2015 (6) TMI 645 - AT - Income Tax

Income from house property - Disallowance of interest on borrowed capital u/s 24(b) - CIT(A) allowed partial relief - Held that - In financial year 2003-04, out of repayment of ₹ 2.08 crores, ₹ 2 crores was borrowed as a short term loan from ERHL (a group company of assessee). This short term loan of ₹ 2 crores was repaid to ERHL in financial year 2004-05 by again borrowing ₹ 2 crores from D. S. Construction Company. These facts are verifiable from paper book page 8, where these entries are recorded. There is one more entry of ₹ 12.96 lacs as received from D. S. Construction Company and further, there is another entry of ₹ 9,500/-, which was paid to D S Construction Company. Therefore, in all, the balance due to D S Construction Company was ₹ 3,77,52,230/- out of which ₹ 3,76,00,000/- was paid after borrowing from Lord Krishna Bank. The above facts are verifiable form the balance sheet of assessee for the year ending 31.03.2005 where an amount outstanding from bank loan is reflected at ₹ 3.76 crores and unsecured loan from D.S. Construction Company has reduced from ₹ 1,64,56,230/- to ₹ 57,230/-. Therefore, in fact, the entire loan of ₹ 3.76 crores has been utilized to repay the debts raised by assessee for construction of property the income of which was offered under the head income from house property . Ld. CIT (A) while granting partial relief to the assessee only considered the amount of outstanding as on 31.03.2004 of ₹ 1.64 crores due to M/s. D. S. Construction Company. However, he misdirected himself in not considering the amount of ₹ 2 crores which was raised by assessee as a short term liability to reduce the loan component of M/s. D.S. Construction Company and also ignored the other transactions entered during financial year 2004- 05. The transactions entered into by assessee in 2004-05 also relate to acquisition of property. Therefore in all, the entire interest on the term loan from bank should have been considered by Ld. CIT(A) for allowing relief to the assessee. Circular 28 as relied upon by Ld. A.R. and as noted by Ld. CIT(A), clearly state that if the interest free loan is repaid by interest bearing loan funds, the interest on such loan is allowable for deduction u/s 24(b) of the Act. - Decided in favour of assessee. Value of building (gross block) as per the depreciation chart up to FY 02-03 was ₹ 1.11 Crores only - Held that - Revenue has challenged that as on 31.03.2003, only an amount of 1.11 crores was invested in building therefore, interest on entire loan of ₹ 3.76 crores cannot be considered. However, we find that besides building, there is an investment in land also which is at ₹ 7,97,88,679/- and investment in property always includes investment in land also. - Decided in favour of assessee.

Summary

Issues Involved:
1. Reduction of addition under section 24(b) on account of interest on borrowed funds.
2. Eligibility of the entire loan amount for the purpose of construction of the property.
3. Ignoring the value of the building as per the depreciation chart.

Issue-wise Detailed Analysis:

1. Reduction of Addition under Section 24(b) on Account of Interest on Borrowed Funds:
The Revenue contended that the CIT(A) erred in reducing the addition under section 24(b) from Rs. 39,41,374 to Rs. 22,16,370, thereby granting relief of Rs. 17,25,004 to the assessee. The assessee had declared a loss from house property after deducting interest payments. The Assessing Officer (A.O.) disallowed the interest claim, asserting that the borrowed funds were not used for acquiring or constructing the let-out property. The CIT(A) partially allowed the claim, restricting the interest claim to the loan amount of Rs. 1,64,56,230, thus confirming the disallowance of Rs. 22,16,370. The Tribunal found that the entire loan of Rs. 3.76 crores was utilized to repay debts raised for constructing the property, and hence, the interest on the term loan from the bank should have been fully allowed. Consequently, the Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal.

2. Eligibility of the Entire Loan Amount for the Purpose of Construction of the Property:
The CIT(A) accepted the assessee's contention that the loan of Rs. 3.16 crores obtained in FY 97-98 was utilized for constructing the property. The A.O. disallowed the interest claim, arguing that the bank loans were used to retire unsecured, interest-free loans from associated concerns, not for acquiring or constructing the let-out premises. The CIT(A) found that only Rs. 1,64,56,230 of the loan was utilized for repaying the construction loan, and thus, restricted the interest claim to this amount. The Tribunal, however, concluded that the entire loan of Rs. 3.76 crores was used to repay debts for constructing the property, making the interest fully deductible under section 24(b). Therefore, the Tribunal allowed the assessee's appeal.

3. Ignoring the Value of the Building as per the Depreciation Chart:
The Revenue argued that the CIT(A) ignored the fact that the value of the building as per the depreciation chart up to FY 02-03 was only Rs. 1.11 crores. The Tribunal found that the total investment in fixed assets, including land and building, amounted to Rs. 9,24,08,822, with a small portion invested in a car. The Tribunal noted that the investment in property included land, which was valued at Rs. 7,97,88,679. Therefore, the Tribunal dismissed the Revenue's appeal, affirming that the interest on the entire loan was allowable.

Conclusion:
The Tribunal concluded by allowing the assessee's appeal and dismissing the Revenue's appeal. The Tribunal held that the entire loan amount was utilized for repaying debts raised for constructing the property, and thus, the interest on the term loan from the bank was fully deductible under section 24(b). The Tribunal also confirmed that the investment in property included land, justifying the interest claim on the entire loan amount. The order was pronounced in the open court on 11th June, 2015.