In a recent judgment that will benefit many, the Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) has held that in cases where employees are provided with accommodations by employers, the notional interest on the security deposit paid by an employer to the landlord cannot be added to the taxable income of the employee.
The I-T laws provide that where an employer pays rent to a landlord for accommodation provided to an employee, the `perquisite value’ (taxable in the hands of the employee) will be the rent actually paid or 15% of salary, whichever is less. If any amount is recovered from the employee, the perquisite value is reduced to this extent. The net perquisite value forms part of the taxable salary income of the employee.
The relevant case for this judgement is the Vikas Chimakurty case. In this case, Vikas was an employee of Kotak Investment Advisors. He was provided with rented accommodation by his employer and the rent was borne by the company. In addition to rent, the employer also paid the landlord a security deposit of Rs 20 lakh.
In this case, relating to the financial year 2009-10, the I-T officer also computed a notional interest at 12% against Rs 20 lakh, and added Rs 2.4 lakh, to the income of the employee. The notional interest was treated as a perquisite value. Thus, the addition to income made by the I-T officer led to an increase in the I-T liability of the employee.
An appeal was filed by Chimakurty with ITAT, which adjudicates I-T disputes. Based on an earlier verdict of the Bombay HC and also the precise reading of Rule 3 of the I-T Rules, the ITAT, it its judgment dated June 3, ordered deletion of Rs 2.4 lakh that had been added to the employee’s income.
While the ITAT order is silent, one can presume that the security deposit covered by this judgment was not adjustable against the rent. In this context, Amarpal S. Chadha to Economic Times, Tax partner at EY-India, a professional services firm, said: “If the security deposit is adjustable against the rent, then such adjusted amount would be considered as rent.” Rent, payable by the employer, would result in a perquisite value which is taxed in the employee’s hands.
“To mitigate litigation, there should be adequate documentation in place to substantiate that the security deposit is not high compared to the market practices and there is no intention to lower the lease rentals to artificially reduce the perquisite value in the hands of the employee. Second, the security deposit paid should be in line with the prevailing market practices in that area for similar property,” said Chadha.