2012 (4) TMI 336 - AT - Income Tax

Interest claim for deduction u/s. 24(b) in the computation of income from house property - Normal interest versus penal interest versus interest on interest - allowed at nil by the Revenue as the interest on unpaid capitalized interest is not envisaged for allowance u/s 24(b) Held that - the term interest is defined comprehensively u/s. 2(28A) to include on any debt and, more importantly, the same is in respect of capital borrowed . - The word capital is wider in scope than the term money , and under appropriate circumstances, as the present one, include part of the debt that the seller, a financial institution, has agreed to extend, on charge of interest, to the assessee purchaser. The interest deductible is the actual interest payable by the assessee in respect of the capital borrowed, and not one which would have been payable under a different fact setting than the actual one. - the claim must be genuine and not a result of an artifice, arising as a device to inflate the interest expense with tax or other motivation. There is no scope for bifurcating the interest into normal and penal components, as done by the Revenue. The agreement is clear. The capital is to be repaid as per a time schedule. If not paid thereat, additional interest would become chargeable for the period of default, i.e., till the payment of the installment. This would not be interest on interest, but a higher rate of interest on the capital borrowed and, thus, allowable u/s. 24(b) of the Act. Interest at normal rate allowed - Interest at panel rate allowed - Interest on Interest is not allowed.

Issues Involved:
1. Deductibility of interest under Section 24(b) of the Income Tax Act, 1961.
2. Classification of unpaid purchase price as 'borrowed capital.'
3. Deductibility of penal interest and interest on interest under Section 24(b).

Detailed Analysis:

1. Deductibility of Interest under Section 24(b) of the Income Tax Act, 1961:
The primary issue in these appeals is the amount of interest deductible under Section 24(b) in computing income from house property. The assessee claimed interest amounts of Rs. 10,20,869/- and Rs. 8,54,807/- for the assessment years 2006-07 and 2007-08, respectively. The Revenue, however, allowed nil deduction. The interest claimed arose from the unpaid purchase price of a property bought in an auction, which included both normal and penal interest. The Tribunal examined whether this interest qualifies for deduction under Section 24(b).

2. Classification of Unpaid Purchase Price as 'Borrowed Capital':
The Tribunal first addressed whether the unpaid purchase price could be considered 'borrowed capital' under Section 24(b). It concluded that the interest payable qualifies as interest on borrowed capital, as defined comprehensively under Section 2(28A) of the Act. The term 'capital' is broader than 'money' and includes debts extended by the seller, a financial institution, to the purchaser.

3. Deductibility of Penal Interest and Interest on Interest:
The Tribunal then considered whether the interest deductible should be restricted to the amount payable had the assessee adhered to the agreed repayment schedule. It found no basis in Section 24(b) for limiting the deductible interest to a hypothetical scenario. The deductible interest is the actual interest payable by the assessee.

The Tribunal further examined whether the interest allowable would include penal interest and interest on interest. It referred to the Supreme Court's decision in Shew Kissen Bhatter v. CIT, which clarified that interest on unpaid (capitalized) interest is not deductible under Section 24(b). The interest deductible must be on the capital borrowed for acquiring the property, not on interest that has been capitalized.

The Tribunal also addressed whether the interest allowable should be bifurcated into normal and penal components. It concluded that penal interest, being a higher rate of interest on the borrowed capital due to non-payment, is deductible under Section 24(b). However, interest on interest, whether normal or penal, is not deductible.

Conclusion:
The Tribunal restored the matter to the Assessing Officer (AO) to allow the assessee to furnish details of the interest claimed, bifurcating it into:
- Interest on borrowed capital at the normal rate.
- Penal interest on borrowed capital.
- Interest on interest, which is impermissible for deduction under Section 24(b).

The AO is directed to verify the details and allow the deduction accordingly, providing explicit reasons for any differences in the determination of interest figures. The deduction allowable is only for the interest liability accruing or arising to the assessee for the relevant years. The assessee's appeals were partly allowed for statistical purposes.

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