2013 (8) TMI 103 - AT - Income Tax

Deduction of Interest from income from house property - deduction u/s 24(b) - assessee contended that he has paid interest on borrowed capital for construction of house to City Bank of Rs.52,964/- which was related to pre-construction period. The assessee has claimed this interest as part of cost of construction and accordingly claimed in the return of income. It is further submitted that the interest expense related to pre-construction period either can be added to cost of construction or can be claimed 1/5th every year. - Held that - the assessee is entitled for deduction u/s.24(b) of the Act. The AO directed to delete the addition - decided in favor of assessee. Exemption u/s 10(13A) - house rent allowance (HRA) - As per AO assessee and his wife are living together as a family. Therefore, it can be inferred that the house owned by wife of the assessee is occupied by the assessee also - Held that - the requirement of the section is that any allowance (by whatever name called) granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed. However, the exemption is not available in case the residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him. Assessee paid the rent - The assessee has fulfilled twin requirements of the provision, i.e. occupation of the house and the payment of rent. Under these circumstances, the assessee is entitled for exemption u/s.10(13A) of the Act. - Additions made by the AO deleted - decided in favor of assessee.

Summary

Issues:
1. Disallowance of interest claimed for capital gain from sale of house-property.
2. Disallowance of exemption u/s.10(13A) for house rent allowance.

Issue 1: Disallowance of Interest for Capital Gain:
The appeal was against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2009-10. The Assessing Officer disallowed various additions made by the assessee, including disallowance of interest claimed under section 24(b) of the Income Tax Act, 1961, related to the pre-construction period on borrowed capital. The assessee argued that the interest should be part of the cost of acquisition of the property and relied on relevant case laws. The Tribunal found that the AO and CIT(A) did not provide reasons for disallowing the claim and held that the interest amount should be considered as part of the cost of acquisition of the property. The Tribunal allowed the appeal, directing the AO to delete the addition and allow the deduction under section 24(b) of the Act.

Issue 2: Disallowance of Exemption u/s.10(13A) for House Rent Allowance:
The second ground of appeal related to the disallowance of exemption under section 10(13A) of the Act for house rent allowance. The AO and CIT(A) disallowed the claim on the basis that the assessee and his wife were living together, indicating a colorable device to avoid taxes. The Tribunal noted that the assessee had submitted rent receipts and evidence of payment through bank transfers. The Tribunal analyzed section 10(13A) which allows exemption for rent actually incurred on residential accommodation not owned by the assessee. Since the assessee fulfilled the requirements of occupation and payment of rent, the Tribunal held that the exemption should be allowed. The Tribunal directed the AO to allow the exemption under section 10(13A) to the assessee, deleting the addition. The appeal of the assessee was allowed on this ground as well.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the AO to delete the additions related to disallowance of interest for capital gain and disallowance of exemption under section 10(13A) for house rent allowance. The Tribunal provided detailed reasoning based on the provisions of the Income Tax Act and relevant case laws to support its decision.