Case Law Details
Housing & Hospitality Pvt. Ltd. Vs ITO (ITAT Pune)
Interest on loans borrowed for acquisition of flats which is allowable u/s 24 cannot be capitalized: ITAT Pune
Introduction: In a recent case, Housing & Hospitality Pvt. Ltd. contested an appeal against the order of the National Faceless Appeal Centre, Delhi, dated 21.08.2023, pertaining to the assessment year 2015-16. The key dispute centered around the disallowance of deductions under section 48(ii) of the Income Tax Act related to the indexed cost of interest paid for the acquisition of a property sold by the assessee.
Grounds of Appeal: The appellant presented several grounds of appeal, challenging the disallowance made by the Assessing Officer (AO) and the decision of the Commissioner of Income Tax (Appeals) [‘CIT(A)’]. The primary contentions included objections to the disallowance under section 48(ii) and the denial of deduction amounting to Rs.24,38,826/- under the same section. Additionally, the appellant sought leave to add, modify, delete, or amend the grounds of appeal.
Additional Grounds of Appeal: The appellant introduced additional grounds of appeal, contesting the disallowance of interest paid for the acquisition of the properties, the charge of interest under section 234B of the Income Tax Act, and the plea to add/alter/amend any grounds of appeal.
Factual Background: Housing & Hospitality Pvt. Ltd., a company engaged in hotel and lodging operations, filed its return of income for the assessment year 2015-16 on 20.09.2015, declaring a Nil income. The AO completed the assessment on 28.11.2017, determining a total income of Rs.41,68,080/-. The primary bone of contention was the addition of Rs.41,68,078/- under section 50C of the Act, related to the sale of two flats. The AO invoked section 50C based on the stamp duty valuation authority’s valuation of the properties.
Key Issues: The crux of the matter revolved around the deduction claimed by the appellant under section 48(ii) for the indexed cost of interest incurred on loans borrowed for property acquisition. The AO disallowed this deduction, resulting in the appeal to the NFAC.
Appellant’s Stand: The appellant contended that the disallowance was beyond the scope of the limited scrutiny assessment, asserting that the AO exceeded the jurisdiction. On merits, the appellant argued that the flats were acquired using borrowed funds and claimed the deduction under section 24(b) for the interest paid. The indexed cost of this interest expenditure, the appellant argued, should be allowed as a deduction while computing capital gains.
NFAC Decision: The NFAC, citing the Supreme Court’s decision in CIT vs. Tata Iron & Steel Co., upheld the disallowance. The NFAC rejected the appellant’s reliance on various decisions supporting the allowability of indexed cost of interest expenditure.
ITAT Pune’s Verdict: The ITAT Pune, after considering the rival submissions, emphasized the fundamental point that expenditure allowable under section 24 cannot be capitalized or claimed as a cost of acquisition. The tribunal affirmed that when the statute prescribes a specific manner for deduction, the AO must adhere to that prescribed method. In essence, the ITAT upheld the AO’s decision and dismissed the appeal.
Conclusion: The Housing & Hospitality Pvt. Ltd. vs. ITO case highlights the nuanced debates surrounding the deductibility of interest expenditure on borrowed funds for property acquisition. While the appellant argued for the indexed cost of such interest to be allowed as a deduction, the ITAT Pune, in alignment with the AO and NFAC, maintained that statutory provisions must be strictly followed. This case serves as a reminder of the importance of understanding the intricacies of deduction provisions and the need for meticulous adherence to statutory requirements in taxation matters.
FULL TEXT OF THE ORDER OF ITAT PUNE
This is an appeal filed by the assessee directed against the order of the National Faceless Appeal Centre, Delhi [‘NFAC’] dated 21.08.2023 for the assessment year 2015-16.
2. The appellant raised the following grounds of appeal :-
“1. The disallowance of deduction u/s 48(ii) of the Income Tax Act from the Long Term Capital Gains, in respect of the indexed cost of interest paid for the acquisition of the house property sold by the assessee, made by the Assessing Officer by travelling beyond the issue for which this case was selected for limited scrutiny under CASS is without jurisdiction.
