2016 (1) TMI 311 - AT - Income Tax

Disallowance of interest under section 24(b) - whether amount paid by the assessee to its sister concern Salivahana Associates, is not for the purpose of acquisition of property? - Held that - From the details of the property, it is clear that the very same building Bhuvana Towers was mortgaged with the Oriental Bank of Commerce. Thus, though the assessee has taken the loan from UCO Bank after construction of the building, we find that the same has been taken to repay the loan taken from Oriental Bank of Commerce by its associate concern Shalivahana Associates (the developer). The details of the purpose of loan from Oriental Bank of Commerce are not filed before us. Therefore, the exact purpose of the said loan is not known to us. However, the fact that the title deeds of Bhuvana Towers have been mortgaged with the Oriental Bank of Commerce raises the presumption that the loan must have been taken by the developer in relation to the said property. Since the construction of the property was completed in 2004 and the lease deeds were entered into on 01.01.2005, the contention of the assessee that the loan had been obtained by the developer for construction of the building is probable as no Bank would probably give a loan on a building which is not yet completed for any other purpose. However, the loan from Oriental Bank of Commerce was taken by the developer and the reason for the assessee to repay the same is stated to be for the purpose of acquiring the property. If the assessee has agreed to pay the developer for the works outside the development agreement for making it fit for letting out the property with all amenities, it is the expenditure incurred by the assessee for acquisition or improvement of the property. The mode or time of payment would not determine the nature of the expenditure. Therefore, all these facts need verification by the A.O. which has not been carried out by the A.O. for the assessment years before us. But the first year of the claim is A.Y. 2005-06 wherein the claim of the assessee was allowed in the assessment proceedings under section 143(3) of the Act and this fact has been taken note of by the Coordinate Bench of this Tribunal while quashing the revision order under section 263 of the Act. As rightly held by the CIT(A), the observations of ITAT in the 263 proceedings may not be entirely relevant for the proceedings under section 144 read with section 147 of the Act but as seen from the copy of the assessee s submissions before the A.O. for the A.Y. 2005-06, we find that the assessee had submitted that it had requested the builder to complete their share of constructed area for which the assessee shall reimburse the expenses incurred for providing all the amenities and that the availing of the loan was to reimburse the developer for such finishing works. Since the assessment for A.Y. 2005-06 was completed under section 143(3) of the Act after calling for various details and scrutiny of the same, it is to be presumed that the A.O. has verified the details and accepted the assessee s contentions after being satisfied about their acceptability. There has to be consistency and uniformity in the approach of the Revenue in the assessee s own case in the subsequent assessment years on the same set of facts. Since the A.O. has accepted the assessee s claim after verification and the revenue has not taken any steps to revise or reopen the assessment for A.Y. 2005-06, the assessee cannot be asked to prove the same set of facts from year to year. Therefore, we are of the opinion that the disallowance of the claim of interest on the loan borrowed by the assessee from UCO Bank under section 24(b) of the Act is not sustainable. - Decided in favour of assessee

Issues Involved:
1. Validity of the supplementary deed and its impact on the sharing ratio between the assessee and the developer.
2. Allowability of interest on borrowed funds under section 24(b) of the Income Tax Act.
3. Legitimacy of reopening assessments under section 147 based on previous assessment orders revised under section 263.

Detailed Analysis:

Issue 1: Validity of the Supplementary Deed and Sharing Ratio
The primary dispute revolves around the sharing ratio mentioned in the development agreement and the existence of the supplementary deed. The assessee contended that the original development agreement dated 01.04.2001 mentioned a sharing ratio of 65:35, which was later altered to 50:50 due to the developer's failure to pay a non-refundable deposit of Rs. 80 lakhs. This change was documented in a supplementary agreement dated 19.12.2002. The CIT, however, observed that both the original and supplementary agreements mentioned a 50:50 sharing ratio, leading to the conclusion that the supplementary deed was a colorable device to claim interest expenditure from rental income. The Tribunal, however, found that the original agreement did indeed mention a 65:35 ratio and that the supplementary agreement was valid, thus quashing the CIT's order under section 263.

Issue 2: Allowability of Interest on Borrowed Funds under Section 24(b)
The assessee claimed interest paid to UCO Bank from 'income from house property' as interest paid for the acquisition or improvement of the property under section 24(b). The A.O. initially allowed this claim for A.Y. 2005-06 after verifying the details. However, the CIT later sought to revise the assessment orders for A.Ys. 2006-07 and 2007-08, arguing that the loan was taken against lease rentals and not for construction or improvement of the property. The Tribunal found that the loan was indeed taken to repay a loan obtained by the developer for construction purposes, and thus, the interest was allowable under section 24(b). The Tribunal emphasized that the loan was taken to reimburse the developer for finishing works, which were necessary for letting out the property, thereby qualifying as an expenditure for acquisition or improvement.

Issue 3: Legitimacy of Reopening Assessments under Section 147
The A.O. reopened the assessments for A.Ys. 2008-09, 2009-10, and 2010-11 under section 147 based on the disallowance of the interest claim in earlier years. The Tribunal noted that the reopening was based on the assessments revised under section 263, which had already been quashed. The Tribunal cited the principle of consistency, referencing the Supreme Court's decision in Radhaswami Satsang vs. CIT, which held that a position accepted in one year should not be changed in subsequent years without substantial reasons. Since the A.O. had accepted the assessee's claim after verification in A.Y. 2005-06 and no steps were taken to revise or reopen that assessment, the Tribunal found the reopening of assessments for subsequent years to be unsustainable.

Conclusion:
The Tribunal allowed the assessee's appeals for A.Ys. 2009-10 and 2010-11, holding that the disallowance of the interest claim under section 24(b) was not justified. The Tribunal emphasized the need for consistency in the Revenue's approach and upheld the validity of the supplementary deed, thereby allowing the interest on borrowed funds as a deduction from rental income.

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