Structmast Realtors (Mumbai) Pvt. ... vs Department Of Income Tax

This appeal has been filed by the Revenue against order dated 27.09.2012, passed by Ld. CIT-13, Mumbai for the quantum of assessment passed u/s 143(3) for the A.Y. 2009-10, vide which following grounds have been raised:-

"i) The Learned CIT(A) has erred in law and on facts in treating the interest bearing refundable security deposits received from Tenats as "Capital borrowed" for the purpose of Sec. 24(b) of the I.T. Act 1961.

ii) The Learned CIT9A) has erred in law and on facts not considering the provision u/s 24(b) of the Act wherein interest paid on money borrowed for the purpose of repaying old loan and not an interest paid on security deposits from tenants.

ITA No. 6920/Mum/2012 2 Assessment Year: 2009-10

iii) The Learned CIT(A) has erred in law and on facts in allowing interest paid on 'Security Deposit' from tenant u/s. 24(b) of the I.T. Act

iv) The Learned CIT(A) has erred in law and on facts in differentiating between the term 'Security Deposit' and 'Borrowed Capital"

v) The Learned CIT(A) has erred in law and on facts in considering the expression ''capital borrowed" predicates the relation of a borrower and a lender; which relationship does not exists in that case.

vi) The Learned CIT(A) has erred in law and on facts in appreciating that the interest bearing refundable security deposits received from the tenants only to protect the possible damage to the rental property or non -payment of rent.

vii) The learned CIT(A) has erred in law and on facts in appreciating that fiscal law must be strictly construed, the words must say what they mean nothing should be presumed or employed as held in Hon'ble SC in M/s. Goodyear India Ltd. Vs. State of Haryana 188 ITR 402.

viii) The Learned CIT(A) has erred in law and on facts not considering the Judgment of Hon'ble SC in the case of Bombay Steam Navigation Co.{l953) Pvt. Ltd. Vs. CIT (1965) 56 ITR 52.

ix] The Ld.CIT(A)'s order is contrary in law and on facts and deserves to be set aside. "

2. Thus the only issue raised by the revenue is that, deduction of interest claimed by the assessee u/s 24 (b) is not allowable because the same has been paid on security deposit received from the tenants.

3. The brief facts of the case are that, assessee is engaged in the business of builders and developers. During the year the assessee had shown income from house property, income from capital gain and income from other sources. In the computation of income house perty, the assessee had claimed deduction of interest of Rs.62,34,000/-u/s 24(b). The assessee had taken an unsecured loan from Reliance Industries Ltd. of Rs. 11 crores for the purchase of immovable property at Mittal Court, Nariman Point. The said loan was interest free and was ITA No. 6920/Mum/2012

3 Assessment Year: 2009-10

provided for a very short period to be repaid within the period of 60 days. The property was purchased for Rs.10,07,69,540/-. Thereafter, the assessee let out these properties to various tenants and in terms of the agreement assessee received deposits from these tenants for sum aggregating to Rs.10,25,40,000/-. These deposits were interest bearing where the assessee had to pay interst @ 6%. These deposits were utilized for the repayment of loan taken form the Reliance industries. The assessee's submission in this regard have been incorporated by the AO from pages 2 to 4 of the assessment order. The Ld Assessing Officer held that section 24(b) clearly provides that, interest should be payable on capital borrowed or the capital borrowed must be for the purpose of repayment of old loan. The security deposits cannot be termed as capital borrowed for the purpose of repayment old loan. Thereafter, he also examined the agreement with the assessee and tenants, wherein the noticed that there was clear cut agreement that payment received by assessee was towards deposits bearing interest of 5% per annum. Some of the agreement have been reproduced by him from pages 7 to 9 of the assessment order. Thus, after giving detail reasoning, he held that such an interest is not allowable as deduction u/s 34(b).

4. Before the Ld. CIT(A), the assessee gave following details of borrowing made in the Financial Year 2006-07, which were in the form of loan and deposits.

Date Name of the Party Nature of receipt Amount (Rs.) 01.03.2007 Simplex Construction Loan 1,50,00,000/-

Pvt. Ltd.

02.03.2007 Rambhita Trading Loan 11,00,000/-

Pvt. Ltd.

ITA No. 6920/Mum/2012 4 Assessment Year: 2009-10

03.03.2007 Laderup Corporate Loan 50,00,000/-

Advisory Pvt. Ltd.

07.03.2007 Laderup Corporate Loan 50,00,000/-

Advisory Pvt. Ltd.

07.03.2007 SPA Securities Ltd. Deposit 25,00,000/- 13.03.2007 Ladderup Corporate Loan 20,00,000/- 13.03.2007 Lotus logistics Pvt. Loan 1,00,00,000/-

Ltd.

13.03.2007 SPA Capital Services Deposit 1,00,00,000/-

Ltd.

13.03.2007 SPA Merchant Deposit 1,00,00,000/-

Bankers Ltd.

13.03.2007 SPA Securities Ltd. Deposit 3,00,00,000/- 22.03.2007 SPA Merchant Deposit 9,40,000/-

Bankers Ltd.

22.03.2007 SPA Capital Services Deposit 10,00,000/-

Ltd.

