2016 (5) TMI 1147 - AT - Income Tax

Repayment of liabilities of the donor - allowability u/s 24(b) - whether borrowed capital was not utilised for acquiring the property? - Held that - Mortgage loan and other liabilities repaid by the assessee, to the extent it has improved his right to title and interest in the property should be considered as cost of improvement incurred by the assessee. The government valuer has fixed the value of the property at ₹ 47,62,000/-, as mentioned at page 29 para 9 of the registered gift deed. The factors which went into the valuation are not known. The principle laid down by the Hon ble Supreme Court in RM. Arunachalam Versus Commissioner of Income-Tax 1997 (7) TMI 5 - SUPREME Court that, amounts paid by the donee to discharge the liabilities which resulted in his right, title and interest of the assessee in the property being improved has to be taken as cost of improvement is to be applied and this ground of the assessee should be allowed. No contrary decision is brought to our notice by the Ld.D.R. Submissions made by the assessee that the loans and liabilities repaid was only to improve and perfect his title to the property, and not otherwise, and that all these loans and other liabilities are attached to this property is not factually disputed by the Revenue. Keeping in view the legal position laid down by the Hon ble Apex Court, we direct the A.O. to consider the repayment of liabilities of the donor, made by the assessee as that which is incurred to perfect his title of the property and thus it is cost of improvement and consequentially the borrowings made for the same is to be taken as that which is for incurring the cost of improvement of the property and consequentially the interest expenditure incurred should be allowable u/s 24(b) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest claimed by the assessee against property income.
2. Acceptance of funds borrowed for repayment of liabilities as part of the cost of acquisition.
3. Assessment order being deemed wrong, arbitrary, and illegal.

Issue 1: Disallowance of Interest Claimed:
The appeals filed by the Assessee challenged the orders dated 31.10.2011 and 11.2.2013 concerning the Assessment Years 2007-08 and 2009-10. The Assessee, a Chartered Accountant, declared rental income and claimed deductions under section 24(b) of the Income Tax Act for interest on borrowed capital used to acquire a property. The Assessing Officer rejected this claim, stating that the borrowed funds were used to repay family loans, not for property acquisition. The First Appellate Authority agreed with the AO, leading to the Assessee's appeal. The Tribunal, after considering the arguments, held that the repayment of liabilities attached to the property should be considered as a cost of improvement, allowing the interest expenditure claimed by the Assessee.

Issue 2: Acceptance of Funds Borrowed for Repayment of Liabilities:
The Assessee contended that the funds borrowed for repaying liabilities attached to the property should be considered part of the cost of acquisition, citing relevant case laws. The Senior Departmental Representative argued against this claim, emphasizing the lack of evidence supporting the Assessee's expenditure for acquiring a property valued significantly lower. The Tribunal referred to legal precedents where payments made to clear mortgages of the previous owner were considered as the cost of acquisition. Applying these principles, the Tribunal held that the liabilities repaid by the Assessee to improve his title to the property should be treated as a cost of improvement, allowing the Assessee's appeal on this ground.

Issue 3: Assessment Order Being Deemed Wrong:
The Assessee raised concerns about the Assessment Orders being wrong, arbitrary, and illegal. However, the Tribunal, after considering all facts, material on record, lower authorities' orders, and relevant case laws, found in favor of the Assessee on the grounds related to interest disallowance and acceptance of borrowed funds for repayment of liabilities as part of the cost of acquisition. The Tribunal allowed both appeals for the Assessment Years 2007-08 and 2009-10, emphasizing the legal position established by the Supreme Court and directing the Assessing Officer to consider the repayment of liabilities as cost of improvement, thereby allowing the claimed interest expenditure.