2006 (9) TMI 358 - AT - Income Tax

Summary

Issues:
Entitlement to claim deduction under section 24(1)(vi) of the Income-tax Act for interest paid on borrowed capital to acquire lease-hold rights.

Analysis:

Issue 1: Entitlement to claim deduction under section 24(1)(vi) of the Income-tax Act
The case involved the question of whether the assessees were entitled to claim a deduction under section 24(1)(vi) of the Income-tax Act for the interest paid on borrowed capital used to acquire lease-hold rights. The assessees had sublet a property to a tenant and later paid a substantial amount to the tenant to obtain vacant possession. The assessees then borrowed money to make this payment and subsequently sublet the property to others, generating rental income. The assessees claimed a deduction under section 24(1)(vi) for the interest paid on the borrowed capital.

The Assessing Officer disallowed the deduction, arguing that the payment made to the tenant was not for acquiring any property but for obtaining vacant possession. The Assessing Officer maintained that the borrowed money used to acquire the same rights from the property owner could be considered under section 24(1)(vi). The CIT (Appeals), however, allowed the deduction, considering the payment as acquiring more tenancy rights. The Tribunal analyzed the situation and concluded that the assessees did not acquire any interest over the property by making the payment to the tenant. The Tribunal held that the payment was made to enhance rental income and not for acquiring the property. Therefore, the borrowing was not in connection with acquiring the property, and the claim for deduction was disallowed.

In conclusion, the Tribunal reversed the decision of the CIT (Appeals) and upheld the Assessing Officer's order, denying the deduction under section 24(1)(vi) of the Income-tax Act. The appeals of the revenue were allowed based on this analysis.

This judgment clarifies the scope of deduction under section 24(1)(vi) of the Income-tax Act concerning interest paid on borrowed capital for acquiring property rights. It emphasizes that the crucial factor is whether the payment is directly related to acquiring the property itself, rather than for other purposes such as enhancing income.