2020 (12) TMI 1151 - AT - Income Tax

Computation of income from house property - deduction of interest on subsequent loan which was borrowed to repay earlier loan - assessee has claimed deduction under section 24(b) as interest paid on capital borrowed for the purpose of construction of the property- interest paid on the loans borrowed for the purpose of construction of a commercial building - CIT(A) allowed the claim of the assessee for deduction of interest paid to Corporation Bank but did not allow the claim of the assessee for deduction on account of interest paid to Kaveri Bai - HELD THAT - The CBDT in Circular No. 28 dated 20-8-1969 has explained that when a loan is taken to repay loan taken for construction of a property interest paid on such loan is also deductible in computing under the head income from house property. CIT(A) held that this circular is not applicable because the same was issued when erstwhile Sec. 24(1)(vi) of the Act was in force and that by the Finance Act, 2001 w.e.f. 1.4.2002 Sec. 24 of the Act was reframed is not correct on the part of the CIT(A) to conclude that the aforesaid circular is not applicable as it was issued under the erstwhile provisions of Sec. 24 as it stood prior to 1.4.2002. The new provisions of Sec. 24 are also on the same lines with regard to the scheme of determination of income under the head income from house property and in particular with regard to allowability as deduction of interest paid on loans borrowed for the purpose of constructing the property. Therefore one of the reason given by the CIT(A) for not allowing the claim of the Assessee is therefore unsustainable. Denyi ng deduction of interest paid to Mrs. Kaveri bai is by applying the 3rd proviso to Sec. 24(b) - The expression used in Sec. 24(b) is 'property' and not residential or commercial property. Therefore, irrespective of the nature of the property whether it is residential or commercial, deduction has to be allowed under section 24(b) of the Act. As far as the 3rd proviso to section 24(b) of the Act is concerned, all the provisos to Sec. 24(b) of the Act deal with property referred to in section 23(2) of the Act which refers to a residential property. The proviso only carves out an exception to section 24(b) of the Act, in so far as it relates to property used for residential purposes and does not deal with or curtail the right of an assessee to get deduction on interest paid on loans borrowed for the purpose of constructing commercial property. Both the AO and CIT(A), in our view, fail into an error in applying the 3rd proviso to section 24(b) of the Act to the case of the assessee. None of the reasons assigned by the revenue authorities for denying the claim of the Assessee for deduction of interest paid to Mrs. Kaveri Bai, while computing income under the head income from house property can be sustained. We, therefore, direct that the deduction claimed by the assessee should be allowed.

Summary

Issues:
Appeal against disallowance of deduction on interest paid to a lender for a commercial building project under section 24(b) of the Income Tax Act, 1961.

Detailed Analysis:
1. The assessee, a company engaged in real estate projects, filed a return declaring income under "Income from House Property" for Assessment Year 2011-12, claiming a deduction of interest paid on capital borrowed for property construction under section 24(b) of the Act.
2. The dispute arose when the Assessing Officer disallowed the deduction on interest paid to a lender, Mrs. Kaveri Bai, despite the funds being used to repay a loan taken for property construction from Corporation Bank.
3. The CIT(A) upheld the disallowance, citing the third proviso to section 24(b) of the Act, which was inserted by the Finance Act, 2002, emphasizing that the provision is relevant only for self-occupied properties as per Section 23(2) of the Act.
4. The assessee contended that the CBDT Circular No. 28 dated 20-8-1969, applicable under the previous provisions of the Act, remains relevant, allowing deduction for interest paid on loans used to repay original property construction loans, irrespective of the property type.
5. The Tribunal analyzed the statutory provisions of Sec. 22, 23, and 24 of the Act, emphasizing that the deduction under Sec. 24(b) is applicable to properties acquired, constructed, or renewed with borrowed capital, without specifying the property type.
6. Referring to the CBDT Circular, the Tribunal disagreed with the CIT(A)'s interpretation, asserting that the circular's principles remain applicable under the current Sec. 24(b) provisions, allowing deduction for interest paid on loans used to repay original property construction loans, regardless of property type.
7. The Tribunal concluded that the reasons provided by the revenue authorities for disallowing the deduction were unsustainable, directing that the deduction claimed by the assessee for interest paid to Mrs. Kaveri Bai should be allowed.

This detailed analysis highlights the interpretation of statutory provisions and the applicability of the CBDT Circular in allowing deductions for interest paid on loans borrowed for property construction, emphasizing that the nature of the property does not restrict the eligibility for such deductions under section 24(b) of the Income Tax Act, 1961.