Rent-securitisation loan interest and rented flat depreciation: s36(1)(iii) allowed, s24(a) directed, s68 remanded after Rule 46A.

Disallowance of interest under s. 36(1)(iii) was contested on the ground that the assessee had not proved borrowing from a bank. The Tribunal held that the loan was sanctioned under a rent securitisation arrangement to another company, with the assessee as a security holder and ultimate recipient of funds, and that documentary evidence established payment of interest through the intermediary; the deletion of disallowance was affirmed and this ground failed. Depreciation on a residential flat was denied because rental receipts were assessable only under "income from house property" (ss. 22-27); depreciation was disallowed, but the AO was directed to allow standard deduction under s. 24(a). Deletion of s. 68 addition was set aside for Rule 46A violation; the matter was remanded to the AO for fresh verification.

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ISSUES PRESENTED AND CONSIDERED

1. Whether interest expenditure of Rs. 16,16,297/- was allowable under section 36(1)(iii) where the borrowing was under a "Rent Securitization" arrangement in which another entity was the sanctioned borrower, but the assessee was a party/security holder and paid the interest through that entity.

2. Whether depreciation of Rs. 8,78,750/- claimed on flats let out on lease was allowable when the receipts were held to be assessable as "Income from house property".

3. Whether repair and maintenance expenditure claimed in relation to rental receipts was allowable, and if not, whether only the standard deduction under section 24(a) should be allowed while computing "Income from house property".

4. Whether deletion of addition of Rs. 10,29,00,000/- under section 68 could be sustained where the deletion was based on additional evidences (bank statements, copies of accounts, confirmations), and whether the matter required remand to the Assessing Officer for verification due to Rule 46A concerns and adverse field verification indicating the creditors did not exist.

ISSUE-WISE DETAILED ANALYSIS

1. Allowability of interest expenditure under section 36(1)(iii) (Rent Securitization loan; assessee as party/security holder)

Legal framework: The Court considered deductibility of interest expenditure under section 36(1)(iii) on borrowed capital used for business purposes.

Interpretation and reasoning: The Court accepted that the loan was sanctioned to another entity under the "Rent Securitization" scheme but found that the assessee was also a party to that arrangement and became a security holder. The Court noted that the assessee produced the loan agreement, a certificate evidencing interest receipt by the borrower-entity from the assessee, and ledger/confirmation reflecting receipt of Rs. 16,16,297/-. The Court also noted the finding that the interest amount received by the borrower-entity was included in its income, supporting the transactional linkage and actual payment.

Conclusion: The Court found no infirmity in the appellate deletion of the disallowance and affirmed allowance of the interest expenditure of Rs. 16,16,297/-.

2-3. Depreciation on leased flats and allowability of repair/maintenance vis-à-vis head of income (house property computation)

Legal framework: The Court applied the scheme for taxation of rental income under sections 22 to 27, and the standard deduction mechanism under section 24(a).

Interpretation and reasoning: The Court held that the receipts from letting out the flats were admittedly rental income assessable as "Income from house property". Once assessed under that head, depreciation on the flats could not be allowed. Regarding repair and maintenance, the Court held that the proper deduction is the statutory standard deduction at 30% of rent under section 24(a), rather than allowing repair and maintenance as claimed. The Court directed recomputation accordingly.

Conclusions: (i) Depreciation of Rs. 8,78,750/- was not allowable and the deletion granted by the appellate authority was reversed. (ii) Repair and maintenance claim was not allowed as claimed; instead, the Assessing Officer was directed to allow standard deduction under section 24(a) and recompute the income from house property.

4. Section 68 addition of Rs. 10,29,00,000/- and treatment of additional evidence/verification (Rule 46A concern)

Legal framework: The Court considered the requirement to establish identity, creditworthiness, and genuineness for section 68 credits, and addressed procedural fairness regarding admission of additional evidence before the appellate authority (Rule 46A issue) and the need for verification by the Assessing Officer.

Interpretation and reasoning: The Court noted that the assessee relied upon additional evidences (copies of accounts, bank statements and related materials) to support that credits were received and repaid through banking channels. However, the Court also noted that the Assessing Officer had deputed an Inspector for verification and the Inspector's report stated that the creditor parties did not exist. The Court accepted the Revenue's contention that the materials were fresh documents produced at the appellate stage and that proper opportunity/verification by the Assessing Officer was necessary. Emphasising that the onus remained on the assessee to provide correct details (address, identity, creditworthiness, genuineness), the Court remitted the issue for full verification and re-decision by the Assessing Officer.

Conclusion: The deletion of the section 68 addition was not sustained at this stage; the matter relating to addition of Rs. 10,29,00,000/- was remanded to the Assessing Officer for verification of the additional evidences and fresh adjudication in accordance with law.

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