2020 (3) TMI 1435 - AT - Income Tax

Income from house property - claim of interest u/s. 24(b) - property given on rent under family arrangement - assessee has claimed a loss qua the said property on account of interest (on borrowed capital) adjusting it against the rental income - said rent was, on the basis of a field enquiry by AO found to be from the assessee s major son and major daughter residing thereat along with the assessee s other family members - Whether house property is self-occupied property? - Nobody would, in the view of the AO, charge rent (for residence) from his own son and daughter, thus arrangement was therefore regarded merely as a tax-reducing device adopted by the assessee - HELD THAT - Surely, the arrangement is highly unusual, particularly considering that the rent is in respect of a self-owned property (i.e., for which no rent is being paid), which constituted the family s residence, with, further, the assessee s son and daughter being unmarried. That, however, to our mind, may not be conclusive of the matter. Being a private arrangement, not involving any third party, not informing the cooperative housing society may also not be of much consequence. The Revenue has rested merely by doubting the genuineness of the arrangement, without probing the facts further. What is the total area, as well as its composition/ profile? How many family members, besides the assessee (the owner) and the two tenants, are residing thereat? - How has the rent been received, i.e., in cash or through bank and, further, been sourced, i.e., whether from the assessee (or any other family member), or from the capital/income of the tenants. Why, there was even no attempt to inquire if the arrangement was a subsisting/continuing one, or confined to a year or two, strongly suggestive of, in that case, a solely tax motivated exercise. We are conscious, well be that the assessee s major son and daughter are financially independent (or substantially so), with independent incomes, sharing the interest burden of their common residence with their father. And, as such, instead of transfer of funds to him per se, have regarded, by mutual agreements, the same as rent, as that would, apart from meeting the interest burden to that extent, also allow tax saving to the assessee-father. A genuine arrangement cannot be disregarded as the same results or operates to minimize the assessee s tax liability. We are, accordingly, in principle, in agreement with the assessee s claim inasmuch as, as afore-noted, there is nothing on record to further the Revenue s case of the arrangement being not a genuine arrangement, i.e., apart from being unusual. The interest claimed is qua the entire property, which therefore cannot be allowed in full against the rental income, which is qua a part of the house property. The assessee s interest claim therefore cannot be allowed in full and shall have to be suitable proportioned, even as agreed to by Sh. Mehta, restricting the interest claim relatable to the self occupied part thereof to, as allowed, Rs. 1.50 lakhs. The assessee shall provide a reasonable basis for such allocation as well as the working of the area let. We say so as it may well, in view of the joint residence, be that no area (portion) is specified in the rent agreements. The number of family members living jointly; their living requirements which may not be uniform; fair rental value of the property, etc., are some of the parameters which could be considered for the purpose. The AO shall adjudicate thereon per a speaking order, giving definite reasons for being in disagreement, where so, in whole or in part, with the assessee s working, within a reasonable time. Assessee s appeal is partly allowed.

Summary

Issues:
Delay in filing the appeal condonation, House property income assessment, Rental income from family members, Genuine arrangement for tax-saving, Allocation of interest claim on house property.

Delay Condonation:
The appeal was delayed by sixty-six days, but the delay was reasonably explained and thus condoned by the tribunal to admit the appeal.

House Property Income Assessment:
The main issue was regarding the house property income of the assessee's residential property in Mumbai. The assessee claimed a loss on the property due to interest on borrowed capital, which was adjusted against rental income. The Assessing Officer (AO) treated the property as self-occupied and restricted the interest claim, a decision upheld by the CIT(A).

Rental Income from Family Members:
The rental income was from the assessee's son and daughter, residing with other family members in the property. The AO viewed this arrangement as a tax-reducing device and disregarded the rental income.

Genuine Arrangement for Tax-Saving:
The tribunal analyzed the genuineness of the arrangement, considering factors like the total area of the property, family members residing there, mode of rent payment, and the source of funds. It was suggested that the arrangement might be a tax-saving measure if the son and daughter were financially independent and shared the interest burden with their father.

Allocation of Interest Claim on House Property:
The tribunal found that the property was both self-occupied and let out based on rent agreements. It directed the assessee to proportion the interest claim between the self-occupied and rented parts of the property. The tribunal required the AO to assess this allocation and provide reasons for any disagreement with the assessee's working.

In conclusion, the tribunal partially allowed the appeal, directing the assessee to allocate the interest claim appropriately between the self-occupied and rented portions of the property for tax assessment purposes.