1986 (1) TMI 174 - AT - Income Tax

Summary

Issues:
1. Determination of income from a newly constructed house for assessment year 1980-81.
2. Disallowance of entertainment expenses and repairs and maintenance expenses.

Detailed Analysis:

Issue 1: Determination of income from a newly constructed house
The assessment for the assessment year 1980-81 involved the determination of income from a newly constructed house that was let out from 1st March 1980. The assessee sought to deduct the interest paid on borrowed funds for the construction of the house to determine the income from the property as a negative figure. The Income Tax Officer (ITO) allowed a partial deduction for interest paid during the period the property was let out but denied the deduction for the balance, considering the interest paid before the completion of the house as capital expenditure. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, relying on the proviso to section 23(1)(c) of the Act, which states that the income from property cannot be a loss. The assessee argued that section 23 deals with the annual value determination, while further deductions are provided under section 24. The assessee relied on a judgment by the Madras Bench of the Tribunal to support the claim that deductions under section 24 can result in a loss figure, contrary to the restrictive clause in section 23(1)(c). The Tribunal agreed with the assessee's contention, citing the Madras Bench's judgment and the subsequent amendment to the law by the Finance Act, 1984, which allowed deduction of interest on borrowed capital without distinction between residential and commercial properties.

Issue 2: Disallowance of entertainment and maintenance expenses
The second ground in the appeal concerned the disallowance of entertainment expenses and repairs and maintenance expenses by the AAC. The assessee raised this ground in the memorandum of appeal, alleging that the AAC erred in not deciding on this issue. However, during the hearing, the assessee's counsel did not address this point, and there was no evidence that this ground was raised before the AAC. As a result, the Tribunal rejected this ground. The Tribunal partially allowed the appeal, directing the ITO to allow the deduction for interest paid on borrowed funds used for constructing the house property before 1st March 1980, in accordance with section 24(1)(vi) and the Explanation thereto.