Interest from loan against mortgage of properties cannot be treated as rental income

Sunil Kumar Ahuja Vs ACIT (ITAT Hyderabad)

ITAT Hyderabad held that interest income received towards loan extended against mortgage of properties cannot partake the character of rental income.

Facts- The assessee is an individual and derives income from investment in real estate and share marketing. He had filed his original return of income on 31.12.2009 admitting total income of Rs.83,95,860/- and agricultural income of Rs.9,28,856/-. A search and seizure operation u/s 132 of the I.T. Act was conducted at the residential and business premises of the assessee on 17.09.2008. Notice u/s 153A of the Act was issued and served on the assessee. However, no return of income in response to such notice was filed. AO completed the assessment u/s 153A r.w.s. 143(3) on 30.12.2010 determining the total income of the assessee a Rs.2,09,52,528/- wherein apart from other additions he made addition of Rs.34,14,900/- towards house rent and treated the agricultural income of Rs.9,28,856/- as income from other sources.

In appeal, the learned CIT (A) confirmed the additions made by AO. Aggrieved with such order of the CIT (A) the assessee is in appeal before the Tribunal.

Conclusion- We find the Assessing Officer in the instant case made addition of Rs.34,14,900/- by treating the same as “income from other sources” as against rental income shown by the assessee on the ground that the assessee could not prove the existence of the persons against whom he has shown the cash receipt as rental income as those persons were not in existence and were not traceable. It is the case of the Assessing Officer that the assessee had given certain amount os loan against mortgage of property and such interest income has to be treated as income from other sources and not rental income.

Held that it is an admitted fact that the assessee was giving loan against mortgage of the property and such interest income received towards loan extended against mortgage of properties cannot partake the character of rental income.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal filed by the assessee is directed against the order dated 28.02.2022 of the learned CIT (A)11 Hyderabad relating to A.Y.2009-10.

2. Facts of the case, in brief, are that the assessee is an individual and derives income from investment in real estate and share marketing. He had filed his original return of income on 31.12.2009 admitting total income of Rs.83,95,860/- and agricultural income of Rs.9,28,856/-. A search and seizure operation u/s 132 of the I.T. Act was conducted at the residential and business premises of the assessee on 17.09.2008. Notice u/s 153A of the Act was issued and served on the assessee. However, no return of income in response to such notice was filed. The Assessing Officer completed the assessment u/s 153A r.w.s. 143(3) on 30.12.2010 determining the total income of the assessee a Rs.2,09,52,528/- wherein apart from other additions he made addition of Rs.34,14,900/- towards house rent and treated the agricultural income of Rs.9,28,856/- as income from other sources.

3. In appeal, the learned CIT (A) confirmed the additions made by the Assessing Officer.

4. Aggrieved with such order of the CIT (A) the assessee is in appeal before the Tribunal by raising the following grounds:

“1. The order of the learned CIT (A) is erroneous to the extent is prejudicial to the appellant.

2. The learned CIT (A) erred in confirming the addition made by the Assessing Officer towards agricultural income of Rs.9,28,856/-.

3. The learned CIT (A) erred in confirming the addition towards cash received from rental income of Rs.10,24,470/-.

4. Any other ground/grounds that may be urged at the time of hearing”.

5. Ground of appeal 1 and 4 being general in nature are dismissed.

6. In ground of appeal No.2, the assessee has challenged the order of the learned CIT (A) in confirming the addition made by the Assessing Officer towards agricultural income of Rs.9,28,856/-, treating the same as income from other sources.

6.1. So far as the treatment of agricultural income of Rs.9,28,856/- as income from other sources is concerned, the facts in brief are that the Assessing Officer disbelieved the agricultural income on the ground that the assessee has not booked any income for agricultural activities. The receipts are coming to the books at regular intervals but there is no outgo and the assessee was not able to produce any evidence for carrying out of any agricultural activities other than its possession of the agricultural land. He compared to the treatment of such agricultural income as other income in the past years and accordingly treated the amount of Rs.9,28,856/- as income from other sources which has also been confirmed by the CIT (A). Aggrieved with such order, the assessee is in appeal before the Tribunal.

