1989 (10) TMI 102 - AT - Income Tax

Summary

Issues: Interpretation of deduction of interest under section 24(1)(vi) for borrowed capital in construction of property

In this judgment by the Appellate Tribunal ITAT MADRAS-A, the issue at hand pertains to the deduction of interest under section 24(1)(vi) for borrowed capital in the construction of a property for the assessment year 1984-85. The dispute arose when the Income Tax Officer (ITO) restricted the deduction of interest paid by the assessee to Rs. 35,948, despite interest paid amounting to Rs. 50,826. The ITO based this decision on the grounds that the loans taken for repayment were at a higher rate of interest and were acquired subsequent to the construction of the property. The assessee appealed to the AAC, but the appeal was unsuccessful due to non-appearance. The matter was then brought before the Appellate Tribunal ITAT MADRAS-A for consideration.

The learned counsel for the assessee argued that since the borrowings were solely for the construction of the property, the interest paid should be allowed as a full deduction. On the other hand, the Departmental Representative emphasized the wording of section 24(1)(vi) which states that the deduction is admissible where the property has been acquired with borrowed capital. The Representative contended that the provision does not permit deduction on fresh amounts borrowed to repay the original amounts. The crux of the issue was whether the Revenue's interpretation was acceptable.

The Tribunal analyzed the provision of section 24(1)(vi) in the context of house construction and genuine loan transactions. It highlighted that the provision aims to facilitate house construction and acknowledged scenarios where borrowers may need to repay original loans with fresh borrowings due to various reasons. The Tribunal rejected the strict interpretation proposed by the Revenue and emphasized that the key consideration should be whether the transaction is genuine and entered in good faith. As long as the loans are legitimate and subsequent borrowings are used to discharge the original loan in the normal course, the deduction under section 24(1)(vi) should not be restricted. In the absence of any evidence suggesting colorable transactions or deficiencies, the Tribunal ruled in favor of the assessee, allowing the full relief claimed under section 24(1)(vi) amounting to Rs. 50,826. Consequently, the appeal was allowed in favor of the assessee, overturning the decision of the ITO and granting the full deduction of interest paid.