2018 (12) TMI 1382 - AT - Income Tax

Reopening of assessment - claim of interest u/s 24 (b) against the rental income from Dhanwatay House - Held that - Though an A.O in the backdrop of the judgment in the case of Goetze (India) Ltd. Vs. CIT 2006 (3) TMI 75 - SUPREME COURT cannot entertain a claim for deduction/relief which had not been raised by the assessee in its return of income, otherwise than by filing a revised return of income, however, the appellate authorities were vested with a jurisdiction to entertain such claim as long as the same was borne from the facts available on record. We thus, without going into the intricacies of the facts we are of the considered view that on the basis of the judgment in the case of Pruthvi Broker and Share Holders Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT no infirmity does emerge from the order of the CIT(A) who remaining well within his jurisdiction had directed the A.O to allow deduction of the interest expenditure under Sec. 24(b) to the assessee also in respect of the Dhanwatay House, as per the method which was suggested by him for establishing a nexus between the interest bearing borrowed funds and utilization of the same towards the aforementioned properties, viz. (i) Dhapla House property; and (ii) Dhanwatay House property. We thus finding ourselves to be in agreement with the view taken by the CIT(A) - Decided against revenue Entitlement for claim of deduction of the interest expenditure u/s 24(b) in respect of the Dhanwatay House property, to the extent of his share of income from M/s M.D. Dhanwatay & others, AOP - Held that - As given a thoughtful consideration to the observations of the A.O, and unable to persuade ourselves to subscribe to the interpretation of Sec. 67A(3) so accorded by him. Admittedly, the interest paid by a member on capital borrowed by him for the purpose of investment in the AOP shall, in computing his share chargeable under the head Profit and gains of business or profession is to be deducted from his said share of income. In case before us the claim of interest expenditure of the assessee, is not in context of any borrowed capital which had been utilized for making of an investment in the AOP. Rather, the aforesaid interest expenditure pertains to the capital which was borrowed by the assessee for an investment in the property, the rental income of which only pursuant to a pending litigation amongst the members of the Dhanwatay family before the Hon‟ble High Court, was deposited in the bank account standing in the name of M/s M.D. Dhanwatay and others, AOP - the aforesaid interest expenditure pertaining to the funds which were utilized by the assessee in respect of Dhanwatay House property, cannot be placed at par with the interest on capital which was borrowed by the assessee for the purpose of making an investment in the AOP - in terms of our aforesaid observations are persuaded to subscribe of the view taken by the CIT(A) who in our considered view had rightly concluded that the share of profit in the form of rent received by the assessee was liable to be taxed under the Income from house property , and the assesses would be eligible to claim deduction of the interest expenditure against the said income, though with a rider that such deduction was not to exceed the share of income of the assessee as a member of the AOP. - Decided against revenue

Summary

Issues Involved:
1. Entitlement to claim interest deduction under Section 24(b) of the Income Tax Act against rental income.
2. Non-inclusion of the interest deduction claim in the original or revised return.
3. Applicability of the Supreme Court decision in Goetze (India) Ltd. vs. CIT regarding the claim of deductions.

Detailed Analysis:

1. Entitlement to Claim Interest Deduction Under Section 24(b) Against Rental Income:

The primary issue revolves around whether the assessee is entitled to claim a deduction of interest under Section 24(b) of the Income Tax Act against the rental income from Dhanwatay House. The assessee had claimed a consolidated interest deduction for both Dhapla House and Dhanwatay House properties. The Assessing Officer (A.O) rejected the claim for Dhanwatay House, arguing that the deduction was not explicitly claimed in the original return or the return filed in response to the notice under Section 148.

The CIT(A) observed that the assessee had utilized borrowed funds for purchasing and maintaining both properties. Referring to previous years' assessments (A.Y 2008-09 and A.Y 2009-10), the CIT(A) suggested a method to establish a nexus between the borrowed funds and their utilization towards the properties. Consequently, the CIT(A) directed the A.O to follow the same method and allow the deduction for Dhanwatay House, restricted to the share of income from the AOP received by the assessee.

2. Non-Inclusion of the Interest Deduction Claim in the Original or Revised Return:

The A.O, supported by the revenue, contended that the assessee did not claim the interest deduction for Dhanwatay House in the original return or the revised return filed under Section 148. The A.O cited the Supreme Court's decision in Goetze (India) Ltd. vs. CIT, which restricts the allowance of deductions not claimed in the return of income. However, the appellate authorities are not bound by this restriction and can entertain such claims if borne out by the facts on record.

The ITAT upheld the CIT(A)'s decision, noting that the appellate authorities have the jurisdiction to entertain claims not made in the original or revised return, as long as they are substantiated by the facts. The ITAT referenced the Bombay High Court's decision in CIT vs. Pruthvi Broker and Share Holders Ltd., which supports this view.

3. Applicability of the Supreme Court Decision in Goetze (India) Ltd. vs. CIT:

The A.O relied on the Supreme Court's decision in Goetze (India) Ltd. vs. CIT to argue that the interest deduction claim could not be entertained as it was not included in the original or revised return. However, the ITAT clarified that this restriction applies only to the A.O and not to the appellate authorities. The appellate authorities can allow such claims based on the facts and evidence presented.

The ITAT concluded that the CIT(A) was correct in directing the A.O to allow the interest deduction under Section 24(b) for Dhanwatay House, following the method suggested for establishing the nexus between borrowed funds and their utilization. The ITAT also agreed with the CIT(A)'s observation that the assessee's share of rental income from the AOP should be taxed under "Income from house property," and the interest deduction should be allowed against this income, subject to the share of income from the AOP.

Conclusion:

The ITAT dismissed the revenue's appeal and upheld the CIT(A)'s order, allowing the assessee to claim the interest deduction under Section 24(b) for Dhanwatay House, restricted to the share of income from the AOP. The ITAT emphasized that appellate authorities have the jurisdiction to entertain claims not made in the original or revised return, provided they are substantiated by the facts on record.