Total Borrowings 10,25,40,000/-

Then again in the A.Y. 2008-09, the assessee accepted further deposits of Rs.10,39,000,00/-. These amounts were utilized to repay the balance of earlier loan taken. The purpose and utilization of subsequent loans/deposits was submitted before him in the form of fund flow statement and the bank statement. These deposits were in fact were a kind of loan only, as it beared the interest rate of 6%. Such a loan on deposits were utilized for the repayment of original loan taken for the purchase of house property. There is nothing in the section to suggest that deduction of interest is allowable strictly on the loans. The ITA No. 6920/Mum/2012 5 Assessment Year: 2009-10

borrowings can be in the form of loans or deposits, as the statute envisages the phrase "borrowed capital." And not loan alone. The interest bearing refundable deposits was nothing but capital borrowing only for the purpose of section 24(b). Reliance was also placed on the decision of ITAT Mumbai Bench in the case of JCIT Vs. B.K. Patel Family Trust reported in (2006) 9SOT 583.

5. The Ld. CIT-(A) after dealing with the entire observation of the AO as well as submissions of the assessee, and the facts of the case, allowed the claim of deduction of interest u/s 24(b) after observing and holding as under:-

"It was an admitted fact that security deposit taken by the appellant from the tenants was interest bearing i.e @. 6%. The facts shows that the security deposits taken by the appellant was more than 120 times of the monthly rent of the property. In the case under consideration, this cannot be termed as normal security deposit In any case, whether it is a normal security deposit or a security deposit of very high amount, if interest is payable on such security deposit, such security deposit is nothing but borrowed capital or borrowed loans. Nomenclature "security deposit" used will not alter the character of the transaction. Since it was interest bearing, the security deposit was nothing but interest bearing capital! loans. Any interest bearing loan/capital taken for repayment of original loan partakes the character of original loan as explained and recognized in sec.24 of the IT Act. In my considered view, if interest is payable on amount repayable, such interest expenses is allowable as deduction u/s 24(b) of the Act Whether term used for the amount borrowed is ''Security deposit" or ''Borrowed Capital 'of "Borrowed loans". If interest is payable on security deposit the amount was nothing but loan or capital borrowed. Since interest was payable on such amount taken in the name of "security deposit, there existed relationship of lending and borrowing. It is also important to note as to how the money has been utilized. In the case under consideration, the security deposit was interest bearing and second it had been utilized for the purpose of repayment of original loan. For the purpose of allowing deduction u/s 24(b) of the Act, it should be the interest bearing money borrowed and ITA No. 6920/Mum/2012

6 Assessment Year: 2009-10

the term "Capital", "loan" or "deposit" is immaterial. it is also immaterial whether the lender party was nor not in the business of money lending.

The AO also raised a doubt as to whether the amount received as security deposit was utilized for repayment of original loan. The appellant has explained that the amount of security deposit taken was utilized only for the purpose of repayment of original loan. In support of its argument, the appellant has filed balance sheet which shows the only asset as investments in immovable property at Rs.10.23 crores. On the other hand, the major liability is on account of security deposits taken at 10.39 crores. The balance sheet supports the appellants submission that the amount of security deposit was utilized only for the purposes of repayment of original loans.

Considering the facts and circumstances of the case, in my considered view the interest paid by the appellant on security deposit taken from the tenants and loan, if any taken from other persons, was allowable as expenditure ujs.24(b) of the Act. The AO is directed to allow deduction of such interest expenses. "

6. Before us, Ld. DR strongly relied upon the order of the AO and submitted that the assessee has repaid the loan from the deposits received from the tenants of the property. Such deposits cannot be equated with the loan as the same was in lieu of usage of the property for rent. From the perusal of the lease agreement also, it is clear that apart from the rent, the assessee has received deposits though on interest @ 6% per annum. These deposits cannot be treated as borrowed capital either for the purchase of property or for the repayment of old loan. Thus, assessee's claim for interest cannot be allowed within the ambit of section 24(b).

7. Before us the learned counsel strongly relied upon the order of the Ld. CIT-(A) and submitted that the assessee has mostly taken loan from the various parties. It has also received deposits from the tenants on which assessee had to~ interest. Therefore, such deposit was in the ITA No. 6920/Mum/2012

7 Assessment Year: 2009-10

nature of loan only and hence interest paid on the deposits also which was utilized in repayment of the loan should be allowed.

8. We have heard the rival submissions and also perused the relevant finding given in the impugned orders, The assessee had purchased property by utilizing the loan of Rs. 11 crores taken from Reliance Industries Ltd., for a short period. This loan was interest free. In order to repay the loan, the assessee had taken loan and also deposits from its tenants as per the details incorporated above. The assessee had utilized the interest bearing security deposits for the repayment of loan taken from the Reliance Industries. The interest paid on the deposit @ 6% has been claimed as deduction u/s 24(b), on the ground that it is borrowed capital utilized for the repayment of old loan. Generally under a lease agreement, the security deposits are taken as an advance of rent of a certain period which are generally not interest bearing. Here in this case the deposits received from various tenants are more than 100 times of the arrival rent amount. These deposits have been taken/accepted on a payment of interest @ 6% per annum and deposit is to be refunded back by the assessee. Now, whether such a deposit can 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 receiving 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. A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and is to be refunded back, then debt is created on the assessee which it is liable to be discharged in future. Here the concepts of debt has to be understood as per the terms of the parties. If the deposits had been security deposit ITA No. 6920/Mum/2012 8 Assessment Year: 2009-10

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 cannot be equated with the borrowed money, because then there is no debt on the assessee. A moment a deposit is accepted on interest, then it part takes the character of borrowed money. It is an undisputed fact here that, these interest bearing deposits has been utilized for repayment of borrowed capital. Accordingly, finding of the Ld. CIT(A) in this regard is affirmed. Ground raised by the Revenue are dismissed.

9. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open court on this 25th day of March, 2015.

Sd/- Sd/- (D.KARUNAKAR RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 25.03.2015 *Srivastava

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "E" Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.