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Issues Involved:
1. Deductibility of interest paid on sums borrowed for acquiring properties under Section 24(1)(vi) of the Income-tax Act, 1961. 2. Determination of the annual value of the self-occupied portion of a property under Section 23(2) of the Income-tax Act, 1961. Detailed Analysis: 1. Deductibility of Interest Paid on Sums Borrowed for Acquiring Properties: The primary issue in the appeals was whether the interest amounts of Rs. 3,359 and Rs. 5,850 paid by the assessees on sums borrowed for acquiring properties were deductible under Section 24(1)(vi) of the Income-tax Act, 1961. The properties in question were allotted to the assessees, Shri Sumermal Dugar and Smt. Manori Dugar, upon their retirement from the partnership firm M/s. Rekhabchand Sohanlal. The Income Tax Officer (ITO) disallowed the deduction, arguing that the properties were not acquired with borrowed capital but were given as part of the settlement of the partners' accounts upon retirement. The ITO considered the payment of interest as a capital charge under Section 27(5) of the Act, which did not qualify for deduction under Section 24(1). The Appellate Assistant Commissioner (AAC) reversed the ITO's decision, stating that the charge was not a capital charge but an annual charge, thereby allowing the interest deduction under Section 24(1)(vi). The Tribunal, after careful consideration, restored the ITO's orders, setting aside the AAC's orders. The Tribunal emphasized that for an interest deduction to be allowable under Section 24(1)(vi), the property must be acquired with borrowed capital. In this case, the properties were acquired as part of the settlement of accounts during the retirement from the firm, not through borrowed capital. The Tribunal noted that the amounts withdrawn by the partners were from their capital accounts as existing partners, not as borrowed funds. Therefore, the transactions did not qualify as "acquiring" property with borrowed capital, and the interest paid could not be deducted under Section 24(1)(vi). 2. Determination of the Annual Value of the Self-Occupied Portion of a Property: The second issue involved the determination of the annual value of the self-occupied portion of a property under Section 23(2) of the Income-tax Act, 1961. The ITO initially took the annual value of the self-occupied portion at 10 percent of the other income. The assessee challenged this, claiming a further deduction of Rs. 1,800 for the self-occupied portion, which the AAC accepted. The Tribunal analyzed Section 23(2), which specifies that the annual value of a self-occupied house should be determined as if the property were let out and then reduced by one-half of the amount determined or Rs. 3,600, whichever is less. The proviso to Section 23(2) states that if the computed sum exceeds 10 percent of the total income (excluding income from the property and before deductions under Chapter VIA), the excess should be disregarded. The Tribunal found that the AAC's direction to deduct Rs. 1,800 from the 10 percent figure was incorrect. The proper method is to first compute the annual letting value in the normal course, deduct Rs. 1,800, and then compare it with 10 percent of the other income. The lower of the two values should be adopted as the annual value. The ITO had not followed this method, and therefore, the Tribunal set aside the orders of both the AAC and the ITO on this point, remanding the matter back to the ITO for recomputation in accordance with the law. Conclusion: The Tribunal restored the ITO's orders regarding the disallowance of interest deductions under Section 24(1)(vi) and set aside the AAC's orders. The Tribunal also remanded the issue of determining the annual value of the self-occupied portion back to the ITO for proper computation. The departmental appeals were treated as allowed, and the cross-objections supporting the AAC's orders were rejected.
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