2014 (6) TMI 845 - AT - Income Tax

Allowability of deduction of u/s 24(b) from house property (rental) income Interest paid on capital to partners Held that - The assessee claimed deduction on the amount of interest paid to partners on their capital contribution u/s 24(b) of the Act - no material has been placed on record to indicate that any property was acquired, constructed, repaired or renewed, etc., with the borrowed capital on which interest was paid Relying upon CIT vs. Four Fields Pvt. Ltd. 1997 (5) TMI 23 - PUNJAB AND HARYANA High Court - deduction for interest u/s 24(b) of the Act can be allowed only where the property has been acquired, constructed, etc., with a borrowed capital and interest is payable in respect of such capital - the claim of the assessee is in clear violation of the provisions of section 24(b) of the Act and it cannot be allowed Decided in favour of Revenue. Validity of assessment u/s 147 of the Act Change of opinion Held that - There is no fresh basis for which the assessment was sought to be reopened - The AO is harping on the same material to canvass now the amount is not deductible - This amounts to change of opinion - There is no reference to any tangible material coming to the possession of the AO after the completion of the original assessment divulging the escapement of income Relying upon CIT v. Kelvinator of India Limited 2010 (1) TMI 11 - SUPREME COURT OF INDIA - there can be no reopening of assessment simply on the basis of change of opinion - there must be some tangible material with the AO proposing to issue notice for reassessment leading to the conclusion about the escapement of income - there is no fresh material by which the AO could have entertained reason to believe about the escapement of income - there is no need to deal with the question of disallowance of interest and other expenses - Decided against Revenue.

Summary

Issues:
1. Appeal against allowing deduction u/s 24(b) for interest paid on capital to partners for AY 2004-05.
2. Challenge to the annulment of reassessment for AY 2006-07 by ld. CIT(A).

Issue 1: AY 2004-05 - Deduction u/s 24(b) for interest paid on capital to partners:

The AO disallowed the deduction claimed by the assessee under section 24(b) of the Income-tax Act, 1961 for interest paid on capital to partners. The AO held that this deduction was not allowable as the interest on partners' capital was not related to borrowed capital for property. The ld. CIT(A) overturned the AO's decision, citing past assessments where similar deductions were allowed. However, the ITAT Delhi noted that the deduction under section 24(b) is only permissible if the interest is paid on borrowed capital used for property purposes. The tribunal highlighted a case law where interest deduction was disallowed as there was no specific borrowing for property acquisition. The ITAT Delhi emphasized that the claim violated section 24(b) and overturned the decision of the ld. CIT(A).

Issue 2: AY 2006-07 - Annulment of reassessment by ld. CIT(A):

In the case of AY 2006-07, the AO initiated reassessment proceedings disallowing interest and other expenses claimed by the assessee. The ld. CIT(A) declared the reassessment null and void, stating that the notice issued after four years from the end of the assessment year lacked jurisdiction. However, the ITAT Delhi clarified that the notice was within the permissible period as per the first proviso to section 147. The ld. CIT(A) also considered the reassessment as a change of opinion, which the ITAT Delhi agreed with. Referring to the Supreme Court's decision, the tribunal held that there was no fresh material for reassessment, indicating a change of opinion by the AO. Consequently, the ITAT Delhi upheld the ld. CIT(A)'s decision to set aside the reassessment order under section 147 for AY 2006-07.

In conclusion, the ITAT Delhi allowed the appeal for AY 2004-05, disallowing the deduction claimed under section 24(b) for interest paid on capital to partners. For AY 2006-07, the tribunal dismissed the appeal, upholding the ld. CIT(A)'s decision to annul the reassessment due to lack of fresh material and a change of opinion by the AO.