2015 (6) TMI 568 - AT - Income Tax

Tribunal rejects claim of interest deduction on house property investment against interest income.

The Tribunal dismissed the assessee's appeal concerning the claim of interest paid on borrowed capital invested in a house property against interest ... Interest paid on borrowed capital (from bank) invested in a house property - claim against interest income assessable u/s. 56, i.e., in computing the income chargeable under the head of income ‘income from other sources’ - disallowance of interest paid and claimed as deduction against the interest receipts - Held that:- In the present case, section 24(b) governs the deduction on account of interest on borrowed capital for the purpose of acquiring house property or improvement thereto. The same, however, limits the deduction in respect of self occupied property (SOP) at ₹ 1,50,000/-. This, in fact, even as observed during hearing, is what had led to what we may term as an ‘imbalance’ as per the assessee’s plans. But for this limit, the entire interest on borrowed capital (Rs.15,69,007/-) would stand to be allowed against income under Chapter IV-B, i.e., income from house property, resulting in the two arrangements, i.e., either withdrawing money lent and saving interest to bank, or, alternatively, assuming borrowing for investment in house property, being at par, both financially (perhaps, that is – the interest rates on borrowing and monies lent being not known), as well as under the tax regime. Assuming a tax equivalence, while none existed, then, thus, represents the fundamental fallacy in the assessee’s argument and case, i.e., the underlying assumption that the two arrangements being financially equivalent (or nearly so), would lead to a similar or same consequence in law as well. The disallowance of the assessee’s claim is under s. 24(b) itself and, at best, read with s. 57(iii), and there is no need to travel to s. 14A of the Act; there being no income not forming part of the total income for invocation of the said section, to though either no benefit to the assessee or prejudice to the Revenue. The two investments, i.e., house property and interest bearing loan, have different income potential/implications, and carry different risks. The two streams of income, flowing from vastly different sources, are subject to different computational provisions under the Act, and bear different risk profiles. To say, therefore, that interest on a borrowing applied toward house property be deducted against the income from the property on the security on which the same is raised, is misplaced. Rather, the claim of interest on borrowing applied to a particular source of income (house property) against income arising from the said source of income, i.e., house property (Rs.1.50 lacs) as well as against income from another source, i.e., income from other sources (at ₹ 14.19 lacs), is self contradictory. - Decided against assessee. Issues involved:Maintainability of the assessee's claim of interest paid on borrowed capital invested in a house property against interest income assessable u/s. 56 for the assessment year 2010-11.Detailed Analysis:1. Issue of Maintainability of Interest Claim:The appeal revolves around the maintainability of the assessee's claim regarding interest paid on borrowed capital invested in a house property against interest income assessable u/s. 56. The assessee contested the disallowance of Rs. 14,19,007 as deduction against interest receipts. The borrowing from the bank was utilized for a residential house, and the claim was based on the premise that had the loan been withdrawn and invested in the property, the interest would not have been earned. The Tribunal found the claim misconceived and not tenable in law. The computation of total income under the Act mandates adherence to specific heads of income and their respective computation provisions. The deduction of interest on borrowed capital for house property acquisition is governed by section 24(b), limiting the deduction for self-occupied property at Rs. 1,50,000. The Tribunal emphasized that the financial equivalence of different arrangements does not imply legal equivalence, rejecting the claim under section 24(b) and section 57(iii) without invoking section 14A due to no income outside the total income.2. Precedents and Legal Interpretation:The Tribunal cited the decision in CIT vs. Dr. V. P. Gopinathan, where the court negated a similar claim as it lacked a nexus between interest earned and paid. Additionally, the Tribunal distinguished the case of Raj Kumari Aggarwal, highlighting material differences, as borrowing was not invested in income sources. The decision emphasized the direct nexus between borrowing and income in allowing deductions. The Tribunal concluded that the interest claim on borrowing for house property investment against different income sources was contradictory and not permissible under the Act. The decision in Raj Kumari Aggarwal was found inapplicable due to differing factual circumstances.3. Final Judgment:Ultimately, the Tribunal dismissed the assessee's appeal, emphasizing the distinction between income sources and the inadmissibility of offsetting interest on borrowing against income from disparate sources. The Tribunal's decision was based on the legal provisions governing deductions and the lack of a direct link between the borrowing for house property investment and the interest income sought to be set off. The judgment reiterated the necessity of complying with the Act's computation provisions and the specific conditions for allowable deductions under different heads of income.This detailed analysis encapsulates the Tribunal's assessment of the issues involved in the appeal regarding the maintainability of the assessee's interest claim against interest income assessable under the Income Tax Act for the relevant assessment year.