Case Law Details

Case Name : Akulu Nagaraj Gupta Subbaraju Vs. ITO (ITAT Bangalore)
Appeal Number : ITA Nos. 2282 to 2286 (Bang.) of 2016
Date of Judgement/Order : 31/08/2017
Related Assessment Year : 2005-06 to 2009-10
Courts : All ITAT (6332) ITAT Bangalore (312)

Akulu Nagaraj Gupta Subbaraju Vs. ITO (ITAT Bangalore)

Tribunal referred to a CBDT Circular No. 28, date 20-8-1969 wherein it was specified that if the second borrowing has really been used to repay the original loan and this fact is proved to the satisfaction of the assessing officer, the interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi) of the Income Tax Act.

Interest on subsequent loan to repay the earlier housing loan is also allowable subject to the following conditions.

  1. the assessee has to establish that the subsequent loan is to repay the earlier housing loan
  2. deduction on interest is allowable only to the extent of interest on earlier loan used for acquiring or constructing the housing property and not on the unpaid interest on such earlier housing loan or subsequent housing loan to repay the earlier housing loan.

AO should examine the claim of the assessee in line with above discussion and deduction on account of interest should be allowed to the extent the assessee is able to establish that the subsequent loan on which interest is being claimed is used for the purpose of repayment of earlier housing loan and such claim of interest should be restricted to the extent of actual amount of earlier/new housing loan used for acquiring/constructing housing property and it should not be for unpaid interest.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

All these 5 appeals are filed by the assessee which are directed against the combined order of learned Commissioner (Appeals)-1, Bangalore dated 20-9-2016 for assessment years 2005-06 to 2009-10. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. The assessee has raised several grounds in each year but a common grievance is raised in all the 5 years regarding the dis allowance made by the assessing officer on account of interest expenditure paid by the assessee under section 24B of the Income Tax Act. The amount of dis allowance is Rs. 12,61,165 in assessment year 2005-06, Rs. 11,16,912 in assessment year 2006-07, Rs. 9,84,432 in assessment year 2007-08, Rs. 11,47,216 in assessment year 2008-09 and Rs. 11,80,957 in assessment year 2009-10.

3. The assessee has raised 7 identical additional grounds also in each of all these years and the same are reproduced herein below.

“1. The learned Commissioner (Appeals) and the learned assessing officer, have erred, in law and in facts, by not considering the loan documents submitted by the Appellant.

2. The learned Commissioner (Appeals) and the learned assessing officer have erred, in law and in facts, by considering that the loan was borrowed for the purpose of expanding the Appellant’s business, when in fact, the loan was taken for the acquisition of the let out property and when the Appellant was not engaged in any business.

3. The learned Commissioner (Appeals) and the learned assessing officer have erred, in law and in facts, by disallowing the interest on borrowed funds on the basis that the Appellant had not repaid the loan borrowed within the time period of the loan, when in fact, the loan from Corp Bank was borrowed on 16-1-2006 which was by way of taking over of loan from SBI directly.

4. The learned Commissioner (Appeals) and the learned assessing officer have erred, in law and in facts, by disallowing the interest paid on the basis that the interest is claimed as deduction without actual payment.

The learned Commissioner (Appeals) and the learned assessing officer have erred, in law and in facts, by ignoring the fact that the original loan from KSFC was borrowed on 26-9-2000 and the same loan amount has been used to purchase the property on 4-10-2000 and KSFC clearly sanctioned the loan only for the purchase of the let out property.

5. The learned Commissioner (Appeals) and the learned assessing officer have erred, in law and in facts, by failing to appreciate the fact that the appellant had incurred totally Rs. 70,61,000 to acquire the let out property by taking loan from KSFC and other lenders as per the financials which was clearly evident in the Balance sheet of the appellant.

6. The learned Commissioner (Appeals) have erred, in facts and in law, by holding that the last installment of the KSFC loan would have been paid on January 2005 and the Appellant was eligible to claim interest only up to January 2005 without actually appreciating the fact that KSFC loan was not paid as per the originally agreed schedule and it was paid only out of the loan from SBI.

7. The learned Commissioner (Appeals) have erred, in facts and in law, failed to understand the scope of the word “borrowed capital” is wider than the term “money” and includes overdue loans.”

