Case Law Details
ITAT, BENCH `B’, CHENNAI
K. S. Kamalakannan Vs ACIT
ITA No. 588/Mds/2009
DECIDED ON: November 27, 2009
RELEVANT PARAGRAPH
9. The question that arises is whether the loan taken by the assessee from HSBC was for repayment of the loan taken for construction, acquisition, reconstruction “or renewal of the property in question. The undisputed feet emerging from the records is that the deceased father of the assessee took the loan of Rs. 1 crore from EBSL for business purposes by mortgaging the property in question. The assessee inherited immovable property, movable property and liabilities from his father vide family arrangement/ distribution. As such, the loan repayment liability was the share of the assessee in the family division/ arrangement. When the assessee got the share in the entire estate of his father, then the loan liability was shared by the assessee not only because of his inheritance or succession to the property in question, but due to his share-in the estate of his father, which included both assets as well as liabilities. It was a part of family arrangement due to convenience and mutual arrangement between all the legal heirs of the deceased father of the assessee. Therefore the share of the liability owned by the assessee is independent and irrespective of the assets owned by the assessee under succession even in case the assessee had not received any asset and only liability was to be shared by the legal heirs. Therefore, the inheritance or succession of the property in question is the share of the assessee in the total estate and has no nexus with the liability shared by the assessee because the loan was not taken by the father of the assessee for acquisition of the property in question. A simple test for allowing the deduction u/s 24(l)(vi) of the Income Tax Act is that, if the interest paid on the original loan is allowable as deduction, then the interest paid on the second loan for repayment of the original loan is also allowable. Therefore, when the interest payable on the original loan is not allowable u/s 24(l)(vi), then the interest paid or payable on the second loan for repayment of original loan is also not allowable.
10. In the case of V.S.M.R. Jagadtshchandran (Deed) By Lrs. Vs. CTT dted supra, the Honourable Apex Court has held that,
In Civil Appeals Nos. 6098-6101 of 1983 filed against the judgement of the full Bench of the Madras High Court in S. Valliammai Vs CTT we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon Vs OT and have held that the said decision does not lay down the correct law insofar as it holds that where the previous owners had mortgaged the property during his lifetime the clearing off of the mortgage debt by his successor can neither be treated as “cost of acquisition” nor as “cost of improvement” made by the assessee. It has been held that where a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagor’s interest in the property and by discharging the mortgage debt he acquires the mortgagee’s interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagee’s interest in the property which is deductible as cost of acquisition under section 48 of the Ac:. In the present case, we find that the mortgage was created by the assessee himself. It is not a case where the property had been mortgaged by the previous owner and the assessee had acquired only the mortgagor’s interest in the property mortgaged and by clearing the same he had acquired the interest of the mortgagee in the said property. The questions raised by the assessee in the application submitted under section 256(2) of the Act do not, therefore, raise any arguable question of law and the said application was rightly rejected by the High Court. In the circumstances, even though we are unable to agree with the reasons given in the impugned order, we are in agreement with the order of the High Court dismissing the application filed by the assessee under section 256(2} of the Act.”
11. In the above said case, the Honourable Apex Court has observed that the mortgage was created by the assessee himself and it was not a case where the property has been mortgaged by the previous owner and the assessee acquired only mortgagor’s interest in the property mortgaged and by clearing the same he had acquired interest of the mortgagee in the said property. In our view, for computation of capital gains, there should be a transfer of title and if there is a charge “on the property which is cleared by the assessee before transferring “it, then the said clearance of the charge is essential for transfer transactions which resulted in capital gains. Therefore, the essential element in the case of capital gains is the transfer of title of the properly and, therefore, the clearing of the title by the assessee by discharging the charge will be a part of the cost of acquisition for the purpose of capital gains. But in case of Income from House Property, the transfer in the name of the assessee is not an essential element if the assessee inherited and succeeded the property with existing charge, not created for acquisition of the property, by the previous owner. Then the Charge on the property does not affect the rights of the assessee in earning the Income from House Property,
12. In the case in hand, the assessee inherited the property under the family arrangement and the loan taken by the father of the assessee, by mortgaging the property has* not affected the existence of the property, which is required for the purpose of computing Income from House Property. Since the father of the assessee has not created a charge for borrowing capital for bringing the property into existence, the original loan was not connected with the existence of the property, being prior to even the purchase of land by the father of the assessee. Hence, the principle laid down by the Hon’ble Apex Court on the issue of cost of the property for computation of capital gains is not applicable per se in the case of deduction u/s 24(1 )(vi) for computation of income.
