Case Law Details

Case Name : Akansha Ranju Pilani Vs Income Tax Officer (ITAT Mumbai)
Appeal Number : Income Tax Appeal No. 3597/Mum/2013
Date of Judgement/Order : 12/06/2015
Related Assessment Year : 2010-11
Courts : All ITAT (5373) ITAT Mumbai (1672)

Brief of the case

 In the case of Akansha Ranju Pilani vs. Income Tax officer, (ITAT Mumbai) has held that Only the expenditure/outgoings specified under the relevant head of income and, further, subject to the conditions specified in respect thereof, stand to be allowed in computing the income under that head of income. Merely because the assessee may have incurred expenditure toward or in relation to an income falling under a particular head of income, would not by itself be sufficient to allow the same.

Facts of the case

1. The assessee’s borrowing from bank was toward and, in fact, utilized for/invested in a residential house, income from which is assessable u/s.22. The property being self occupied, the assessee in fact claimed and was allowed interest on the said home loan to the extent permissible in computing the income under the said head of income for such, i.e., self occupied, property, at Rs.1,50,000/-. The balance interest (Rs.14,19,007/-) was set off against the assessee’s interest income on loan (at Rs.15,34,628/-) to one, M/s. Shubham International.

2. AO has disallowed claimed of assessee and added Rs 14,19,007/-, since maximum allowance u/s 24 in case of self occupied properties is Rs 1,50,000/- any excess interest cannot be allowed under that section. And deduction of balance interest of Rs 14,19,007 cannot be allowed against income from other sources as per the provision of the Income Tax Act. Assessee couldn’t able to succeed in before CIT(appeal). Hence, therefore, aggrieved by the decision of CIT(A) , Assessee file an appeal before ITAT.

Issue Under Consideration

1. Whether Interest paid of Rs.14,19,007/- on borrowing for investment in house property be allowed as deduction against the interest receipts, when assessee was not able to retrieve the loan money back from the person to whom he had lent, in time, necessitating a temporary arrangement by way of bank borrowing.

Assessee’s Contention

1. The basis of the assessee’s claim is that had he withdrawn his loan and invested in the house property, he would not have earned the said interest. Correspondingly, he would not suffer interest on the bank borrowing. In fact, that is what he had intended to, but could not, as he was not able to retrieve the loan money back from the person to whom he had lent, in time, necessitating a temporary arrangement by way of bank borrowing.

2. The two arrangements are at par, so that interest suffered, i.e., in excess of Rs.1,50,000/- (Rs.14.19 lacs), ought to be adjusted in computing his ‘actual income’. Reliance is placed on the decision in the case of Raj Kumari Aggarwal v. Dy. CIT (ITA No. 176/Agra/2013 dated 18/7/2014), wherein the Tribunal, in a similar situation, allowed the assessee’s claim for interest on borrowings against the interest arising on bank FDRs, on the security of which the borrowing was raised.

ITAT decision / observations

1. The total income under the Act, i.e., chargeable to tax there-under, is to be computed by classifying it, according to the nature of the income, under various heads of income, with the income not covered under any specific head falling to be classified under the residuary head, i.e., ‘income from other sources’. Further, income under any head of income is to be computed following the computation provisions as specified for the relevant head, which stand classified as various parts of Chapter IV of the Act, i.e., Chapter IV-A to IV-F.

2. Merely because the assessee may have incurred an expenditure toward or in relation to an income falling under a particular head of income, would not by itself be sufficient to allow the same. It would be so only where the same is listed as an admissible deduction and, two, satisfies the condition/s specified for deduction, to which the same is therefore subject. In the present case, section 24(b) governs the deduction on account of interest on borrowed capital for the purpose of acquiring house property or improvement thereto.

3. In fact, even as observed during hearing, is what had led to what we may term as an ‘imbalance’ as per the assessee’s plans. But for this limit, the entire interest on borrowed capital (Rs.15,69,007/-) would stand to be allowed against income under Chapter IV-B, i.e., income from house property, resulting in the two arrangements, i.e., either withdrawing money lent and saving interest to bank, or, alternatively, assuming borrowing for investment in house property, being at par, both financially (perhaps, that is – the interest rates on borrowing and monies lent being not known), as well as under the tax regime. Assuming a tax equivalence, while none existed, then, thus, represents the fundamental fallacy in the assessee’s argument and case, i.e., the underlying assumption that the two arrangements being financially equivalent (or nearly so), would lead to a similar or same consequence in law as well.

4. The issue under reference is in fact covered against the assessee, as again observed by the Bench during hearing, by the decision by the apex court in CIT vs. Dr. V. P. Gopinathan [2001] 248 ITR 449 (SC). In the facts of that case the assessee had moneys in fixed deposit, on which it earned interest at Rs. 1,17,444/-. He borrowed on the security of the bank deposit, paying interest to the bank at Rs. 90,410/-, claiming that he be taxed only on the differential amount of Rs.27,034/-. The same being allowed by the tribunal and the hon’ble high court, the Revenue carried the matter in appeal by special leave. The claim was negatived on the ground that it had no basis in law, i.e., s. 57(iii), inasmuch as there was no nexus, as in the present case, between the interest earned and paid.

5. The bank borrowing has been invested toward another source of income, i.e., income from house property. The same may not necessarily result in any income and, in any case, has no relation to the income by way of interest on the bank deposit, on the security of which the borrowing was raised for investment in house property, and against which income the interest thereon is sought to be set off. That the assessee could have invested in house property out of his sources, in which case he would not have suffered interest at all, is a different matter altogether. The two investments, i.e., house property and interest bearing loan, have different income potential/implications, and carry different risks.

6. The two streams of income, flowing from vastly different sources, are subject to different computational provisions under the Act, and bear different risk profiles. To say, therefore, that interest on a borrowing applied toward house property be deducted against the income from the property on the security on which the same is raised, is misplaced. Rather, the claim of interest on borrowing applied to a particular source of income (house property) against income arising from the said source of income, i.e., house property (Rs.1.50 lacs) as well as against income from another source, i.e., income from other sources (at Rs.14.19 lacs), is self contradictory. The borrowing is undertaken only for investment in house property. The assessee may have his reason for the same, but that would not operate to alter or change the character of the income arising there-from, or the expenditure incurred in relation thereto, and which shall therefore, subject to the provisions of the Act, stand to be allowed there against, as indeed has been in the instant case. Therefore, the appeal is dismissed.

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Tags : CA Rahul Sureka (55) ITAT Judgments (5553)

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