1986 (6) TMI 70 - AT - Income Tax

Annual Charge, Carrying On Business, Deduction Of Interest, House Rent, Income From House Property, Interest Payable, Rectification Of Mistakes

Summary

Issues:
1. Deductibility of interest under mortgage for assessment years 1974-75 to 1976-77.
2. Disallowance of interest under mortgage for assessment years 1977-78 to 1980-81.
3. Rectification of assessment orders under section 154.
4. Interpretation of section 24(1)(iv) regarding annual charge on house property.

Analysis:

Issue 1:
The dispute revolved around the deductibility of interest under a mortgage for the assessment years 1974-75 to 1976-77. The assessing ITO initially allowed the deduction of interest under the mortgage against house rent receivable based on the property being pledged as security. However, during later assessment years, the ITO disallowed the interest claiming it was voluntarily created by the assessee's predecessor-in-interest. The AAC set aside the orders for the initial assessment years, stating the mistake was not apparent from the record.

Issue 2:
For the assessment years 1977-78 to 1980-81, the assessing ITO disallowed the interest under the mortgage, stating it was voluntarily created by the assessee. The AAC upheld the disallowance for these years, emphasizing that the interest claimed was not allowable under section 24(1)(iv) as it was voluntarily created.

Issue 3:
The ITO initiated proceedings under section 154 for rectification of the assessment orders for the years 1974-75 to 1976-77, disallowing the interest under the mortgage. The AAC held that the mistake was not apparent from the record, and rectification was not justified as there was no error in the original assessment orders.

Issue 4:
The interpretation of section 24(1)(iv) was crucial in determining the deductibility of interest under the mortgage. The provision allows deduction for an annual charge on house property, excluding charges voluntarily created by the assessee. The tribunal found that the charge was not created by the present assessee but by her predecessor-in-interest, and therefore, it was not voluntarily created. The tribunal clarified that the charge need not be on the income arising from the property, as misunderstood by the lower authorities, but only that the property should be subject to an annual charge.

In conclusion, the tribunal held that the interest under the mortgage on the house property was deductible under section 24(1)(iv) for all relevant assessment years. The rectification under section 154 was deemed unjustified, and the appeals of the assessee were allowed while dismissing the departmental appeals.