Rent income - small rent, big security deposit - dilemma

1. Security deposit is current liability( to be shown in Balance sheet) and not Income

2. If std rent is  6L for 12 months, it is 5L for 10 months. (Rs 50000 per month)

You got only 1.2L for 10 months (12000 per month) which is less not due to vacancy but due to other reasons. ( proportionate rent recd less than proportionate std rent)

So, in my view, your Annual value should be 5L (Rs 50000*10)

[(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable]

pl see the example given on page 5.11 of following link

https://www.icai.org/resource_file/18882sm_dtl_finalnew_cp5.pdf
 

Madhavi - first off - thanks for a clear response, and thanks for numeric calculation

Question 1. Going strictly by word of text, shouldnt clause be interpreted to mean only rental money received, and not *proportionate* rent

23(1)(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable

Question 2: Fair rent value is considered, when IT O judges it to be above actual rent received. How do they calculate fair rent?

I know capital value calculation which used to calculate property tax. It seems same capital value is also used to calculate fair rent - would you know more?

The other approach of comparing with rent received for other similar properties is too subjective, I feel, to be commonly employed

In calculations I have taken1.2L is what you recevied for 10 months

"(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable"

So before we apply this,we need to know what is actual rent received or receivable.

1.2L X 12/10 that is 1.44L is rent receivable  but not actual rent receivable

You have not mentioned wheter the said deposit is to be refunded or not?

If its a non refundable deposit then it shall be included in rent received or receivable on pro rata basis, Lest it may or may not be included in such ACTUAL rent receivable/recevied

For inclusion we would have to examine as to what was the purpose for making such deposit?

Its ubiquitous that security deposit is taken from tenant to ensure that tenant will not mis-use or damage the property.,comply with ToC of the agreement , Payment on timely basis and most importantly as a compensation short payment or non-payment of rent.

In CIT V K.Streetlite ElectricCorp 2011 , it was held that if the purpose of the security deposit is to compensiate the short payment or non payment of the rent then notional interest should be added in rent received/receivable

Since in your case the rent received/receivable to is way too low than standard rent, it clearly shows that the purpose was to compensate the short payment.

We also needed fair rent and Municipal value, presuming that these values are higher than standard rent of 600k

Your rental income would be HIGHER OF

a) 600k

b) 144k + 240k (Presumed annual notional income)

which is 600k then LOSS DUE TO VACCANCY,which you were mentioning, [ {144k-120k} + relating to notional {240k X 2/12), which comes out to 64k(Loss)

Gross annual value 600k - 64k = 536,000

On the security deposit I agree with Z

Z - thanks for your detailed explanation.

Some counter points which you could consider:

1.We wanted insurance against rent defaulters. So asked for hefy refundable security deposit 20L. In return, renter bargained for lower monthly rent, 12K. The refundable deposit was invested in loss making business

2. Since security deposit wasnt requested for compensation, but as purely a security, should we still accomodate notional interest?

3. Notional interest, I presume would be estimated at 8% i.e. average RBI repo rate. Do your caluclations indicate 12% interest rate?

1. Its not that you have returned the income,back to tenant, which would have accrued had the funds of the deposit be invested in some virtually risk free investment. Further the rent amount is significantly low and once you yourself agree that tenant has won the bargain of lowering rent you will have to consider the differential as income.

It doesn't matter whether you invested in business or not

2) You will have to prove your point, your rent is low , you havent  given any income to tenant.No AO would listen. But however if Municipal value & fair value are near your 12k/month then there is a chance.but 99% NO

3) Nah I did that just for easy calculation