Notional Interest earned on the Security Deposit not to be taken into consideration while Computing total Rental Income: AAAR [Read Order]

The Karnataka Authority of Advance Rule (AAAR), while modifying the order passed by the AAR ruled that the notional interest earned on the security deposit not to be taken into consideration while computing total rental income.

The Appellant, M/s Midcon Polymers Pvt. Ltd. is engaged in the business of renting of commercial property on monthly rents and allied business. The Appellant intends to enter into a commercial agreement of renting of immovable property with educational institutions in Bangalore.

The contract is on the basis of the reserved monthly rent and also refundable caution deposit/security deposit. As per the terms of the contract, the deposit received shall be returned without interest on the termination of the tenancy.

The refund of the advance caution deposit does not in any way determine the quantum of rent or enhance the services. The Appellant also discharges the statutory taxes levied by the BBMP on the property and the property tax so paid is no way related to the supply of services.

In this regard, the Appellant approached the Authority for Advance Ruling (AAR) seeking a ruling on the question that for the purpose of arriving at the value of rental income, whether the applicant can seek deduction of property taxes and other statutory levies and for the purposes of arriving at total income from rental, whether notional interest on the security deposit should be taken into consideration. Whether the applicant is entitled for exemption of tax under the general exemption of Rs 20 lakhs.

The AAR held that the applicant cannot deduct the property taxes and other statutory levies for the purpose of arriving at the value of rental income. The notional interest on the security deposit shall be taken into consideration for the purposes of arriving at total income from rental, only if it influences the value of supply of RIS service i.e monthly rent.

“The applicant is entitled for exemption of tax under the general exemption of Rs 20 lakhs, subject to the condition that their annual turnover which includes monthly rent and notional interest, if it influences the value of supply, does not exceed the threshold limit,” the AAR added.

However, the coram consists of D.P. Nagendra Kumar and M.S.Srikar notified the AAR’s order and held that for the purpose of arriving at the value of rental income, Appellant cannot deduct the amount paid as property tax to the Municipal Authority or any other statutory levies levied under any law for the time being in force, other than the CGST, SGST, IGST and Compensation Cess, subject to the condition that it is charged separately by the Appellant.

The AAAR further held that for the purpose of arriving at the total rental income, the notional interest earned on the security deposit is not to be taken into consideration.

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