2023 (3) TMI 1089 - AT - Income Tax

Income from house property - deduction for interest u/s.24(b) - disallowance of deduction claimed u/s 24(b) in respect of interest paid on borrowed capital while computing income from house property - HELD THAT - In this case, since the assessee has let out the building from January, 2007 onwards in the Financial Year relevant to the AY 2007-08, it has rightly claimed interest paid on borrowed capital u/s.24(b). CIT(A), although, accepted the fact that the assessee has borrowed loan from bank for the purpose of construction of building and also said building has been let out, erred in sustaining addition made towards disallowance of interest on flimsy grounds like probability or improbability of construction of building in a short period ignoring fact that what was constructed by the assessee is unfinished building. AO is erred in disallowing interest claimed towards borrowed capital u/s.24(b) - CIT(A) without appreciating the facts simply sustained additions made by the AO and thus, we direct the AO to delete additions made towards disallowance of deduction claimed towards interest paid on loan borrowed from SBI u/s.24(b) - Decided in favour of assessee.

Summary

Issues:
Appeal against disallowance of deduction u/s24(b) of the Act for interest paid on borrowed capital while computing income from house property.

Analysis:
The appeals were filed against identical orders of the Commissioner of Income Tax (Appeals) for assessment years 2007-08 & 2008-09. The assessee, a domestic company in real estate, challenged the disallowance of deduction under section 24(b) of the Act for interest paid on borrowed capital. The AO disallowed the deduction as no rental income was derived from the property on which the loan was borrowed. The Ld.CIT(A) upheld the AO's decision, stating that the loan was not utilized for the property generating rental income. The assessee contended that the building was completed in 2006 and rented out in 2007, justifying the interest deduction. The Ld.DR supported the AO's decision, citing lack of evidence linking the borrowed funds to property construction. The ITAT Chennai noted that the loan was for building construction and accepted by the bank for the same purpose. The building was completed in 2006 and rented out in 2007. The ITAT Chennai held that the assessee could claim interest deduction against rental income as the building was let out during the relevant financial year, overturning the disallowance made by the AO and Ld.CIT(A).

The ITAT Chennai emphasized that the building completion and rental income generation timeline supported the deduction claim. The Ld.CIT(A) was criticized for sustaining the disallowance based on flimsy grounds. The ITAT Chennai directed the AO to delete the disallowance of deduction claimed for interest paid on the loan borrowed from SBI under section 24(b) of the Act for both assessment years. Consequently, the appeals filed by the assessee were allowed.