TaxTMI 
TaxTMI 
2009 (11) TMI 552
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....rom HSBC was utilized to repay the loan from EBSL taken by his father. Accordingly, the assessee claimed that the loan outstanding was the cost of acquisition for acquiring mortgage rights of the property so that he could become the absolute owner. The AO, after examining all the relevant records and materials, including the agreement, loan agreements, mortgage deeds, etc. has noticed that the loan of Rs. 1 crore was borrowed by his father to start new industries and the property in question was mortgaged in two ways (i) simple mortgage for Rs. 10 lakhs and (ii) mortgage by deposit of original title deed and collateral security for Rs. 90 lakhs. The AO also noticed that a new loan of Rs. 1 crore was borrowed by the assessee himself from EBSL on 10th Dec., 1996, by offering the same property as collateral security for the purpose of business. The borrowed funds were invested in shares and the partnership firm. Accordingly, the AO held that the assessee is not entitled for payment of interest on the loan borrowed for the purpose of business by mortgaging the property. 4. On appeal, the learned CIT(A) confirmed the order of the AO. 5. Before us, the learned Authorised Representative....
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....hand, the learned Departmental Representative has submitted that as per s. 24(1)(vi), if a property is acquired, constructed, repaired, renewed or reconstructed with borrowing capital, deduction of interest payable on such capital is allowable against the income from house property. In the present case, the loan was borrowed by the assessee's father from EBSL not for the purpose of construction, acquiring, repair, renewal or reconstruction etc. as mentioned in s. 24(1)(vi) but for the purpose of business by mortgaging the property in question. Therefore, the subsequent loan taken by the assessee for repayment of the original loan cannot be said to be capital borrowed for acquiring or construction of the property. The assessee has not borrowed the subsequent loan for any purpose as provided under s. 24(1)(vi) but to repay the liability inherited by the assessee and his family. He has further submitted that the decision relied upon by the assessee are related to computation of capital gain and cost of acquisition of the capital asset and, therefore, the same are not applicable in the case of computation of income from house property. He has further pointed out that the assessee, subs....
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....nting new loan taken by the assessee himself. The total outstanding loan in the month of November, 1999 towards EBSL was Rs. 99.9 lakhs. 8. The assessee took a loan of Rs. 1 crore on 24th Nov., 1999 from HSBC for repayment of the entire outstanding loan amount of EBSL. The assessee claimed deduction under s. 24(1)(vi) of the IT Act for the interest paid to HSBC against the income from house property on the ground that the interest was paid for the purpose of repayment of the funds borrowed for acquisition of the property. There is no dispute on the point that the interest paid on the loan taken for repayment of earlier loan taken for construction, acquisition, reconstruction, repair, etc. of the property is allowable under s. 24(1)(vi) of the Act existing at that point of time. However, in the present case, the original loan was not taken for the purpose as prescribed under cl. (vi) of sub-s. (1) of s. 24 and the same was taken for business purposes. The Circular No. 363, dt. 24th June, 1983 relied upon by the assessee clarifies that, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital and in a case where a fresh loan has bee....
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....owable under s. 24(1)(vi), then the interest paid or payable on the second loan for repayment of original loan is also not allowable. 10. In the case of V.S.M.R. Jagadishchandran (Decd) By LRs. vs. CIT cited the Hon'ble apex Court has held that: "In Civil Appeal Nos. 6098-6101 of 1983 filed against the judgment of the Full 'Bench of the Madras High Court in S. Valliammai vs. CIT we have examined the correctness of the view of the Kerala High Court in Ambat Echukutty Menon vs. CIT and have held that the said decision does not lay down the correct law insofar as it holds that where the previous owner had mortgaged the property during his lifetime the clearing off of the mortgage debt by his successor can neither be treated as 'cost of acquisition' nor as 'cost of improvement' made by the assessee. It has been held that where a mortgage was created by the previous owner during his time and the same was subsisting on the date of his death, the successor obtains only the mortgagor's interest in the property and by discharging the mortgage debt he acquires the mortgagee's interest in the property and, therefore, the amount paid to clear off the mortgage is the cost of acquisition of th....
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....y, which is required for the purpose of computing income from house property. Since the father of the assessee has not created a charge for borrowing capital for bringing the property into existence; the original loan was not connected with the existence of the property, being prior to even the purchase of land by the father of the assessee. Hence, the principle laid down by the Hon'ble apex Court on the issue of cost of the property for computation of capital gains is not applicable per se in the case of deduction under s. 24(1)(vi) for computation of income. 13. The learned CIT(A) relied upon the decision of the Hon'ble jurisdictional High Court in the case of K. Govinda Bhatt vs. CIT (1998) 149 CTR (Mad) 444 : (1999) 235 ITR 528 (Mad) wherein the Hon'ble jurisdictional High Court has held in pp. 532 and 533 as under: "We have already extracted the relevant portion of s. 24(1)(vi) of the Act as well as s. 55 (4)(b) of the Transfer of Property Act. According to s. 100 of the Transfer of Property Act, where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to mortgage, t....