2023 (11) TMI 690 - AT - Income Tax

Revision u/s 263 - Claim of interest against rental income - Proof of availing loan for acquisition or construction of property - CIT mentioned that assessee has claimed deduction u/s. 24(b) and assessee has not furnished documentary evidences in support of its claim during the assessment proceedings - HELD THAT - As in our considered view proviso of section 24(b) states that where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital ; however, we observe that this proviso is directly linked to the 1st and 2nd proviso. The first proviso, states that in respect the property referred to in sub section (2) of section 23, which is the property consists of house or part of house which is in the occupation of the owner for the purpose of his own residence or it cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him. In such situation, the annual value of such house shall be taken to be NIL. The first proviso has specifically relates to the situation discussed in section 23 sub-section 2 of the Act, where the individual can claim deduction not exceeding ₹ 30,000/-. The second Proviso is also in relation to first proviso, wherein the above said individual has acquired a constructed with the borrowed capital within five years from the end of the Financial Year in which capital was borrowed the amount of deduction shall not exceed two lakhs rupees. The third proviso is also closely linked to the proviso 1 and 2 and gives certain contingencies in order to claim the deduction mentioned in proviso 1 and 2 therefore all the proviso mentioned in section 24(b) are relation to an individual who intend to claim deduction u/s. 23(2) of the Act. Therefore, the proviso contained in section 24(b) is not applicable to assessee who borrows the capital for the purpose of earing income by letting out the property under the head income from house property . Therefore, the interpretation of third proviso to 24(b) in isolation is not proper and we are not inclined to agree with the findings of the CIT u/s. 263 of the Act. As per the facts on record, we observe that assessee is in business of construction and letting of the property as well as maintenance of the property, in such combined business, it is normal in the construction business to borrow the capital for the overall business and apportion the same based on the head of income. It is not in dispute that assessee has paid the relevant interest to the bank. We observe from the record that AO has collected the information from the assessee and as per the assessment records there is no evidences to show that AO has verified the same in detail. Assessee has submitted all the relevant information, the basis of allocation before the AO. Even otherwise if we consider that Assessing Officer has not verified the claim made by the assessee it can be considered as erroneous order. However, in order to invoke provisions of section 263 of the Act, both conditions has to be satisfied, not just erroneous, even the condition, prejudicial to the revenue. But as per the discussion in the above paragraph we do not agree with the Ld. Pr.CIT that the condition of prejudicial to the interest of the Revenue is satisfied. Therefore, twin conditions as per provisions of section 263 are not satisfied in this case. Hence the order passed u/s. 263 is set aside.

Summary

Issues Involved:
1. Validity of the order under Section 263 of the Income-tax Act, 1961.
2. Disallowance of interest expense under Section 24(b) of the Income-tax Act, 1961.
3. Alternative claim of interest expense as business expenditure under Section 37 of the Income-tax Act, 1961.

Summary:

Validity of Order under Section 263:
The Principal Commissioner of Income-tax (Pr.CIT) issued an order under Section 263 of the Income-tax Act, 1961, stating that the assessment order dated 25.12.2019 was erroneous and prejudicial to the interests of the revenue. The Pr.CIT noted that the assessee claimed a deduction under Section 24(b) without furnishing the necessary documentary evidence during the assessment proceedings. The Pr.CIT observed that the Assessing Officer (AO) did not make any further verification regarding the deduction claimed, thereby invoking the provisions of Section 263. The Pr.CIT directed the AO to conduct requisite enquiries and frame the order of assessment denovo.

Disallowance of Interest Expense under Section 24(b):
The assessee argued that the interest expense claimed under Section 24(b) was legitimate and supported by loan agreements and bank statements. The Pr.CIT, however, noted that the assessee did not provide an interest certificate from the bank, which is a requirement under Section 24(b). The Pr.CIT also observed that the loan agreements did not specify that the loans were for the acquisition or construction of properties generating rental income. The Pr.CIT held that the apportionment of interest costs between "Income from House Property" and "Income from Business" lacked legal sanctity.

Alternative Claim under Section 37:
The assessee alternatively claimed that if the interest expense was disallowed under Section 24(b), it should be allowed as a business expenditure under Section 37. The Pr.CIT rejected this claim, stating that the assessee did not provide supporting evidence to show how the loan was used for business activities generating other business income.

Tribunal's Findings:
The Tribunal observed that the third proviso to Section 24(b) is not applicable to the assessee, as it is relevant for individuals claiming deductions under Section 23(2). The Tribunal noted that the assessee is in the business of construction and letting of property, and it is common to borrow capital for overall business purposes and apportion the interest expense accordingly. The Tribunal found that the AO had collected information from the assessee but did not verify it in detail. However, the Tribunal held that the order was not prejudicial to the revenue, as the assessee had paid the relevant interest to the bank. Therefore, the twin conditions for invoking Section 263 were not satisfied. The Tribunal set aside the order passed under Section 263 and allowed the appeal filed by the assessee.

Conclusion:
The appeal filed by the assessee is partly allowed. The Tribunal set aside the order under Section 263, concluding that the conditions for invoking Section 263 were not satisfied, as the order was not prejudicial to the revenue.