2020 (3) TMI 684 - AT - Income Tax

Treating the house property as a self-occupied property - AO restricted the claim of interest u/s. 24(b) - status of the property, i.e., self-occupied or rented - HELD THAT - Revenue has rested merely by doubting the genuineness of the arrangement, without probing the facts further. What is the total area, as well as its composition/profile? How many family members, besides the assessee (the owner) and the two tenants, are residing thereat? Has the area let been specified, allowing private space (a separate bedroom each) to son and daughter, who would in any case be also provided access to or user of the common area - specified or not so in the agreement/s, viz. kitchen, balcony, living area, bathrooms, etc. How has the rent been received, i.e., in cash or through bank and, further, been sourced, i.e., whether from the assessee (or any other family member), or from the capital/income of the tenants. Why, there was even no attempt to inquire if the arrangement was a subsisting/continuing one, or confined to a year or two, strongly suggestive of, in that case, a solely tax motivated exercise. We are conscious, well be that the assessee's major son and daughter are financially independent (or substantially so), with independent incomes, sharing the interest burden of their common residence with their father. And, as such, instead of transfer of funds to him per se, have regarded, by mutual agreements, the same as rent, as that would, apart from meeting the interest burden to that extent, also allow tax saving to the assessee-father. A genuine arrangement cannot be disregarded as the same results or operates to minimize the assessee's tax liability. We are, accordingly, in principle, in agreement with the assessee's claim inasmuch as, as afore-noted, there is nothing on record to further the Revenue's case of the arrangement being not a genuine arrangement, i.e., apart from being unusual. On quantum, however, the assessee's stand is infirm. The house property, A/1-5, Prithvi Apartments, the family residence of the Pathan family, is, in view of the rent agreements, both a self-occupied and a let out property. The interest claimed (₹ 21.62 lakhs) is qua the entire property, which therefore cannot be allowed in full against the rental income, which is qua a part of the house property. The assessee shall provide a reasonable basis for such allocation as well as the working of the area let. We say so as it may well, in view of the joint residence, be that no area (portion) is specified in the rent agreements. The number of family members living jointly; their living requirements - which may not be uniform; fair rental value of the property, etc., are some of the parameters which could be considered for the purpose. The AO shall adjudicate thereon per a speaking order, giving definite reasons for being in disagreement, where so, in whole or in part, with the assessee's working, within a reasonable time. We decide accordingly. - Decided partly in favour of assessee.

Summary

Issues:
1. Delay in filing the appeal.
2. Dispute regarding house property income and interest claim.

Analysis:
1. The appeal was delayed by sixty-six days, but the delay was condoned after a reasonable explanation, and the appeal was admitted.
2. The main issue was the dispute over house property income related to the assessee's residential property in Mumbai. The assessee claimed a loss on the property due to interest on borrowed capital, which was adjusted against rental income. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) restricted the interest claim, considering the arrangement as a tax-reducing device. The assessee argued that the arrangement was supported by written agreements and should not be disregarded just because it involved close family members. The Tribunal noted the unusual nature of the arrangement but emphasized the need for further inquiry into various aspects, such as the total area, composition of the property, rent payment method, source of rent, and continuity of the arrangement. The Tribunal acknowledged the possibility of a genuine arrangement for tax-saving purposes and referred to relevant legal precedents. However, the Tribunal found the assessee's interest claim to be excessive as it related to the entire property, including the self-occupied and let-out portions. The Tribunal directed the assessee to provide a reasonable basis for allocating the interest claim and instructed the AO to make a decision based on specified parameters. The appeal was partly allowed based on these considerations.