2023 (1) TMI 273 - AT - Income Tax

Income from house property - Denial of complete deduction of interest paid on the loan under section 24(b) - not allowing carry forward of loss under the head income from house property - HELD THAT - Under section 24(b) of the Act interest paid on capital borrowed for the purpose of acquisition, construction, repair, renewal, or reconstruction of property is allowable as a deduction. The 2nd proviso to section 24(b) of the Act restricts such deduction to Rs.2 lakh, in case of the property referred to in the 1st proviso. Further, the 1st proviso to section 24(b) of the Act deals with the property as referred to in section 23(2) of the Act. From the reading of section 23(2) of the Act, it is evident that the property as referred to therein is only the residential property and the same cannot be the commercial property. In the present case, as per the agreement for the purchase of the property being Unit 3C, Cynergy, Prabhadevi, Mumbai 400028, we find from clause no. (mm) that the said property can only be used for the purpose of setting up the IT office as per the IT Park Policy of the Government of Maharashtra. Thus, it is evident that the property in respect of which the assessee claimed interest under section 24(b) of the Act is only a commercial property, and therefore the restriction on deduction as provided in 2nd proviso to section 24(b) of the Act shall not be applicable. Therefore, we are of the considered view that the AO has erred in restricting the deduction of interest paid on the loan to Rs.2 lakh vide intimation issued under section 143(1) of the Act. AO while computing the annual letting value of the aforesaid property had granted deduction of interest paid on loan under section 24(b) of the Act. Accordingly, we direct that the interest of Rs.1,31,39,560, paid on the loan for acquiring the above property be allowed as a deduction under section 24(b) of the Act. Since the assessee is entitled to claim the entire interest paid during the year on loan for acquiring the above property, therefore, the amount of loss under the head income from house property , which is not set off against the income under the other head of income be allowed to be carried forward as per provisions of section 71B - Assessee appeal allowed.

Issues Involved:
1. Deemed let-out house property considered as self-occupied.
2. Deduction of interest under Section 24(b) restricted to Rs. 2,00,000.
3. Changing character of property from deemed let-out to self-occupied.
4. Adjustment made without following prescribed procedure.
5. Fair and proper opportunity of being heard not granted.
6. Not allowing carry forward of house property loss to subsequent years.

Issue-wise Detailed Analysis:

1. Deemed Let-Out House Property Considered as Self-Occupied:
The assessee contended that the property was a commercial premise and should be treated as deemed let-out property. The CIT(A) treated it as self-occupied, restricting the interest deduction under Section 24(b) to Rs. 2,00,000. The Tribunal noted that the property was used for setting up an IT office as per the IT Park Policy of the Government of Maharashtra, confirming it as a commercial property. Therefore, the restriction on deduction provided in the 2nd proviso to Section 24(b) does not apply.

2. Deduction of Interest Under Section 24(b) Restricted to Rs. 2,00,000:
The Tribunal observed that under Section 24(b), interest paid on capital borrowed for acquiring property is deductible. The 2nd proviso restricts this deduction to Rs. 2,00,000 for self-occupied properties, as referred to in Section 23(2). Since the property in question is commercial, the restriction does not apply. The Tribunal allowed the full interest deduction of Rs. 1,31,39,560.

3. Changing Character of Property from Deemed Let-Out to Self-Occupied:
The CIT(A) confirmed the action of the Deputy Commissioner of Income Tax (DCIT) in altering the nature of the property from deemed let-out to self-occupied, which the assessee argued was beyond the scope of adjustment permitted by Section 143(1)(a). The Tribunal found that the property was commercial and should not have been treated as self-occupied.

4. Adjustment Made Without Following Prescribed Procedure:
The assessee argued that the adjustments made by the DCIT did not follow the procedure set out in the first and second proviso to Section 143(1)(a). The Tribunal did not specifically address this issue, as it was not pressed during the hearing.

5. Fair and Proper Opportunity of Being Heard Not Granted:
The assessee claimed that a fair opportunity of being heard was not granted, and the principles of natural justice were not followed. The Tribunal did not specifically address this issue, as it was not pressed during the hearing.

6. Not Allowing Carry Forward of House Property Loss to Subsequent Years:
The CIT(A) did not allow the carry forward of the house property loss of Rs. 1,08,81,242. The Tribunal directed that since the entire interest paid during the year is deductible, the loss under the head 'income from house property' should be allowed to be carried forward as per Section 71B.

Conclusion:
The Tribunal allowed the appeal, directing that the interest of Rs. 1,31,39,560 paid on the loan for acquiring the commercial property be allowed as a deduction under Section 24(b). The loss under the head 'income from house property' should be carried forward as per Section 71B. Grounds A, B, and E were allowed, while grounds C and D were not pressed. The appeal was pronounced in favor of the assessee on 05/01/2023.

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