13. The learned Commissioner of Income Tax (Appeals) relied upon the decision of the Honourable Jurisdictional High Court in the case of K. Govinda Bhatt Vs. CTT 235 TTR 528 (Mad) wherein the Honourable Jurisdictional High Court has held in p. 532 & 533 as under:-
“We have already extracted the relevant portion of section 24(l)(vi) of the. Act as well as section 55{4)(b) of the Transfer of Property Act. According to section 100 of the Transfer of Property Act, where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does -not amount to mortgage, the latter person is said to have a charge on the property and all the provisions in that Act, which apply to a simple mortgage shall, so far as may be, apply to such charge. Therefore, a transaction involving a charge, does not amount to a mortgage. In the case on hand, the assessee has executed a mortgage deed in respect of a property by a registered deed and that, therefore, the assessee cannot claim relief under section 24(1 )(vi) of the Act. In CIT Vs. Smt. Indramani Devi Singhania (1991) 189 ITR 124, the Allahabad High Court, while considering the provisions of section 24(1 )(vi) of the Act, held that no one mortgages his property, except when he is in need and on that account, the transaction of mortgage cannot be said to be an involuntary transaction. Therefore, the interest paid by the owner of a property on the mortgage executed by him, even though in the interest of his business, in respect of that property, is not deductible under section 24{l)(vi) of the Act, as, under that clause, only an annual charge, which is not voluntary or which does not amount to capital charge, is deductible. In CT Vs. Tarachand Kaiyanji (1993) 204 ITR 43, the Bombay High Court res held that where an assessee had created a charge on his property to meet its excess profits tax liability or a portion thereof, which is a voluntary charge, the interest liability was not a permissible deduction under section 24(l)(iv). In CIT Vs. Rajah, Dhanrajgiriji (1985) 154 ITR 719, the Andhra Pradesh High Court held that whether the charge created was voluntary or not, is a question of fact. The mortgage in respect of the Bombay house property was created under the pressure of a court sale and in respect of Pune property, since the creditor demanded additional security, the assessee was obliged to create an equitable mortgage. Therefore, it could not be said that the charge was create by the assessee voluntarily. Therefore, the amount paid towards interest on the mortgages were deductible under section 24(1 )(IV) 0f the Act. Such is not the case here. The mortgage, in the case- on hand, was created ‘ neither under a threat of court sale nor to meet the demand for additional security. In CT Vs. Central Bank Executor and Trustee Co. Ltd. (1993) 203 ITR 666, the Bombay High Court, held that where an overdraft was obtained with a bank on the security of the house property by creating a charge on it for the payment of estate duty, the interest payable on such loan, is not deductible under section 24(1 )(iv) of the Act, while computing the income from the property. In the present case, assuming there is a charge, the charge was created by the assessee voluntarily. It was not created or thrust upon the assessee either by operation of law or by a decree of a court or by the act of his predecessor- in-title. Therefore, we consider that the Tribunal was correct in saying that in the present case, there is neither a charge nor the charge was created involuntarily and, therefore, interest payable on such charge is not deductible under section 24(l)(iv) of the Act. Accordingly, we answer the question referred to us in “the negative and against the assessee. No costs.”
14. Even otherwise, the subsequent loan taken by the assessee from HS8C was not fully utilized for repayment of the outstanding loan taken by the father of the assessee as It is clear from the facts that the assessee took another loan of Rs.l crore from EBSL for investment in shares and partnership firm and the repayment of loan of Rs.l crore to EBSL includes the loan taken by the assessee himself. In any case, the original loan taken by the father and subsequent loan taken by the assessee from EBSL was not for the purpose of construction or acquisition, etc. of the house property in question. Hence, the loan taken from HS8C for repayment of earlier loan does not fail under the category of “loan for discharging the liability of the loan taken for acquisition or construction etc of the property”. Accordingly, the interest whether paid or payable, is not allowable under the provision of section 24(l)(vi) of the Income Tax Act as it stood at the relevant time. Accordingly, we find no error or illegality in the order of the lower authorities qua this issue. The order of the learned Commissioner of Income Tax (Appeals) is upheld.
