Real estate company wins appeal for interest deduction on borrowed capital under Section 24(b)

The ITAT Chennai allowed the appeals filed by the domestic real estate company against the disallowance of deduction under section 24(b) of the Act for interest paid on borrowed capital. The ITAT Chennai held that the assessee could claim the interest deduction against rental income as the building was let out during the relevant financial year, overturning the decisions of the AO and Ld.CIT(A). The ITAT Chennai directed the AO to delete the disallowance for both assessment years, emphasizing the timeline of building completion and rental income generation in support of the deduction claim.

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Issues:
Appeal against disallowance of deduction u/s24(b) of the Act for interest paid on borrowed capital while computing income from house property.

Analysis:
The appeals were filed against identical orders of the Commissioner of Income Tax (Appeals) for assessment years 2007-08 & 2008-09. The assessee, a domestic company in real estate, challenged the disallowance of deduction under section 24(b) of the Act for interest paid on borrowed capital. The AO disallowed the deduction as no rental income was derived from the property on which the loan was borrowed. The Ld.CIT(A) upheld the AO's decision, stating that the loan was not utilized for the property generating rental income. The assessee contended that the building was completed in 2006 and rented out in 2007, justifying the interest deduction. The Ld.DR supported the AO's decision, citing lack of evidence linking the borrowed funds to property construction. The ITAT Chennai noted that the loan was for building construction and accepted by the bank for the same purpose. The building was completed in 2006 and rented out in 2007. The ITAT Chennai held that the assessee could claim interest deduction against rental income as the building was let out during the relevant financial year, overturning the disallowance made by the AO and Ld.CIT(A).

The ITAT Chennai emphasized that the building completion and rental income generation timeline supported the deduction claim. The Ld.CIT(A) was criticized for sustaining the disallowance based on flimsy grounds. The ITAT Chennai directed the AO to delete the disallowance of deduction claimed for interest paid on the loan borrowed from SBI under section 24(b) of the Act for both assessment years. Consequently, the appeals filed by the assessee were allowed.

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