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Issues:
- Deduction of interest paid on a loan individually raised for construction of a property. - Interpretation of Sections 22 to 26 of the Income Tax Act, 1961 regarding computation of income from house property for co-owners. Analysis: The judgment dealt with the issue of whether an assessee could claim a deduction for interest paid on a loan individually raised for contributing to the construction of a property. The assessee, along with five others, initially started construction but had to borrow funds to complete it. The Income Tax Officer (ITO) assessed all six co-owners as an association of persons, denying the individual deduction claimed by the assessee. The assessee appealed, and the Appellate Authority Commission (AAC) allowed the deduction. The Tribunal also upheld the assessee's claim, stating that the deduction should be permitted in addition to the interest paid collectively by all co-owners for further construction. The revenue appealed, arguing inconsistency with Section 26 of the Income Tax Act. The High Court, analyzing Sections 22 to 26, emphasized that where co-owners have definite shares, the income must be computed individually before being included in total income. The Court rejected the revenue's interpretation, stating it would undermine the statutory provisions and result in unfair taxation. The Court referenced prior decisions supporting this interpretation, emphasizing the straightforward nature of the issue. The Court highlighted Section 26 of the Income Tax Act, which prohibits assessing co-owners as an association of persons and mandates individual computation of income based on definite shares. The Explanation to Section 26 clarifies that each co-owner's share should be computed as if they were individually entitled to relief. The judgment emphasized that gross income should first be ascertained based on Section 23, with deductions under Section 24 leading to the net income of the property. This net income should then be allocated to each co-owner according to their shares. The Court criticized the ITO's interpretation as undermining Section 26 and distorting the taxation process. Upholding the ITO's decision would result in unequal treatment of co-owners' borrowings for property acquisition, contrary to the Act's provisions. The Court cited previous decisions supporting this interpretation, reinforcing the straightforward nature of the issue. In conclusion, the High Court ruled in favor of the assessee, allowing the deduction of interest paid on the loan individually raised for construction. The Court emphasized adherence to statutory provisions and rejected the revenue's argument, citing consistency with prior decisions. The revenue was directed to bear the costs of the case, affirming the assessee's entitlement to the claimed deduction.
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