1990 (8) TMI 208 - AT - Income Tax

Annual Value, Borrowed Capital, Income From House Property, Income From Other Sources, Rental Income

Summary

Issues Involved:
1. Classification of income from property and other sources.
2. Reasonableness of the rent received.
3. Deductibility of interest on borrowed capital.

Issue-Wise Detailed Analysis:

1. Classification of Income from Property and Other Sources:
The primary issue was whether the income derived from the property, which included air-conditioning and lift facilities, should be classified entirely under "income from property" or partially under "income from other sources." The assessee argued that the provision of air-conditioning and lift facilities was independent of the lease of the property and should be assessed separately. However, the tribunal upheld the view that the entire income should be assessed under the head "income from property." Citing Section 56(2)(iii) and the Supreme Court decision in Sultan Bros. (P.) Ltd. v. CIT, it was determined that the intention of the parties did not indicate an inseparable letting of machinery and building. The tribunal concluded that the lease of the building could continue even if the air-conditioning and lift facilities failed, indicating that these facilities were merely amenities attached to the building and not independent sources of income.

2. Reasonableness of the Rent Received:
The assessee contended that the rent received, calculated at Rs. 2.35 per sq. ft., was reasonable and should be accepted without variation. The tribunal noted that under Section 23, the annual value of the property is deemed to be the reasonable rent or the actual rent received if it is more than the reasonable rent. The assessee provided examples of nearby properties with lower or comparable rents to support their claim. However, the tribunal considered the interest-free loan of Rs. 25 lakhs received by the assessee as part of the income derived from the property. The Supreme Court's decision in Bhagwan Dass Jain v. Union of India was cited, stating that income includes what one saves by using a property oneself. The tribunal concluded that the interest saved by the assessee on the borrowed capital should be included in the income, which, when added to the rent offered by the assessee, justified the CIT(A)'s assessment of Rs. 7,20,000.

3. Deductibility of Interest on Borrowed Capital:
The assessee claimed a deduction for interest on borrowed capital used to purchase air-conditioning equipment. The ITO and CIT(A) disallowed this deduction, arguing that there was no nexus between the borrowed capital and the equipment. The tribunal upheld this view, stating that since the entire income was assessed under "income from property," the interest on borrowed capital could not be deducted. The tribunal also referenced the principle that different legal transactions may attract different tax treatments, and the assessee's choice to take an interest-free loan did not warrant a deduction for hypothetical interest payments.

Conclusion:
The tribunal upheld the CIT(A)'s assessment of the income from property at Rs. 7,20,000, rejecting the assessee's claims for bifurcating the income and deducting interest on borrowed capital. The decision emphasized the inseparability of the building and amenities, the inclusion of interest saved as part of the income, and the tax implications of the assessee's chosen financial arrangements.