Tribunal rules for assessee on sharing ratio, interest deduction

The Tribunal ruled in favor of the assessee, allowing their appeals for A.Ys. 2009-10 and 2010-11. The Tribunal upheld the validity of the supplementary deed, confirming the 65:35 sharing ratio and quashing the CIT's order under section 263. Additionally, the Tribunal found the interest on borrowed funds to be allowable under section 24(b), emphasizing that the loan was used for property improvement. The Tribunal deemed the reopening of assessments for subsequent years unsustainable, citing the principle of consistency.

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Issues Involved:
1. Validity of the supplementary deed and its impact on the sharing ratio between the assessee and the developer.
2. Allowability of interest on borrowed funds under section 24(b) of the Income Tax Act.
3. Legitimacy of reopening assessments under section 147 based on previous assessment orders revised under section 263.

Detailed Analysis:

Issue 1: Validity of the Supplementary Deed and Sharing Ratio
The primary dispute revolves around the sharing ratio mentioned in the development agreement and the existence of the supplementary deed. The assessee contended that the original development agreement dated 01.04.2001 mentioned a sharing ratio of 65:35, which was later altered to 50:50 due to the developer's failure to pay a non-refundable deposit of Rs. 80 lakhs. This change was documented in a supplementary agreement dated 19.12.2002. The CIT, however, observed that both the original and supplementary agreements mentioned a 50:50 sharing ratio, leading to the conclusion that the supplementary deed was a colorable device to claim interest expenditure from rental income. The Tribunal, however, found that the original agreement did indeed mention a 65:35 ratio and that the supplementary agreement was valid, thus quashing the CIT's order under section 263.

Issue 2: Allowability of Interest on Borrowed Funds under Section 24(b)
The assessee claimed interest paid to UCO Bank from 'income from house property' as interest paid for the acquisition or improvement of the property under section 24(b). The A.O. initially allowed this claim for A.Y. 2005-06 after verifying the details. However, the CIT later sought to revise the assessment orders for A.Ys. 2006-07 and 2007-08, arguing that the loan was taken against lease rentals and not for construction or improvement of the property. The Tribunal found that the loan was indeed taken to repay a loan obtained by the developer for construction purposes, and thus, the interest was allowable under section 24(b). The Tribunal emphasized that the loan was taken to reimburse the developer for finishing works, which were necessary for letting out the property, thereby qualifying as an expenditure for acquisition or improvement.

Issue 3: Legitimacy of Reopening Assessments under Section 147
The A.O. reopened the assessments for A.Ys. 2008-09, 2009-10, and 2010-11 under section 147 based on the disallowance of the interest claim in earlier years. The Tribunal noted that the reopening was based on the assessments revised under section 263, which had already been quashed. The Tribunal cited the principle of consistency, referencing the Supreme Court's decision in Radhaswami Satsang vs. CIT, which held that a position accepted in one year should not be changed in subsequent years without substantial reasons. Since the A.O. had accepted the assessee's claim after verification in A.Y. 2005-06 and no steps were taken to revise or reopen that assessment, the Tribunal found the reopening of assessments for subsequent years to be unsustainable.

Conclusion:
The Tribunal allowed the assessee's appeals for A.Ys. 2009-10 and 2010-11, holding that the disallowance of the interest claim under section 24(b) was not justified. The Tribunal emphasized the need for consistency in the Revenue's approach and upheld the validity of the supplementary deed, thereby allowing the interest on borrowed funds as a deduction from rental income.

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