Case Law Details
DiyyaKrishnasayee Vs DCIT (ITAT Chennai)
The case of DiyyaKrishnasayee Vs DCIT before the Income Tax Appellate Tribunal (ITAT) Chennai revolves around the assessment of long-term capital gains (LTCG) and the inclusion of interest expenditure in the cost of acquisition. This case is significant as it delves into the intricacies of tax assessments under Section 153A read with Section 143(3) of the Income Tax Act, 1961, particularly in scenarios involving deceased taxpayers represented by legal heirs.
The appeal pertains to the Assessment Year (AY) 2006-07, originating from the order of the Commissioner of Income Tax (Appeals)-18, Chennai [CIT(A)] dated 13-04-2023. The deceased assessee, represented by her legal heir, contested the confirmation of LTCG additions by the Assessing Officer (AO).
First Round of Appeal
The deceased assessee was subjected to a search under Section 132 on 16-05-2007. During the search, a sworn statement was recorded, wherein the assessee admitted receiving Rs. 2 Crores from an individual named Shri Duraipandian. This amount, however, was not the subject of the appeal. The core issue was the assessment of LTCG on properties disposed of by the assessee.
Assessment Proceedings
The AO discovered that the assessee had sold properties for Rs. 350 Lacs, which were originally acquired in FY 1991-92 for Rs. 28.63 Lacs. Due to non-payment of loans, the bank sold these properties, retaining the entire sale proceeds towards loan settlement. The AO computed LTCG of Rs. 295.91 Lacs, rejecting the assessee’s claim that no gains were chargeable as the sale proceeds were retained by the bank.
Tribunal’s Intervention
The Tribunal, in ITA No. 508/Mds/13 dated 30-10-2013, remanded the matter to the CIT(A) for reconsideration. During this period, the assessee passed away, and the legal heir continued the proceedings. The CIT(A) upheld the AO’s findings, denying the claim that loan interest should be included in the cost of acquisition as there was no nexus between the loan and the property.
Second Round of Appeal
In the second round, the legal heir sought rectification under Section 154, arguing that comprehensive submissions and additional grounds were overlooked. The CIT(A) dismissed the rectification request, reiterating that the interest on loans could not be allowed as it was not related to the acquisition of the property or its use for business purposes.
Tribunal’s Findings
The ITAT Chennai reviewed the records and submissions. It was established that the deceased assessee had acquired 69.92 grounds of land for a real estate project, funded by loans. However, due to project failure and loan defaults, the bank repossessed and sold the land, retaining the proceeds.
The assessee argued that since the entire sale proceeds were used to settle loan and interest dues, no capital gains should arise. The ITAT referred to precedents set by the Karnataka High Court in CIT vs. Sri Hariram Hotels P Ltd and the Delhi High Court in CIT vs. Mithlesh Kumari. These cases supported the inclusion of interest paid on borrowed funds in the cost of acquisition when calculating capital gains.
The ITAT Chennai concluded that the interest expenditure should be allowable in the computation of LTCG. The Tribunal directed the AO to re-compute the income of the assessee, incorporating the interest component as part of the cost of acquisition.
This ruling underscores the importance of considering interest on borrowed funds in capital gains calculations, especially when the sale proceeds are entirely used for loan repayment. The case highlights the need for meticulous assessment and th
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2006-07 arises out of the order of learned Commissioner of Income Tax (Appeals)-18, Chennai [CIT(A)] dated 13-04-2023 in the matter of an assessment framed by Ld. AO u/s 153A r.w.s. 143(3) of the Act on 31-12-2009. The deceased assessee is represented by her legal heir. The sole grievance of the assessee is confirmation of certain addition of Long-Term Capital Gains (LTCG)
2. This is second round of appeal. The Ld. AR has placed on record sequence of events. It emerges that the assessee was searched u/s 132 on 16-05-2007. The Ld. AO framed an assessment u/s 153A r.w.s. 143(3) on 31-12-2009. During search, a sworn statement was recorded from assessee wherein she admitted to have received cash of Rs.2 Crores from one Shri Duraipandian on 15-05-2007. She also revealed utilization of said cash. However, the same is not subject matter of appeal before us. It transpired that the assessee was doing real estate business and acting as mediator for buying and selling of land. The assessee derived income from such activity.
3. During assessment proceedings, it transpired that the assessee disposed-off certain properties for consideration of Rs.350 Lacs. The same was acquired during financial year 1991-92 for consideration of Rs.28.63 Lacs. It also transpired that the land was under mortgage to bank and due to non-payment of loans, the bank arranged to sell-off the property. The property fetched Rs.350 Lacs which was fully retained by the bank towards settlement of loan dues and no amount came to the assessee. It was, therefore, submitted that no capital gains were chargeable in her hands. However, rejecting the same, Ld. AO computed LTCG of Rs.295.91 Lacs and framed the assessment.