4. It was submitted by the learned Authorized Representative of assessee that copy of loan sanction letter dated 26-9-2000 from Karnataka State Financial Corporation (KSFC) is available on pages 15 to 19 of paper book as per which the loan of Rs. 40 lakhs was sanctioned towards purchase of G-1, G-2 and G-3 commercial space which is having estimated cost of Rs. 58.60 lakhs. He also submitted that on page no. 20 of paper book is a fresh sanction letter on 29-11-2000 from KSFC as per which the additional term loan of Rs. 20 lakhs was sanctioned for the same purpose. Thereafter he drawn my attention to page no. 84 of paper book where the sanction letter from State Bank of India dated 31-3-2004 is available regarding sanction of loan of Rs. 120 lakhs. He also pointed out that on page no. 85 of paper book is bank statement of SBI for the period from 31-3-2004 to 31-7-2004 and from the same, he pointed out that the loan of Rs. 60 lakhs from KSFC was repaid by SBI on 31-3-2004 out of this loan sanctioned by SBI of Rs. 120 lakhs. He submitted that under these facts, it should be accepted that the fresh loan from SBI is towards repayment of earlier loan from KSFC and the earlier loan from KSFC is for the purpose of acquiring house property and therefore, the deduction on account of interest is allowable under section 24B of Income Tax Act.

5. As against this, learned Departmental Representative of revenue supported the orders of authorities below. He also placed reliance on the following judgments in support of his contention that when interest paid is on subsequent loan taken for repayment of earlier housing loan, interest under section 24 is not allowable:–

A. ITO v. Satya Co. Ltd. (1986) 19 ITD 596 (Cal.)

B. Naman Kumar v. CIT (2014) 221 Taxman 269 (Punj. & Har.)

6. In the rejoinder, the learned Authorized Representative of assessee placed reliance on the Tribunal order rendered in the case of Asst. CIT v. Sunil Kumar Agarwal (2011) 8 ITR(T) 304 (Lucknow). He filed the copy of this Tribunal order and submitted that this Tribunal order is subsequent to the earlier Tribunal order rendered in the case of Satya Co. Ltd. (supra) and it was held by the Tribunal in this case that if subsequent loans were raised by the assessee to repay the original loan raised for the purchase of housing property, the interest paid on subsequent loan is deductible under section 24 from rental income received from house property.

7. I have considered the rival submissions. I find that this is noted by the assessing officer in the assessment order for the year 2005-06 that it was a submission of the assessee before the assessing officer that the assessee borrowed the loan from KSFC to acquire a house property at higher rate of interest and subsequently, the assessee borrowed from SBI at lower rate of interest to repay the loan from KSFC and to spend for the alteration, furnishing, cabling, networking civil work and partition etc as per the requirement of the tenant and also the submission of the assessee that SBI had paid the amount to KSFC towards the loan amount and the same is also reflecting in the bank account of SBI. On page no. 2 of the assessment order for the year 2005-06, the assessing officer came to the conclusion that the claim of the assessee is not acceptable in view of the fact that the assessee has not utilized the loan for the purpose of construction and repair of the house and under the provisions of section 24, interest incurred on borrowed capital is allowable only if the capital is borrowed only for the purpose of construction, renewal or reconstruction of the house property and since, the assessee has not complied with these requirements, the assessee is not eligible to claim for the same amount of Rs. 12,61,165 towards interest on borrowed capital under section 24B of the Act. Hence, it is seen that this claim of the assessee that the loan from SBI is for repayment of housing loan earlier borrowed from KSFC is not disputed by the assessing officer in the assessment order. Now in the light of these facts, I examine the applicability of various judgments cited by both sides. As per the Tribunal order cited by learned Departmental Representative of revenue having rendered in the case of Satya Co. Ltd. (supra), it was held that as per the facts of that case, the assessee in that case purchased a house property at Rs. 2.45 lakhs on 22-6-1955 and for this purpose, the assessee made a borrowing of Rs. 1 lakh from General Produce Co. Ltd. on different dates and Rs. 1.50 lakhs from Model Mfg. Co. Ltd. on 27-6-1955. Subsequently on 29-9-1955, the company repaid the loan of Rs. 1 lakh received from General Produce Co. Ltd. out of refund of loan of Rs. 1 lakh from Tulsidas Kanoria & Co. to whom the company had advanced money on loan in earlier years. The loan of Rs. 1.50 lakhs taken from Model Mfg. Co. Ltd. was also repaid during the same year out of funds received on account of sale proceeds of share of Rs. 83,500 repayment of loan from Tulsidas Kanoria & Co. of Rs. 38,000, loan taken from A.K. Kanoria of Rs. 20,100 and other sources of Rs. 11,400. Under these facts, it was held by the Tribunal that any loan unconnected with original borrowed capital is not covered under section 24(1) of the Income Tax Act and consequently, it was held that any loan unconnected with such borrowed capital is not entitled for deduction of interest under section 24. As per the facts of that case, it is seen that the original borrowed capital of Rs. 1 lakh from General Produce Co. Ltd. was repaid out of refund of loan of Rs. 1 lakh received from Tulsidas Kanoria & Co. to whom the company had advanced money on loan in earlier years. Hence it is seen that the repayment of Rs. 1 lakh was out of repayment of advance received was not out of any fresh borrowing. Similarly repayment of Rs. 1.50 lakhs being loan taken from Model Mfg. Co. Ltd. was out of sale proceeds of shares and repayment of loan from Tulsidas Kanoria & Co. and others and only Rs. 20,100 was repaid out of borrowing from Shri A.K. Kanoria. The assessment year before the Tribunal was 1973-74 whereas the repayment of housing loan was reflected in 1955-56. In view of these facts, in my considered opinion, the facts of the present case are different because in the present case, the repayment of housing loan is out of fresh borrowings and hence in the facts of present case, it cannot be said that the present borrowing on which interest is claimed under section 24 is unconnected with the borrowed capital used for acquiring the house property and hence, in my considered opinion, of this Tribunal order cited by learned Departmental Representative of revenue is not applicable in the facts of the present case.