7. We have heard the rival arguments made by both the sides. We find identical issue had come up before the Tribunal in assessee’s own case in the preceding A.Ys. We find the Tribunal in ITA Nos. 151 to 153/Hyd/2022, order dated 8.7.2022 while deciding the identical issue has granted partial relief to the assessee wherein the benefit of agricultural income of Rs.25,000/-for the A.Y 2003-04, Rs30,000/- for the A.Y 2004-05 and Rs.35,000/- for the A.Y 2005-06 were granted by observing as under:

“9. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT (A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.81,485/- treating the same as income from other sources as against agricultural income declared by the assessee. Similar additions have been made for the A.Y 2004-05 amounting to Rs.90,861/- and for A.Y 2005-06 Rs.95,377/-. We find the learned CIT (A) upheld the action of the Assessing Officer the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the learned Counsel for the assessee that since the assessee is holding 38.86 acres of agricultural land which is not in dispute, therefore, some benefit of agricultural income should be given to the assessee.

10. We find some force in the above argument of the learned Counsel for the assessee. Holding of 38.86 acres of agricultural land by the assessee is not in dispute since the learned CIT (A) has given a finding on this issue. However, the allegation of the Revenue is that the assessee failed to produce any evidence regarding the expenditure towards carrying out of such agricultural activities by him, the yield of flowers and vegetables and the sale of such products in the market. At the same time, holding of 38.86 acres of agricultural land is not in dispute. Therefore, in our opinion, some agricultural income should be made available to the assessee. On being a pointed query by the Bench at the time of hearing, the learned Counsel for the assessee submitted that the land is situated at Kurnool and rainfed. Therefore, considering the totality of the facts of the case and in the interest of justice, the benefit of Rs.25,000/- for the A.Y 2003-04, Rs.30,000/- for the A.Y 2004-05 and Rs.35,000/-for the A.Y 2005-06, as agricultural income, in our opinion, will meet the ends of justice. We hold and direct accordingly. The order of the learned CIT (A) for the above 3 years are accordingly modified and the Assessing Officer is directed to give the benefit of agricultural income of Rs.25,000/- for A.Y 2003-04, Rs.30,000/- for the A.Y 2004-05 and Rs.35,000/-for the A.Y 2004-06 respectively. Grounds raised by the assessee are thus partly allowed”.

8. Respectfully following the order of the Tribunal in assessee’s own case for the preceding 3 A.Ys, we are of the considered opinion that an amount of Rs.40,000/- may reasonably be estimated as agricultural income for the impugned A.Y . We accordingly modify the order of the CIT (A) and direct the Assessing Officer to give benefit of Rs.40,000/- as agricultural income and the balance amount is to be treated as “income from other sources”. Ground of appeal No.2 by the assessee is accordingly partly allowed.

9. So far as the ground of appeal No.3 is concerned, the same relates to the order of learned CIT(A) in confirming the addition of Rs. 10,24,470/-. The facts in brief are that the Assessing Officer during the course of assessment proceedings, noted that the assessee has shown substantial cash received as rental income. On being confronted by the Assessing Officer during the assessment proceedings, the assessee submitted details of rent received, account confirmation copies and copies of rental agreement. The Assessing Officer issued summon u/s 131 to some of the persons for his examination. He noted that Shri Mohd.Asif Ali Khan in his statement submitted that he had borrowed a sum of Rs.4.5 lacs by pledging the property with the assessee @ 4% per month. To cover up the interest, a rent agreement was made and interest in the guise of rent was paid by him in cash. The assessee could not produce Shri Lakshmi Gopal, Bharadwaj and Smt. Sheela Lajwanti from whom rent was shown to have been received. It was found by the Assessing Officer that no such person was available at the address given by the assessee. He therefore, recorded the statement of the assessee during the course of assessment proceedings who stated that he stands by the transactions recorded in the book and the statement given by the witness were given to suite their purposes. In absence of any satisfactory explanation given by the assessee during the assessment proceedings, the Assessing Officer treated the rent received over the years in cash as “income from other sources” in respective years. However, wherever the assessee has shown rent in excess of cash rent, he treated the cash portion as income from other sources and the balance was treated as a rent only. For the impugned A.Y, he treated an amount of Rs.34,14,900/- as income from other sources.

10. In appeal, the learned CIT (A) after obtaining a remand report from the Assessing Officer and rejoinder of the assessee to such remand report upheld the action of the Assessing Officer by observing as under:-

“With regard to addition of Rs.34,14,900/ – as ‘income from other sources’ being rent received in cash, during the course of assessment proceedings, the AO noticed that the interest earned by the appellant which was not accounted for in the books was introduced in the books under the head rental income in the names of some persons and as the appellant was not able to prove the existences of such persons, the AO had treated the portion of cash received in the form of rent as income from other source.

