2006 (5) TMI 314 - AT - Income Tax

Summary

Issues:
- Whether the deduction of interest payment of Rs. 8,57,534 as interest payment against income from other sources is allowable.
- Whether the money received from a party for giving two flats on leave and license basis constitutes a deposit or a loan.
- Whether interest paid on borrowed money utilized for construction of a house is an allowable deduction under section 24(1)(vi).
- Whether interest paid on money borrowed for repaying a loan taken for construction purposes is an allowable deduction.
- Whether the investment in NTPC tax-free bonds affects the allowance of interest deduction under section 24(1)(vi).

Analysis:
1. The revenue raised an issue regarding the CIT(A) directing the Assessing Officer to delete the addition of Rs. 8,57,534 made on account of interest, claiming it as allowable from income from house property under section 24(1)(vi) and from other sources. The Assessing Officer contended that the interest payment was not incurred to earn income chargeable under section 57 under the head "Income from other sources."

2. The Assessing Officer observed that the money received from a party for two flats on leave and license basis was subject to conditions for interest payment upon returning vacant possession. As the flats were sold, the conditions for interest payment were not met, leading to the disallowance of interest deduction under section 57(iii).

3. The CIT(A) disagreed with the Assessing Officer's literal interpretation of the agreement clauses, stating that the payment of interest was intended by the assessee. The CIT(A) allowed a portion of the interest under "Income from house property" based on the utilization of funds for repayment of loans and advances to contractors.

4. The Tribunal upheld the allowance of interest paid on borrowed money for construction under section 24(1)(vi), irrespective of whether the amount was termed as a deposit or a loan. The intention was to allow the claim of interest on money not owned by the assessee but utilized for construction purposes.

5. Regarding the investment in NTPC tax-free bonds, the Tribunal directed a re-examination to determine the allowance of interest deduction, considering the retrospective effect of section 14A from 1-4-1962. The onus was placed on the assessee to establish the nexus between the money received and invested in bonds.

6. The Tribunal allowed the revenue's appeal for statistical purposes, emphasizing the need for a fresh examination of the issue related to the investment in NTPC bonds and its impact on interest deduction under section 24(1)(vi).