2023 (10) TMI 260 - AT - Income Tax

Income from house property - disallowance of interest paid on housing loan (borrowed capital) referring to the third proviso to section 24 for the reason that the assessee failed to furnish certificate for interest - assessee claimed TDS on the advance rent received but not reflected in the return of income for this assessment year - CIT (A) directed AO to allow 30% of ALV on advance rent as allowance u/s 24(a) having taxed in the current assessment year - HELD THAT - For the interest on borrowed capital we see no valid reason for disallowing the interest paid on borrowed capital to the banks. The evidences furnished by the assessee in the form of statement of accounts and certificates issued by the banks, sanctioning and disbursing the housing loan to the assessee actually goes to show that the assessee has obtained loans from banks for acquiring the property and the property was let out and the rental income was offered to tax and, therefore, AO should have allowed interest paid on borrowed capital while computing the income under the head income from house property. The observations of the CIT (Appeals) that the interest claimed in the computation has already been allowed by the AO is totally misplaced as AO has not allowed the assessee to carry forward the loss under the head income from house property which is mainly paid on borrowed capital. Thus we direct AO to allow interest on borrowed capital as claimed by the assessee and the same shall be carried forward under the head income from house property. Notional interest on interest free security deposit - As various Courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that what has been stated in Asian Hotels Limited 2007 (12) TMI 274 - DELHI HIGH COURT - Ratio of the decisions squarely applies to the facts of the assessee s case. Thus, we reverse the findings of the ld. CIT (Appeals) on this issue and hold that no notional interest on interest free security deposit can be added to the ALV of the property while computing income from house property. Appeal of assessee allowed.

Summary

Issues Involved:
1. Disallowance of interest paid on housing loan.
2. Enhancement of income without issuing a show cause notice.
3. Addition of notional interest on interest-free refundable security deposit.

Summary:

1. Disallowance of Interest Paid on Housing Loan:
The assessee contested the disallowance of interest paid on a housing loan, arguing that the interest is fully allowable in the case of let-out property as per the provisions of Section 24. The Tribunal observed that the assessee had provided sufficient evidence, including statements of accounts and certificates from banks, showing that the loan was obtained for acquiring the property which was let out. The Tribunal found no valid reason for disallowing the interest paid on borrowed capital and directed the Assessing Officer to allow the interest on borrowed capital as claimed by the assessee and to carry forward the loss under the head income from house property.

2. Enhancement of Income Without Issuing a Show Cause Notice:
The assessee argued that the enhancement of income by the CIT (Appeals) without issuing a show cause notice was illegal and void ab initio. The Tribunal did not specifically address this issue in the detailed judgment provided.

3. Addition of Notional Interest on Interest-Free Refundable Security Deposit:
The assessee challenged the addition of notional interest on an interest-free refundable security deposit, relying on various court decisions. The Tribunal referred to the decisions of the Hon'ble Delhi High Court in the cases of CIT Vs. Moni Kumar Subba and CIT Vs. Asian Hotels Ltd., which held that notional interest cannot form part of the actual rent for determining the annual letting value under Section 23(1)(a). The Tribunal reversed the findings of the CIT (Appeals) on this issue and held that no notional interest on interest-free security deposit can be added to the ALV of the property while computing income from house property.

Conclusion:
The appeal of the assessee was allowed, directing the Assessing Officer to allow the interest on borrowed capital and to exclude the notional interest on the interest-free security deposit from the computation of income from house property.