During the course of appeal proceedings, the appellant furnished the relevant books of accounts and ledger statements. After examining the same, the Assessing Officer, in the remand report, stated that the same were accounted for in the books of accounts and no adverse conclusion was given.

The Assessing Officer for various years has noted that the appellant has accounted for Rent received in its books of accounts. There are 2 types of rents broadly classified by the Assessing Officer on examination of books during the Search and subsequently that a particular set of rent is received by the appellant for its properties and other rent which is received in cash. The classification of the rents so received for various years under consideration is as under as per the assessment order:

The Assessing Officer has considered the sum of Rs.19,20,173/- as rental income whereas the sum of Rs. 70,24,500/-which is in cash. It is seen that the modus operandi of the appellant is that it gives loan to various entities and in turn takes the document of their properties. The appellant effectively is accounting for the interest received on the loans given as rental income in respect of the document of the properties taken by him as security with regard to that loan.

The appellant has never brought out any detail regarding the rentals with its ownership of property. The Assessing Officer in the remand report has merely mentioned that the rents were received in cash and accounted for in books under that head but the appellant could not prove that there was a rental agreement and that it was in regard to the properties owned by it. The Addl.CIT, while forwarding the remand report, noted that if the properties are not owned by the appellant, any quantum so received should be taxed as “Income from Other Sources”.

It is seen that the appellant has though accounted for the said incomes in cash, but has failed to develop a nexus that the property is owned by him and therefore any such receipts on mortgage property in lieu of loan given would only be taxable under the head ‘Income from other sources’ and no deduction u/s 24(b) can be allowed as such. Therefore the action of the Assessing Officer as such is upheld considering the claim of the appellant as Rent and the same is therefore taxed as ‘Income from other sources. The appellant has already offered Rental Income under the head Income from House property, as per the remand report. In view of the same, the addition should be limited to the disallowance u/s 24(b) only subject to verification of the above facts and the ground no.3 is dismissed.”

11. Aggrieved with such order of the CIT (A), the assessee is in appeal before the Tribunal.

12. The learned Counsel for the assessee submitted that the assessee has given the money to certain persons and the persons have registered the property in the name of the assessee as mortgage. Therefore, the assessee was the owner of the properties, although the persons/loanees were staying in their respective houses. Therefore, whatever interest they were giving on account of loan taken from the assessee is towards rent for staying in the house and therefore, such income has to be treated as rental income. He accordingly submitted that the benefit of deduction u/s 24 should be made available to the assessee.

13. The learned DR, on the other hand, strongly supported the order of the Assessing Officer and the CIT (A). He submitted that when the assessee is getting interest on the loan advanced, the same cannot be treated as rental income and the CIT (A) was fully justified in sustaining the addition made by the Assessing Officer.

14. We have heard the rival arguments made by both sides, perused the orders of the Assessing Officer and the CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.34,14,900/- by treating the same as “income from other sources” as against rental income shown by the assessee on the ground that the assessee could not prove the existence of the persons against whom he has shown the cash receipt as rental income as those persons were not in existence and were not traceable. It is the case of the Assessing Officer that the assessee had given certain amount os loan against mortgage of property and such interest income has to be treated as income from other sources and not rental income. We find the learned CIT (A) sustained the addition the reasons of which are already reproduced in the preceding paragraphs. It is the submission of the learned Counsel for the assessee that since the properties were mortgaged to the assessee for giving loan, therefore, the properties have become the property of the assessee and merely because the loanees were staying in their respective houses, such amount given by them as interest cannot be treated as income from other sources and has to be treated as rental income in the hands of the assessee.

14.1. We do not find any force in the above argument of the learned Counsel for the assessee. It is an admitted fact that the assessee was giving loan against mortgage of the property and such interest income received towards loan extended against mortgage of properties cannot partake the character of rental income. We find the learned CIT (A) while upholding the addition has also given a finding that since the assessee has already offered the rental income under the head income from house property as per remand report, the addition should be limited to the disallowance u/s 24(b) of the Act only which in our opinion is just and proper and needs no interference. Accordingly, ground of appeal No.3 by the assessee is dismissed.

15. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the Open Court on 27th March, 2023.