Ao allowed interest on Loan on wrong assumption of facts: Exercise of section 263 Jurisdiction Valid 

Michelle Y. Poonawalla Vs PCIT (ITAT Pune)

Admittedly, the assessee availed loan from Reliance Home Finance Limited for Rs.8,68,50,000/- and paid interest thereon @ 12.50%. Admittedly, the said borrowed loan was paid to statutory tenants in pursuance of relinquishing deed dated 05-04-2011. The PCIT held the interest paid on such borrowed amount does not fit into provisions of clause (b) of section 24 of the Act. The PCIT reproduced the said provisions in the impugned order at Para No. 6. On plain reading the said clause (b) of section 24 of the Act explains that the deduction is allowable where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. In the present case, as discussed above the agreement at Page No. 42 clearly shows that the assessee purchased the said property in the year 2001 and the relinquishment agreement at Page 56 shows that the assessee as “landlord”, therefore, as rightly pointed by the PCIT, the claim of the assessee is not entitled to claim interest as deduction u/s. 24(b) of the Act. On perusal of the assessment order dated 31-12-2015 clearly shows there was no discussion or reference to deduction claimed and how deduction is allowed. Therefore, the AO had wrong assumption of facts and by applying incorrect law without due application of mind allowed claim of interest paid on borrowed capital u/s. 24(b) of the Act. Therefore, in our opinion, the PCIT correctly exercised its jurisdiction in holding the assessment order dated 31-12-2015 is erroneous and prejudicial to the interest of Revenue. Thus, we do not find any infirmity in the order of PCIT and it is justified and the grounds raised by the assessee are dismissed.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal by the assessee against the order dated 28-03-2018 passed by the Pr. Commissioner of Income Tax-4, Pune (‘PCIT”) for assessment year 2013-14 passed u/s. 263 of the Act.

2. The assessee raised three grounds of appeal amongst which the only issue emanates for our consideration is as to whether the PCIT was justified in holding the assessment order dated 31-12-2015 passed by the AO is erroneous and prejudicial to the interest of Revenue.

3. The brief facts of the case are that the assessee is an individual and engaged in managing family business. The assessee derived income from house property and business/profession during the year under consideration. The assessee filed return of income declaring a total income of Rs.15,65,600/- which was accepted by the AO vide its order dated 31­12-2015 passed u/s. 143(3) of the Act. The PCIT having exercising jurisdiction u/s. 263 of the Act found the claim of deduction of interest of Rs.1,11,54,990/- on borrowed capital is not allowable and does not fit into the conditions laid down in section 24(b) of the Act. The assessee contended that the payment of compensation to the tenant for bettering the title is allowable u/s. 24(b) of the Act and further the AO conducted enquiries in this regard during the course of assessment proceedings. Further, it was argued the order passed by the AO is not erroneous and prejudicial to the interest of Revenue. Considering the same, the PCIT held that the heads of expenditure for computation of income under the head income from house property is exhaustive u/s. 23 and 24 of the Act, the deduction cannot be claimed from out of the annual value if particular type of expenditure is not specifically provided u/s. 24 of the Act, having held the same, the PCIT further held that the AO has not acted in accordance with law in allowing the deduction on the amount of interest paid to the statutory tenant for vacating the property and assessment order thereon is erroneous and prejudicial to the interest of Revenue. Having aggrieved by the order of PCIT, the assessee is before us.

4. The ld. AR submits that the assessee purchased property in Mumbai from J.P. Hotels P. Ltd. vide Deed of Apartment dated 06-09-2001 and drew our attention to Page No. 42 of the paper book. Thereafter, the assessee entered into an Agreement for relinquishing/ surrendering of statutory tenancy with Homi Kaikhosru Erani and Mrs. Aban Homi Erani for a total sum of Rs.9,99,00,000/- and drew our attention to Page No. 56 of the paper book. The assessee paid said amount to the statutory tenants and drew our attention to Page No. 61 of the paper book. The ld. AR submits that the assessee availed loan from Reliance Home Finance Ltd. for Rs.8,68,50,000/- and paid interest @ 12.50% on such borrowed amount. He argued that the assessee is entitled to claim the said interest paid on such borrowed amount to an extent of Rs.1,22,59,620/- during the year under consideration under Clause (iii)(b) of section 27 of the Act. The ld. AR placed on record Circular 495 dated 22-09-1987 regarding the amendments at a glance in the Finance Act, 1987.

