Tribunal rules on interest deductibility under Income Tax Act: interest on borrowed capital deductible.

The Tribunal ruled on the deductibility of interest under Section 24(b) of the Income Tax Act, 1961, in relation to unpaid purchase price interest. It held that interest on borrowed capital, including penal interest, is deductible, while interest on interest is not. The matter was remanded to the Assessing Officer for the assessee to provide a breakdown of the interest claimed, distinguishing between interest on borrowed capital and penal interest, with interest on interest not being eligible for deduction. The appeals were partly allowed for statistical purposes.

---

---

Issues Involved:
1. Deductibility of interest under Section 24(b) of the Income Tax Act, 1961.
2. Classification of unpaid purchase price as 'borrowed capital.'
3. Deductibility of penal interest and interest on interest under Section 24(b).

Detailed Analysis:

1. Deductibility of Interest under Section 24(b) of the Income Tax Act, 1961:
The primary issue in these appeals is the amount of interest deductible under Section 24(b) in computing income from house property. The assessee claimed interest amounts of Rs. 10,20,869/- and Rs. 8,54,807/- for the assessment years 2006-07 and 2007-08, respectively. The Revenue, however, allowed nil deduction. The interest claimed arose from the unpaid purchase price of a property bought in an auction, which included both normal and penal interest. The Tribunal examined whether this interest qualifies for deduction under Section 24(b).

2. Classification of Unpaid Purchase Price as 'Borrowed Capital':
The Tribunal first addressed whether the unpaid purchase price could be considered 'borrowed capital' under Section 24(b). It concluded that the interest payable qualifies as interest on borrowed capital, as defined comprehensively under Section 2(28A) of the Act. The term 'capital' is broader than 'money' and includes debts extended by the seller, a financial institution, to the purchaser.

3. Deductibility of Penal Interest and Interest on Interest:
The Tribunal then considered whether the interest deductible should be restricted to the amount payable had the assessee adhered to the agreed repayment schedule. It found no basis in Section 24(b) for limiting the deductible interest to a hypothetical scenario. The deductible interest is the actual interest payable by the assessee.

The Tribunal further examined whether the interest allowable would include penal interest and interest on interest. It referred to the Supreme Court's decision in Shew Kissen Bhatter v. CIT, which clarified that interest on unpaid (capitalized) interest is not deductible under Section 24(b). The interest deductible must be on the capital borrowed for acquiring the property, not on interest that has been capitalized.

The Tribunal also addressed whether the interest allowable should be bifurcated into normal and penal components. It concluded that penal interest, being a higher rate of interest on the borrowed capital due to non-payment, is deductible under Section 24(b). However, interest on interest, whether normal or penal, is not deductible.

Conclusion:
The Tribunal restored the matter to the Assessing Officer (AO) to allow the assessee to furnish details of the interest claimed, bifurcating it into:
- Interest on borrowed capital at the normal rate.
- Penal interest on borrowed capital.
- Interest on interest, which is impermissible for deduction under Section 24(b).

The AO is directed to verify the details and allow the deduction accordingly, providing explicit reasons for any differences in the determination of interest figures. The deduction allowable is only for the interest liability accruing or arising to the assessee for the relevant years. The assessee's appeals were partly allowed for statistical purposes.

---