2003 (11) TMI 29 - HC - Income Tax

Claim for deduction u/s 24(1)(vi) - Deductions from income from house property - contention of the appellant-assessee is that the amount paid to the assessee for purchase of the flat was utilised for construction of the flat and has to be treated as capital borrowed by the assessee for construction of the flat and, therefore, the interest paid thereon is liable to be deducted u/s 24(1)(vi) - Held the amount so paid by the assessee to the purchaser was not interest payable on any borrowed capital with which the construction of the said flat was made - payment made by the assessee to the purchaser on his failure to deliver the flat within the stipulated time, even if it is termed as interest, is in the nature of penalty or liquidated damages. In our opinion, in such facts deduction is not permissible u/s 24(1)(vi)

Summary

Issues:
Assessment of interest payment as business income and deduction under section 24(1)(vi) of the Income-tax Act, 1961.

Analysis:
The appellant's business involves constructing flats and selling them for profit. An agreement with M/s. Sagar Shipping Co. Ltd. led to an advance payment for a flat, which the appellant failed to deliver within the stipulated period, resulting in interest payment to M/s. Surendra Overseas Ltd. The appellant claimed the interest as a deduction from business income under section 24(1)(vi) of the Income-tax Act, 1961 for the assessment years 1985-86 and 1986-87. However, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal rejected this claim, stating that the advance received was not utilized in flat construction.

The appellant argued that the advance payment was used for flat construction, making the interest payment deductible under section 24(1)(vi). The appellant relied on the judgment in CIT v. Parekh Kothi Ltd. On the other hand, the Revenue contended that the interest payment was akin to liquidated damages or penalty due to the failure to deliver the flat within the stipulated period. The Tribunal's findings were considered final in this reference under section 256(1) of the Income-tax Act, 1961.

Section 24(1)(vi) allows for the deduction of interest payable on borrowed capital when property is constructed with such capital. In this case, it was found that the flat was not constructed using borrowed capital, as the advance payment did not incur interest. The interest payment made by the appellant upon failing to deliver the flat within the stipulated time was deemed as penalty or liquidated damages, not interest on borrowed capital. Therefore, the deduction under section 24(1)(vi) was deemed impermissible by the High Court.

The High Court's judgment favored the Revenue, agreeing that the interest payment was not eligible for deduction under section 24(1)(vi) of the Income-tax Act, 1961. Judge S.K. Gupta concurred with this decision.