Issues
Whether or not the assessee was entitled to a deduction for interest paid on a loan used to purchase a residential home since he had not taken possession of the property, and whether or not the lower authorities were correct in rejecting that claim based on the law and the circumstances of the case.
Facts
The assessee, a practising attorney, submitted his income tax return for the 2015–16 fiscal year by electronic filing on March 31. He reported a total income of Rs.1,19,68,190. An income return was first handled under section 143(1) of the Act. In the end, the assessee’s case was chosen for a more in-depth audit under Section 143(2) of the Act. 3. The A.O. noted throughout the assessment process that the assessee had claimed a deduction of Rs. 2 lacs for interest paid on borrowed capital under the category “Income from House property” under Sec. 24(b) of the Act. In response to our inquiry, the assessee said that the monies used to purchase his home (apartment number A-2101 in Palm Beach Residency “A” Wing on the 21st floor of Sector 4 of Palm Beach Road in Nerul, Navi Mumbai) were obtained via a loan. The A.O. denied the assessee’s claim for interest deduction u/s 24(b) of the Act since he had not taken possession of the property in issue. As such, the A.O.’s ruling under section 143(3) of the Act, dated 27.12.2017, set the assessee’s income at Rs.1,21,68,190/-.
Assessee appealed the assessment order to the CIT because he was dissatisfied with it. The CIT(A), however, did not agree with the assessee’s arguments and affirmed the assessee’s claim for deduction u/s 24(b) of the Act.
The CIT(A) rejected the taxpayer’s appeal and upheld the AO’s order on the following basis:
i. The taxpayer had no control or custody over the residential property in question. Due to the continuing disagreement between the taxpayer and the builder/society, he also would not have been able to assume control/domain of the home property. For municipal taxes and other expenses to be deductible, section 24(b) of the ITA requires that there be income taxable under the category “Income from House Property.” Because of the controversy, however, the taxpayer in question was not expected to receive any money from the transaction under discussion.
ii. If the taxpayer’s reasoning is accepted, then the taxpayer will not get any income from the property for a number of years, although continuing to claim the deduction under section 24(b) of the ITA. In granting deduction under section 24(b) of the ITA, the legislature clearly did not intend this to be the case.
Aggrieved, the taxpayer appealed against the CIT(A)’s order before the Mumbai Bench of the Income- tax Appellate Tribunal (ITAT).
Observation of the court
The question before the ITAT was whether or not the lower authorities were correct in rejecting the taxpayer’s claim for deduction of interest paid on a loan used to purchase a residence in accordance with a registered agreement dated September 20, 2009.
The ITAT observed the following:
Using a formal “agreement” dated September 20, 2009, the taxpayer registered a home in lieu for consideration. The aforementioned home was acquired with the help of a loan, on which the taxpayer made interest payments throughout the tax year under consideration (viz. FY 2014-15, corresponding to AY 2015-16). During the audit process, the taxpayer submitted a certificate showing that the aforementioned interest on borrowed monies had been paid. Interest paid on funds borrowed by a taxpayer to finance the purchase, construction, repair, renewal, or reconstruction of an asset is deductible under Section 24(b) of the Income Tax Act. No prerequisite or qualifying requirement was required that the taxpayer should have taken possession of the property thus bought or acquired before claiming deduction of interest under section 24(b) of the ITA. For properties included in Section 23(2) of the ITA, the first and second provisos to Section 24(b) of the ITA only considered an inherent maximum restriction on the amount of deduction.
However, the above caveats do not in any way affect a taxpayer’s right to deduct interest paid on capital borrowed for the purpose of purchasing, building, repairing, renewing, or reconstructing a residential home property that does not come within the scope of section 23(2) of the ITA. According to the CIT(A), the taxpayer would not have any revenue from the subject residential property since he or she does not have control or dominion over it. For this reason, it was incorrect and contrary to the intent of sections 22–24 of the ITA to allow a deduction for the aforementioned home property under section 24(b) of the Act. The taxpayer’s possession of the property was irrelevant to the calculation of the “annual lettable value” of the home under sections 22 and 23 of the Income Tax Act (ITA), which relied only on the taxpayer’s “ownership” of the home. Even though the taxpayer did not really take possession of the residential property for which he had taken out a loan, according to a strict reading of Section 24(b) of the ITA, he was nevertheless entitled to deduct the interest he paid on the loan.
Decision
In view of the above, the ITAT allowed the taxpayer’s appeal and thereby, directed the AO to allow the deduction of INR 200,000 of the interest paid on the borrowed capital under section 24(b) of the ITA.
Comment
There may be a temporal lag between the date of acquisition and the date of possession of a residential property. This ruling:
- Has decided that section 24(b) of the ITA does not preclude a taxpayer from deducting interest paid on a loan obtained to purchase a residential property, even though control of the property has not been transferred to him.
- Has authorised deduction for interest paid on borrowed money (taken for purchasing home property) on the ground that the property was purchased by the taxpayer, even if ownership of the property was not obtained by the taxpayer.
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