The Appellate Authority for Advance Ruling (AAAR) in the Midcon Polymers (P) Limited case held that the property tax paid to the municipal authority or any other statutory levies other than GST and Compensation Tax, cannot be excluded from the value of rental income.

It was also held that the notional interest earned on security deposit cannot be taken into consideration for the purpose of total rental income.

Brief facts

The Midcon Polymers Pvt Ltd is engaged in the business of renting of commercial property on monthly rents and allied business. The Appellant intends to enter into a commercial agreement of renting of immovable property with an educational institution in Bangalore. The contract is on the basis of the reserved monthly rent and also refundable caution deposit/security deposit.

The Appellant approached the Authority for Advance Ruling (AAR) seeking a ruling on the following questions:

(a) For the purpose of arriving at the value of rental income, whether the applicant can seek deduction of property taxes and other statutory levies?

(b) For the purpose of arriving at total income from rental, whether notional interest on the security deposit should be taken into consideration?

(c) Whether the applicant is entitled to exemption of tax under the general exemption of Rs 20 lakhs?

The AAR held that the applicant cannot deduct the property taxes and other statutory levies for the purpose of arriving at the value of rental income. It further said that the notional interest on the security deposit should be taken into consideration for the purpose of arriving at total income from rental, only if it influences the value of supply of RIS service i.e monthly rent.

The applicant, the AAR held, was entitled to exemption of tax under the general exemption of Rs 20 lakhs, subject to the condition that their annual turnover which includes monthly rent and notional interest, if it influences the value of supply, does not exceed the threshold limit.

Aggrieved by the ruling of the AAR, the Appellant filed an appeal with the AAAR.

AAAR

After going through various submissions, the AAAR held that for the purpose of arriving at the value of rental income, the Appellant cannot deduct the amount paid as property tax to the Municipal Authority or any other statutory levies levied under any law for the time being in force, other than the CGST, SGST, IGST and Compensation Cess, subject to the condition that it is charged separately by the Appellant.

It further held that for the purpose of arriving at the total rental income, the notional interest earned on the security deposit should not be taken into consideration.