2016 (9) TMI 648 - AT - Income Tax

Penalty under section 271(1)(c) - disallowance of loss of income from house property - Held that - The assessee did got the possession from the builder after the completion of building and occupation certificate obtained from Bombay Municipal Corporation (BMC) and had also made the entire payment as agreed in the sale agreement. It is also an admitted fact that, the assessee in the return of income had taken municipal ratable for the purpose of ALV under section 23(1)(a). From such computation, the assessee has claimed the interest paid on the borrowed capital for the said house property. The Ld. AO has disallowed the loss claimed under the head income from house property on the ground that, the assessee himself has admitted that, he has not taken the actual possession in the relevant financial year. Such contention of the Ld. AO cannot be upheld, because it cannot be denied on the present facts that the assessee was the actual owner of the said property during the relevant previous year and once the assessee was the owner of the house property, then charge is created for the determination of income from house property by way of ALV. The basis of assessing the tax and income from house property is the ownership of the property and not the actual realization of income. The ownership by itself attracts the charge. The assessee was thus under the law liable to disclose the ALV from the said property. In fact, the assessee had shown the ALV on the municipal ratable value which again is one of the accepted method for showing the ALV in terms of various decisions which has been relied upon before the authorities below. Hence, it cannot be held that, income from house property was not assessable in the case of the assessee in this year. Once the income from house property is assessable, then as a natural corollary deduction of interest paid on the borrowed funds for the purpose of house property has to be allowed in terms of section 24(b). Accordingly, the claim of the assessee was not only bona fide but also was duly supported under the provisions of law. Thus, we hold that, no penalty for disallowance of loss of income from house property can be made and we direct the AO to delete the penalty - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of concealment penalty under section 271(1)(c) for the assessment year 2008-09.
2. Determination of Annual Letting Value (ALV) for the property.
3. Computation of income from house property and deduction of interest on borrowed capital.
4. Bona fide nature of the assessee’s explanation regarding possession and customization of the flat.
5. Legal interpretation of ownership and its implications on income tax liability.

Issue-wise Detailed Analysis:

1. Confirmation of Concealment Penalty under Section 271(1)(c):
The primary issue in this case was whether the penalty of ?7,22,320/- under section 271(1)(c) for concealing and furnishing inaccurate particulars of income by claiming a wrongful deduction of ?21,25,096/- was justified. The assessee contended that there was no concealment or filing of inaccurate particulars as the deduction claimed under section 24 of the Income Tax Act was bona fide. The Tribunal examined the facts and submissions and concluded that the assessee’s explanation was bona fide and supported by various decisions, directing the AO to delete the penalty.

2. Determination of Annual Letting Value (ALV) for the Property:
The assessee had declared the ALV of the property based on the municipal valuation rate, which was ?1,31,500/- and claimed deductions accordingly. The AO, however, held that the fair rental value should be ?100/- per sq. ft. and disallowed the loss claimed under the head "income from house property" on the grounds that the assessee was not in physical possession of the flat. The Tribunal noted that the assessee had shown the ALV on the municipal ratable value, which is an accepted method, and thus, the income from house property was assessable.

3. Computation of Income from House Property and Deduction of Interest on Borrowed Capital:
The assessee computed a loss of ?21,25,096/- under the head "income from house property" after claiming deductions for municipal taxes and interest on borrowed capital. The AO disallowed the loss, arguing that the assessee did not have physical possession of the property. The Tribunal, however, emphasized that the ownership of the property, not physical possession, determines the charge for income from house property. Since the assessee was the owner, the deduction of interest on borrowed capital was allowed under section 24(b).

4. Bona Fide Nature of the Assessee’s Explanation Regarding Possession and Customization of the Flat:
The assessee argued that the possession of the flat was delayed due to customization work and financial constraints, and thus, the actual physical possession was taken on 13th April 2009. Despite this, the assessee declared the deemed let-out value based on municipal valuation as a precaution. The Tribunal found the assessee’s explanation to be bona fide and supported by documentary evidence, indicating that the explanation was reasonable and not an attempt to conceal income.

5. Legal Interpretation of Ownership and Its Implications on Income Tax Liability:
The Tribunal referred to the legal principle that the liability to income tax on property depends on ownership, not on physical possession or the ability to earn income from the property. This was supported by the Bombay High Court’s decision in CIT vs Union Land and Society vs CIT, which clarified that ownership itself attracts the charge for income from house property. Therefore, the assessee, being the owner, was liable to disclose the ALV and claim deductions accordingly.

Conclusion:
The Tribunal concluded that the assessee’s claim was bona fide and supported by law, and thus, no penalty for disallowance of loss from house property could be imposed. The appeal was allowed, and the penalty was directed to be deleted. The judgment underscored the importance of ownership in determining income tax liability and validated the assessee’s method of declaring ALV based on municipal valuation.