The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has remanded a case back to the Assessing Officer (AO) to decide whether interest paid on a loan taken for repayment of an earlier loan for the construction of a property is deductible from House Property Income under section 24(b) of the Income Tax Act, 1961.
The assessee, Shyamnarayan Trades Pvt. Ltd. purchased two shops, four parking spaces, equity shares, and convertible debentures. They claimed a deduction for interest paid on a loan for repayment under section 24(b) of the Income Tax Act, 1961.
The assessee filed a 2008-09 income return, claiming a loss of Rs. 15,55,849. The refund was refunded, but a rectification application was filed, claiming a lesser tax credit. The Assessing Officer disallowed Rs. 3,55,893 and Rs. 23,71,496, citing unsecured loans. However, the AO disallowed the deduction, stating the loan was not for property acquisition. The assessee appealed to the ITAT.
The assessee argued that loans were used to repay earlier loans for house property acquisition, making interest on these loans allowable under section 24(b) of the Income Tax Act, and property enjoyment, use, and occupation are linked to ownership of shares and convertible debentures
The assesse also argued that the cost of these assets should be considered as part of the property’s total cost, and the disallowance of interest expense related to movable instruments should be reversed.
The AO argued that the loan was not taken for the purpose of acquiring the property and the assessee could not claim a deduction for the interest paid on the loan.
The Tribunal observed that the AO did not investigate whether equity shares and fully convertible debentures were included in the definition of property under section 24. Additionally, the AO did not investigate whether loan interest was used for property acquisition.
In the case of Indraprastha Shelters v/s DCIT, The ITAT held that interest paid on the loan was deductible under section 24(b) of the Income Tax Act, 1961. The decision clarifies that interest paid on a loan for repayment of an earlier loan is deductible under the Act, benefiting taxpayers who borrowed money to repay an earlier loan.
The Two Bench Member comprising B.P. Singh (Judicial Member) and Rakesh Bhargava (Accountant Member) has partly allowed the assessee’s appeal for statistical purposes, the issues raised in the appeal will be reevaluated by the Assessing Officer. The final decision on the disallowances of interest expenses will be made by the AO after further examination as per the directions given by the ITAT.
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