Notional interest: Can interest free deposit form a part of sales consideration for calculation on capital gains?

There are situation wherein the buyer provides to the seller of an immovable property, an interest free deposit/ loan before the sale, which gets adjusted against the sales consideration.

A question arises whether notional interest earned on the interest free deposit can form a part of the sales consideration?

To understand it, we need to visit the following provision :

1. Section 52(2) which has now been deleted provided that if the market value of the asset is more than 10% of the stated consideration it will be deemed to be the full value of consideration received.

2. When the issue comes for consideration before the Hon Supreme Court in the case of K. P. Vergese V/s. CIT  131 ITR 597, the Hon’ble Supreme Court held that the notional value of construction received or accruing will be clearly un-constitutional and such fiction can be applied only if there is proof that the assessee has received some consideration under the table but exact amount cannot be ascertained.

3. In short, Hon SC has clearly laid out that sales consideration cannot include any amount which notional in nature.

4. Any interest earned from the loan would have been otherwise offered for taxation as “other source income”.

5. So any further taxation would be a case of double taxation too.

6. To conclude , full value  consideration cannot include notional interest amount.