2015

Interest paid on refundable deposits of tenants is allowable u/s 24 if deposits are used to repay housing loan

Interest paid on refundable security deposits received from tenants is allowable under section 24(b) if deposits are used to repay loan taken for purchase of house property.

a)The assessee had purchased immovable property after utilizing the unsecured loan taken from Reliance Industries ltd.

b)Thereafter, properties were let out and in terms of agreement refundable security deposits were received from tenants. These deposits were interest bearing where the assessee had to pay interest @ 6%. These deposits were utilized for the repayment of loan taken form the Reliance industries.

c)Assessee claimed deduction under Section 24(b) for interest paid on refundable deposits received from tenants on the ground that it was borrowed capital utilized for the repayment of old loan.

d)The Assessing Officer disallowed interest under section 24(b) but the CIT(A) allowed the claim of assessee. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In order to decide issue of allowance under Section 24(b) it had to be decided as to whether refundable deposits received from tenants could be reckoned as "borrowed capital" within the meaning of section 24(b)?. The word "borrow" as defined in Law lexicon (2nd edition) means to take or receive from another person as a loan or on trust money or other article of value with the intention of returning or giving an equivalent for.

2)A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and are to be refunded back, then debt is created on the assessee which is liable to be discharged in future.

3)Here the concept of debt had to be understood as per the terms of the parties. If the deposits had been security deposits simplicitor to cover the damage of the property or lapses on part of the tenant either for non-payment of rent or other charges, then such a deposit could not be equated with the borrowed money, because then there was no debt on the assessee.

4)The moment a deposit is accepted on interest, then it partakes the character of borrowed money. It was an undisputed fact that these interest bearing deposits had been utilized for repayment of borrowed capital. Thus, interest paid on refundable deposits would be deductible under Section 24(b). – ITO V. STRUCTMAST RELATOR (MUMBAI) (P.) LTD. [2015] 56 107 (Mumbai - Trib.)
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