4. The matter reached up-to Tribunal wherein vide ITA No.508/Mds/13 order dated 30-10-2013, the appeal was restored back to Ld. CIT(A) for fresh consideration. In the meanwhile, the assessee expired on 07-07-2015. In the set-aside proceedings, Ld. CIT(A) adjudicated the issue of capital gains in para 7.5 to 7.8 of the impugned order. The Ld. CIT(A) noted the observation of Ld. AO that the loan was taken for assessee’s business needs whereas the land was her capital asset. The claim that the loan taken by the company in which the assessee was director and interest paid on such loan should be allowed as cost of acquisition, could not be accepted. The loan was not taken for the acquisition of the property. There was no nexus between the loan and capital asset. Accordingly, the claim was denied.
5. The assessee sought rectification of the order u/s 154 which were disposed-off vide order dated 14-06-2023. The assessee submitted that comprehensive written submissions as well as additional grounds were not considered. These grounds include the alternative ground that the development and sale of plot was assessee’s business venture and therefore, interest component of one-time settlement with the bank was to be allowed u/s 36(1)(iii). In the rectification order dated 14-06-2023, Ld. CIT(A) noted that though the assessee was purchaser of the property, there was no evidence that the property was purchased out of loan. Further, the aforesaid land was not used for the purpose of assessee’s business. There was no evidence that the loan was obtained for business purposes and no such claim could be allowed u/s 36(1)(iii). The land was sold as such for non-repayment of the loan. The interest had no nexus with the business of the assessee. The other legal grounds were also rejected. Aggrieved, the assessee is in further appeal before us.
Our findings and Adjudication
6. From the case records, it emerges that the deceased assessee had purchased 69.92 grounds of vacant land at Mughlivakkam Village in Porur in the year 1991. As per assessee’s submissions the same was purchased out of loan of Rs.100 Lacs sanctioned by the Indian Bank in assessee’s proprietary concern M/s J.K. Midas Estate which was carrying out real estate project. The real estate project of the proprietary concern M/s J.K. Midas Estate could not be completed since the further loan was not sanctioned. The assessee availed another loan of Rs.150 Lacs in the name of a corporate entity M/s Jay Housing Promoters (India) Pvt. Ltd. wherein the assessee was a director. These two concerns defaulted in repayment of loan. In the meanwhile, one-time settlement was arrived at an amount of Rs.359.44 Lacs was settled by Hon’ble DRT in favor of the bank. The said settlement includes interest component of Rs.259.44 Lacs. Pursuant to recovery action, substantial land to the extent of 64.63 grounds was possessed by the bank which was sold by them and appropriated towards loan and interest dues. The entire consideration was retained by the bank and nothing came to assessee. The assessee sold 5.29 grounds only the sale proceeds of which reached the assessee. It was the submission of the assessee that loan was borrowed to acquire the property and the entire sale proceeds were utilized to repay interest and nothing came to the assessee and therefore, there would not be any capital gains in the hands of the assessee. The assessee also submitted that in such a case, interest component would be allowable in the computations of capital gains as per the decision of Hon’ble Karnataka High Court in the case of CIT vs. Sri Hariram Hotels P Ltd (188 Taxman 170)as well as the decision of Hon’ble High Court of Delhi in CIT vs. Mithlesh Kumari (92 ITR 9).
7. We find that this is undisputed fact that the assessee was engaged in real estate projects. The assessee acquired vacant land towards projects and availed certain loan from the bank in two concerns. However, the project did not take-off and the assessee defaulted in repayment. Admittedly, the assessee was engaged in the business of real estate projects. Since the project did not take-off and no activities was carried out, the assessee may not be in a position to establish that the land was acquired for business purposes. It could further be seen that one-time settlement was arrived at and the land was possessed and sold by the bank. The entire sale proceeds have been retained by the bank and nothing has come to the assessee. In such a case, the decision of Hon’ble High Court of Karnataka in the case of Sri Hariram Hotels P Ltd (supra)would apply which has, more or less, similar facts. In this case, the assessee purchased an immoveable property for a project which did not materialize on account of various reasons and ultimately assessee-company sold the said property. While computing amount of capital gains, assessee claimed deduction in respect of interest paid to Directors on loans borrowed from them in order to purchase property in question. The same was denied by lower authorities. However, Tribunal allowed assessee’s claim on the ground that since the property had been purchased out of loans borrowed from Directors, any interest paid thereon was to be included while calculating cost of acquisition of asset. The Hon’ble Court upheld the order of Tribunal. Similar is the decision of Hon’ble High Court of Delhi in CIT vs. Mithlesh Kumari (supra).In this case, the assessee purchased perpetual leasehold rights in a plot of land and raised a loan for paying price of land. The assessee paid interest on such borrowings. The assessee sold the land and offered gains after including amount of interest and ground rent in actual cost. The revenue denied the claim. However, Tribunal allowed assessee’s claim holding that all expenses incurred by the assessee in acquiring capital asset were distinct from items of expenditure incurred for retaining and maintaining capital asset.
The Hon’ble Court confirmed the stand of Tribunal qua claim of interest component.
8. Therefore, considering the facts and circumstances of the case, we would hold that the impugned interest expenditure would be allowable to the assessee in the computations. We order so. The Ld. AO is directed to re-compute the income of the assessee. The assessee is directed to provide the requisite details.
9. The appeal stand allowed in terms of our above order.
Order pronounced 3rd June, 2024
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