5. The ld. AR by referring to Para No. 23.2 of the said circular argued that the legislature extended definition of the expression of ownership for the purpose of transactions covered by section 269UA of the Act and by inserting sub-clause (iiib) covers all the transactions for the purpose of determining the ownership of the property. He argued that it is a statutory tenant Mr. Erani is the legal owner fitting into the definition of sub-clause (iiib) of section 27 of the Act. Further, the ld. AR drew our attention to the decision of Hon’ble Supreme Court in the case of Podar Cement (P.) Ltd. reported in 92 Taxman 541 (SC) and argued that the Hon’ble Supreme Court clarified the meaning of owner of house property given in clause (iiib) of section 27 deeming a person who comes to have control over the property by virtue of such transactions as are referred to in clause (f) of section 269UA of the Act will also be deemed to be the owner of the property. He vehemently argued that the PCIT incorrectly exercised jurisdiction u/s. 263 of the Act and without pointing out any defect in the assessment order held the assessment order is erroneous and prejudicial to the interest of Revenue is not justified and prayed to allow the grounds raised by the assessee.

6. The ld. DR, Shri Anurag Srivastava submits that the AO failed to examine any of the facts relating to deduction claimed in respect of interest paid on borrowed funds. The AO did not discuss anything in his order in this regard and no evidences in respect of such claim were referred to by the AO. Section 22 of the Act defines the income from house property and clause (iiib) of section 27 of the Act refers to section 269 UA of the Act. He referred to Para No. 5 of the impugned order and argued that the assessee had purchased the said property on 06-09-2001 and since then she has been the legal owner of the property and the provisions u/s. 27(iiib) is not applicable. The assessee availed loan to pay the same to statutory tenant which is not the condition laid down in section 24(b) of the Act to claim deduction. The PCIT rightly held that this aspect was not examined by the AO during the course of original assessment proceedings and supported the order of PCIT. He prayed to dismiss the appeal of the assessee.

7. Heard both the parties and perused the material available on record. We note that the assessee purchased scheduled mentioned property vide Deed of Apartment on 06-09-2001 which is evident from Page No. 43 wherein the assessee has been addressed as “purchaser” and the sellers being Z.M. Investments and Traders Pvt. Ltd. and J.P. Hotels Pvt. Ltd. Further, the agreement for the relinquishing/surrendering of the statutory tenancy is at Page No. 56 of the paper book which is entered on 05-04­2011 between the assessee being addressed as “landlord” and Mr. Homi K. Erani and Mrs. Aban H. Erani being addressed as “statutory tenants”. It is noted from Para B of the said relinquishing agreement that the assessee is clearly addressed as absolute owner of the residential Apartment/Flat No. 11 which clearly supports the view of PCIT that the assessee has been legal owner of property since 06-09-2001. Further, It is noted that the assessee being addressed as landlord issued monthly rent receipts to statutory tenants 1 and 2 which is clear from Para C of the said agreement. In Para Nos. E and F establishes that they entered in to an agreement for the relinquishing of the statutory tenancy for agreed compensation of Rs.9,99,00,000/- shows that the said compensation paid for relinquishing the tenancy rights, in the sense, for bettering the title as rightly opined by the PCIT, not fitting in the conditions laid down u/s. 24(b) of the Act. Therefore, we are unable to accept the arguments of ld. AR that the statutory tenants is to be read as owner in terms of the provisions u/s. 27(iiib), Circular 495 dated 22-09-1987 and the finding of Hon’ble Supreme Court in the case of Podar Cement (P.) Ltd. (supra). Thus, in our opinion, all the above referred does not support the contention of ld. AR in treating the statutory tenants as owner of the property.

8. Admittedly, the assessee availed loan from Reliance Home Finance Limited for Rs.8,68,50,000/- and paid interest thereon @ 12.50%. Admittedly, the said borrowed loan was paid to statutory tenants in pursuance of relinquishing deed dated 05-04-2011. The PCIT held the interest paid on such borrowed amount does not fit into provisions of clause (b) of section 24 of the Act. The PCIT reproduced the said provisions in the impugned order at Para No. 6. On plain reading the said clause (b) of section 24 of the Act explains that the deduction is allowable where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. In the present case, as discussed above the agreement at Page No. 42 clearly shows that the assessee purchased the said property in the year 2001 and the relinquishment agreement at Page 56 shows that the assessee as “landlord”, therefore, as rightly pointed by the PCIT, the claim of the assessee is not entitled to claim interest as deduction u/s. 24(b) of the Act. On perusal of the assessment order dated 31-12-2015 clearly shows there was no discussion or reference to deduction claimed and how deduction is allowed. Therefore, the AO had wrong assumption of facts and by applying incorrect law without due application of mind allowed claim of interest paid on borrowed capital u/s. 24(b) of the Act. Therefore, in our opinion, the PCIT correctly exercised its jurisdiction in holding the assessment order dated 31-12-2015 is erroneous and prejudicial to the interest of Revenue. Thus, we do not find any infirmity in the order of PCIT and it is justified and the grounds raised by the assessee are dismissed.

9. In the result, the appeal of assessee is dismissed.

Order pronounced in the open court on 15t^h July, 2022.