Mortgage interest on unpaid purchase money is not deductible as acquisition borrowing or as an annual charge.

Interest paid on a mortgage created in favour of the vendor for unpaid purchase money was not deductible as interest on capital borrowed for acquiring the property, because the debt arose from the unpaid sale price after acquisition and was not borrowing from a stranger for purchase. It was also not deductible as an annual charge, because the mortgage was a voluntary charge created by the assessee and not an involuntary charge arising by law or court process. The property-income deduction claims under both provisions therefore failed.

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Issues: (i) Whether interest paid on a mortgage executed in favour of the vendor for unpaid purchase money was deductible as interest on capital borrowed for acquiring the property under section 24(1)(vi) of the Income-tax Act, 1961. (ii) Whether such interest was deductible as an annual charge under section 24(1)(iv) of the Income-tax Act, 1961.

Issue (i): Whether interest paid on a mortgage executed in favour of the vendor for unpaid purchase money was deductible as interest on capital borrowed for acquiring the property under section 24(1)(vi) of the Income-tax Act, 1961.

Analysis: The property was first purchased and only thereafter mortgaged to the vendor for the balance of the sale consideration. A debt arising from unpaid purchase price is not the same as capital borrowed for acquisition. The mortgage was not a borrowing from a stranger for acquiring the asset, but a security for the unpaid purchase money.

Conclusion: The claim under section 24(1)(vi) was not allowable and was against the assessee.

Issue (ii): Whether such interest was deductible as an annual charge under section 24(1)(iv) of the Income-tax Act, 1961.

Analysis: A deductible annual charge under section 24(1)(iv) must not be a voluntary charge or a capital charge. The mortgage in question was created by the assessee voluntarily and not by operation of law or under compulsion of a court process. It therefore did not satisfy the statutory requirement of an involuntary annual charge.

Conclusion: The interest was not deductible under section 24(1)(iv) and the finding was against the assessee.

Final Conclusion: The reference was answered in the negative, holding that the interest on the mortgage for unpaid purchase money was not deductible under the property-income provisions invoked.

Ratio Decidendi: Interest on a mortgage given to secure unpaid purchase money after acquisition of property is not interest on capital borrowed for acquiring the property, and a voluntary mortgage charge is not an allowable annual charge for deduction from property income.

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