8. Now I examine the applicability of the second judgment cited by learned Departmental Representative of revenue being judgment of Hon’ble Punjab & Haryana High Court rendered in the case of Naman Kumar (supra). In that case, Hon’ble Punjab & Haryana High Court has followed the judgment of Hon’ble Apex Court rendered in the case of Shew Kissen Bhatter v. CIT (1973) 89 ITR 61 (SC) wherein it was held that only simple interest is allowable and not compound interest. By following this judgment, it was held by Hon’ble Punjab & Haryana High Court that interest paid on interest levied by bank because of non-payment of installments of borrowed capital to bank is not qualified as an admissible deduction and it was held that the Tribunal was right in disallowing the balance interest and allowing deduction in respect of simple interest. Hence it is seen that as per this judgment of Hon’ble Punjab & Haryana High Court, interest on interest is not allowable but interest on the principle amount of borrowed fund which was used for the purpose of housing property is allowable.

9. Now I examine the applicability of the Tribunal order cited by learned Authorised Representative of assessee in the rejoinder i.e., the tribunal order rendered in the case of Sunil Kumar Agarwal (supra). In that case, assessee purchased house property out of loan from HDFC against RBI bonds. When the RBI bonds matured, the assessee raised loan from relatives and IDBI bank to repay the housing loan from HDFC bank. The assessing officer disallowed the deduction of interest paid on the loan from relatives and IDBI on the ground that the loan taken from HDFC was repaid and there remains no housing loan on said date. Such dis allowance was deleted by learned Commissioner (Appeals) by holding that the subsequent loan was to repay earlier/original loan and therefore, the interest on subsequent loan taken for repayment of housing loan was eligible for deduction under section 24 of Income Tax Act against the income from housing property. On appeal from the department, the Tribunal confirmed the order of Commissioner (Appeals) and while confirming the order of Commissioner (Appeals), the Tribunal referred to a CBDT Circular No. 28, date 20-8-1969 wherein it was specified that if the second borrowing has really been used to repay the original loan and this fact is proved to the satisfaction of the assessing officer, the interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi) of the Income Tax Act.

10. With the combined reading of this Tribunal order cited by learned Authorized Representative of assessee having been rendered in the case of Sunil Kumar Agarwal (supra) and the judgment of Hon’ble Punjab & Haryana High Court cited by learned Departmental Representative of revenue rendered in the case of Naman Kumar (supra), it comes out that interest on subsequent loan to repay the earlier housing loan is also allowable subject to the following conditions.

A. the assessee has to establish that the subsequent loan is to repay the earlier housing loan

B. deduction on interest is allowable only to the extent of interest on earlier loan used for acquiring or constructing the housing property and not on the unpaid interest on such earlier housing loan or subsequent housing loan to repay the earlier housing loan.

11. In view of the above discussion, I set aside the order of Commissioner (Appeals) for all the 5 years and restore the matter to the file of the Commissioner (Appeals) for fresh decision with the direction that he should examine the claim of the assessee in line with above discussion and deduction on account of interest should be allowed to the extent the assessee is able to establish that the subsequent loan on which interest is being claimed is used for the purpose of repayment of earlier housing loan and such claim of interest should be restricted to the extent of actual amount of earlier/new housing loan used for acquiring/constructing housing property and it should not be for unpaid interest. The learned Commissioner (Appeals) should pass necessary order as per law as per above discussion after providing adequate opportunity of hearing to the assessee.

12. In the result, all the 5 appeals filed by the assessee are allowed for statistical purposes.

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