Security deposit on flat paid by firm cannot be taxed

Top-rung companies often provide the employees with accommodation by their employers. The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) has come out with a vital judgment which will affect many around the country reaping benefits of this incentive. According to the judgment by the ITAT, the notional interest on the security deposit paid by an employer to the landlord cannot be added to the taxable income of the employee. Vikas Chimakurty, an employee of Kotak Investment Advisors, 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. 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. 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 high court 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, tax partner at EY-India, a professional services firm, says: & quot If the security deposit is adjustable against the rent, then such adjusted amount would be considered as rent.& quot Rent, payable by the employer, would result in a perquisite value which is taxed in the employee's hands. & quot 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,& quot says Chadha.

OUR TAKE

The accommodation that is provided by the employer to the employee is an incentive. The judgment by the ITAT brings relief to the thousands who take this incentive across India. Clarification in this matter was long sought after. It seems like the ITAT has done a decent job in clarifying the matter. Frauds across the country look out or loopholes in the laws and make the most out of it. But the law always gets the last laugh.