MUMBAI: An attempt by a
Cuffe Parade property owner
to reduce the burden of income tax by declaring rent as low as Rs 25,000 has been dismissed by the Income tax Appellate Tribunal (
). The man rented out the posh property to a bank.
ITAT upheld the department’s view that it was an income tax reduction device and also the addition of income of Rs 2 lakh per month as rent from the flat.
Jaikishan Vaswani, a non-resident, received an interest-free security deposit of Rs 4 crore from Bank of America and reflected 25,000 as monthly rent during 2009-10, the year for which the matter was heard by ITAT. In an earlier year, the bank had paid him Rs 2 lakh per month as rent.
The I-T department held that Vaswani was compensated for loss of rent by way of an interest-free security deposit from the tenant. It was merely an I-T reduction device. Also, the deposit was advanced interest-free to family members. Thus, no income was reflected against the deposit.
Based on the facts of the case, especially as no plausible explanation was given as regards the drastic reduction in rent, ITAT in its order, dated January 3, upheld the action of the I-T officer concerned to consider Rs 2 lakh per month as rental income for the flat for 2009-10.
Since many flat owners give their second home on rent and also seek a security deposit, it is essential to understand the related I-T issues.
Gautam Nayak, tax partner at CNK & Associates, said, “The security deposit must be reasonable and as per normal practice and not abnormally high. The gamut of transactions should not lead to the conclusion that the objective is to substantially reduce I-T liability.”
Real estate brokers say lease agreements vary from 11 months to three years. Typically, the eleven-month agreements are renewed each year.
There is no standard practice and security deposit asked for is equal to rent of 3-6 months or can even be an upfront 11-month rental.
Nayak said, “If the security deposit is equal to the rent of several months (beyond say 3-6 months), it cannot outright be considered abnormal. One has to look to what extent rent has been depressed due to such a security deposit. If rent is much reduced, it’s possible that I-T authorities would consider fair rent.” Fair rent is rent which a property can fetch (the ceiling limit for fair rent is the municipal rateable value).
Bombay high court, in 2014, in the case of Tip Top Typography, held that I-T authorities can disregard the rent actually received by the flat owner and adopt fair (market) rent only when the arrangement is found to be a sham, Nayak said.
TOI looked at a few instances where the deposit being asked for was higher than a 6-month rental. A flat owner in Bandra was asking for a security deposit equal to 11 months’ rental. His reasoning: it was a furnished flat and the previous tenants had caused considerable damage. This time he wanted any damages to be adjusted against the security deposit at the time of repayment. This was clearly outlined in the lease agreement template.
There was no drop in rent. Estate agents say a higher security deposit is also asked for when there is apprehension that the tenant may not readily vacate on the expiry of lease.