2. The Ld. Commissioner of Income Tax (Appeals) has eared is not allowing the deduction of Rs.24,38,826/- u/s 48(ii) from the Long Term Capital Gains in respect of the indexed cost of interest of Rs.18,33,363/- paid for acquisition of the house property sold by the assessee.
3. The assessee craves leave to add, to modify to delete or to amend any or all of the above grounds of appeal.”
3. The appellant also raised the following additional grounds of appeal :-
“1. Looking to the facts and circumstances of the case, the Ld. Income Tax Officer, ITO Ward 12(2), Pune has passed the Assessment Order u/s 143(3) of the Income Tax Act on 28-11-2017 by wrongly disallowances of interest paid of Rs.45,56,780/-, which has been paid for acquisition of house property and claimed as cost of acquisition exclusively on assumption/presumptions ignoring entirely facts and circumstances of the case and without any corroborative evidence. Therefore said additions wrongly made by Assessing Officer are not justified on the following grounds and the same may please be allowed as cost of acquisition for acquisition of house property.
(a) The Ld. Assessing Officer has wrongly disallowed the interest paid for acquisition of above said properties/flats and claimed as indexed cost of improvement and therefore the said disallowances made by Assessing Officer is not justified and same may please be allowed as indexed cost of improvement and grant the deduction.
(b) The Ld. Assessing Officer has wrongly ignore the fact that, the appellant has obtained the loan for acquisition of above said properties/flats and wrongly disallowed the interest paid for acquisition of above said properties as indexed cost of improvement.
2. Looking to the facts and circumstances of the case, the Income Tax Officer Ward 12(2), Pune wrongly charged the interest of Rs.2,74,752/- u/s 234B of the Income Tax Act consequent to above said wrong additions.
3. The appellant may please be allowed to add/alter/amend any grounds of appeal.”
4. Briefly, the facts of the case are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of owning, operations conducting hotels, motels, loading and boarding Mangal Karyalaya etc. The Return of Income for the assessment year 2015-16 was filed on 20.09.2015 declaring Rs. Nil income. Against the said return of income, the assessment was completed by the Income Tax Officer, Ward-12(2), Pune (‘the Assessing Officer’) vide order dated 28.11.2017 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.41,68,080/-. While doing so, the Assessing Officer made addition of Rs.41,68,078/- u/s 50C of the Act in respect of two flats situated at building known as “Nebula Empress” on Flat No.701 & 702 area admeasuring 1360 Sq.Ft. each both flats located at 7th Floor, F/1533, 5th Road, Old Khar, Khar (W), Mumbai. According to the Assessing Officer, the value adopted by the Stamp Duty Valuation Authority in respect of above properties is Rs.2,21,10,000/- as against the actual consideration of Rs.50,00,000/-. Therefore, the Assessing Officer was of the opinion that such value should be deemed to be sale consideration in terms of the provisions of section 50C of the Act. Accordingly, the Assessing Officer had called upon the appellant to explain the reasons as to why the provisions of section 50C of the Act cannot be invoked. In response to the said show-cause notice, the appellant company had submitted that the fair market value of the property is much lower than the value adopted for stamp value purpose and, therefore, the matter should be referred to the DVO for the purpose of computing the fair market value. Then the Assessing Officer had referred the matter to the DVO. The DVO vide his report dated 23.11.2017 determined the fair market value of the property of each flat of Rs.77,11,300/-. The Assessing Officer had computed the short term capital gains by deducting the indexed cost acquisition from the value determined by the DVO and arrived at capital gains of Rs.41,68,078/- and brought to tax the same.
5. Being aggrieved by the above addition, an appeal was filed before the NFAC contending that the appellant company had incurred the expenditure of Rs.45,56,780/- on the loans obtained for acquisition of these two flats and, therefore, the indexed cost of such expenditure should be allowed as deduction while computing the capital gains relying on the following decisions :-
(i) CIT vs. Hariram Hotels (P) Ltd., 2010 TaxPub (DT) 1093 (Karn-HC).
(ii) CIT vs. Mithlesh Kumari, 92 ITR 9 (Del).
(iii) Addl.CIT vs. KS Gupta, (1976) 44 CCH 0522 APHC.
(iv) Gayatri Maheshwari vs. ITO, ITA No.208/JODH/2017.
(v) ACIT vs. Mrs. Sheela Chopra, ITA No.169/KOL/2014.
6. However, the NFAC rejected the submissions of the appellant company relying upon the decision of the Hon’ble Supreme Court
in the case of CIT vs. Tata Iron & Steel Co., 231 ITR 285 (SC).
7. Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.
8. It is submitted that the addition made by the Assessing Officer cannot be sustained as it travelled beyond the items for which the case was selected for limited scrutiny assessment. Therefore, the addition made by disallowing indexed cost of interest expenditure falls outside ambit of the limited scrutiny assessment. Finally, on merits, he submits that the flats which were sold, the gains arising on sale of which offered to tax under the head ‘capital gains’ was acquired out of borrowed funds from the directors since no deduction was claimed either u/s 24(b) or section 36(1)(iii), the indexed cost of interest expenditure incurred on interest should be allowed as deduction placing reliance on the following decisions :-
(i) CIT vs. Hariram Hotels (P) Ltd., 2010 TaxPub (DT) 1093 (Karn-HC).
(ii) CIT vs. Mithlesh Kumari, 92 ITR 9 (Del).
(iii) Addl.CIT vs. KS Gupta, (1976) 44 CCH 0522 APHC.
(iv) Gayatri Maheshwari vs. ITO, ITA No.208/JODH/2017.
(v) ACIT vs. Mrs. Sheela Chopra, ITA No.169/KOL/2014.
9. On the other hand, ld. Sr. DR supporting the orders of the lower authorities submits that no interference is called for by this Tribunal.
10. I heard the rival submissions and perused the material on record. The solitary issue that arises in the present appeal is with regard to allowability of the indexed cost of interest expenditure incurred on loans borrowed for acquisition of two flats which are sold during the year while computing the gains arising on sale offered to tax under the head “capital gains”. The assessment order is silent as to the allowability or otherwise as to why this indexed cost of interest expenditure on loans borrowed cannot be allowed as deduction. However, the appellant had claimed deduction towards interest expenditure while computing the capital gains on sale of said two flats. The NFAC placing reliance on the decision of the Hon’ble Supreme Court in the case of Tata Iron & Steel Co. (supra) had confirmed the disallowance. The undisputed fact is that the two flats purchased by the appellant company were held as capital assets. Therefore, the income from these two flats is assessable under the head “income from house property” as per the provisions of section 22 of the Act. The provisions of section 24 specifically provide that where the property had been acquired with borrowed capital, the interest expenditure incurred on such borrowed capital is allowable as deduction. The expenditure which is allowable u/s 24 cannot be capitalized, claimed as cost of acquisition. It is settled position of law that when the Statute provides for deduction in particular manner i.e. the Assessing Officer is bound to compute the income in the manner prescribed under the Statute not in any other manner. Therefore, the approach adopted by the Assessing Officer is totally in accordance with provisions of the Income Tax Act and requires no interference.
Interest on loans borrowed for acquisition of flats which is allowable u/s 24 cannot be capitalized
11. As regards to the additional grounds of appeal raised by the assessee, we find from page no.4 of the Paper Book, it is clear mentioned that the case was selected under CASS for following reasons :-
“a. Sale consideration of the property in ITR is less than sale consideration of property reported in ITR;
b. Sale of property reported in form 26QB.”
12. The cost of acquisition of property also forms integral part of the sale of property. Therefore, it cannot be said that the Assessing Officer had travelled beyond the items for which the case was selected for scrutiny assessment. Accordingly, the grounds of appeal/additional grounds of appeal filed by the assessee stand dismissed.
13. In the result, the appeal filed by the assessee stands dismissed.
Order pronounced on this 15th day of November, 2023.
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