MR. ANURAG MAHESHWARI,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME-TAX , INTERNATIONAL TAXATION CIRCLE-1(2), BENGALURU

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ITITA 400/BANG/2023Status: DisposedITAT Bangalore31 July 2023AY 2020-219 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the appeal by the assessee is allowed. The Tribunal noted that the assessee took a loan to pay an advance for the purchase of a property. The seller later cancelled the agreement and paid Rs. 65 lakhs as compensation, which the assessee offered as income from other sources. The revenue authorities disallowed the deduction of Rs. 53,33,151 as interest paid on the loan. The Tribunal found that the loan taken by the assessee was the source for the advance payment to the seller, and without this loan, the assessee could not have paid the advance or received the compensation. Therefore, there was a direct nexus between paying interest to the bank and earning the compensation. The Tribunal also observed that for computing income from house property, the assessee must be the owner, which was not the case here, thus refuting the revenue's argument that the interest should only be set off against income from house property. The Tribunal concluded that the assessee is eligible for the claim of deduction under Section 57 towards interest paid on the loan. The decision cited by the revenue in Haryana State Small Industries Export Corporation Ltd. was deemed not applicable.

What were the facts?

The assessee, Shri Anurag Maheshwari, filed an appeal against the final assessment order dated March 27, 2023, passed by the Assistant Commissioner of Income Tax, International Taxation, Circle 1(2), Bengaluru, for Assessment Year 2020-21. The assessee, a Non-Resident Indian, had entered into an agreement to purchase a property for Rs. 9,00,00,000 and paid an advance of Rs. 7,00,00,000. This advance was funded by a loan from RBL Bank, on which the assessee incurred interest expenses of Rs. 53,33,121. The sale transaction failed, and the seller cancelled the agreement, paying Rs. 65,00,000 as compensation to the assessee. The assessee offered this compensation as income from other sources and claimed the interest expenses as a deduction under Section 57. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disallowed the interest deduction, holding that interest on a loan for property purchase is only deductible against income from the property itself, not from 'Income from Other Sources'. The AO's final order assessed income at Rs. 18,20,460 after disallowing the interest.

What were the issues?

1. Whether the interest expenditure of Rs. 53,33,121 incurred on a loan taken for the purchase of a property, which was subsequently cancelled, is deductible under Section 57 of the Income Tax Act, 1961, against compensation received from the seller under the head 'Income from Other Sources'. Assessee's contentions: - The interest expenditure is incidental to the income offered under Section 56 and is deductible under Section 57. - There is a direct nexus between the compensation received and the interest paid, as the loan was the source for the advance payment for the property. - The compensation received is for the cancellation of the agreement, and the interest paid is wholly and exclusively for the purpose of earning this income. - The assessee relied on the Supreme Court's decision in CIT vs. Rajendra Prasad Moody and the principle that the purpose of expenditure is relevant for Section 57(iii), not necessarily its fulfillment. Revenue's contentions: - The deduction in respect of interest on a loan borrowed for property purchase is allowed only against income from the property. - The interest paid was not expended wholly and exclusively for the purpose of earning the compensation income. - The revenue relied on the judgment of the Punjab & Haryana High Court in Haryana State Small Industries Export Corporation Ltd. v. CIT.

Which sections of the Income-tax Act were involved?

Section 57,Section 56,Section 143(3),Section 144C(13),Section 57(iii),Section 56(2)(ix)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, SMC “B” BENCH : BANGALORE

For Appellant: Shri Ravi Shankar, Advocate
For Respondent: Shri Ganesh R. Ghale, Standing Counsel
Hearing: 31.07.2023Pronounced: 31.07.2023

This appeal is filed by the assessee against the final assessment DIN & Order No.ITBA/AST/S/143(3)/2022-23/105143844(1) dated 27.03.2023 passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) for the AY 2020-21 on the following grounds of appeal:-

“1. The order of the learned authorities below in so far as it is against the appellant is opposed to law, equity, facts, weight of evidence, probabilities and circumstances of the case.

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2.

The learned below authorities erred in concluding the assessment by disallowing the interest claimed at Rs. 53,33,121/- without considering the facts and circumstances of the case. 3. The learned below authorities are not justified in disallowing the entire expenses of Rs. 53,33,121/- being interest paid to banks and financial institutions to source the advances paid to the seller. 4. The learned below authorities failed to appreciate the fact that the interest expenses claimed u/s 57 of the Act is incidental to income offered under section 56 of the Act, given the circumstances the learned below authorities ought to have allowed to set off of expenditure of Rs. 53,33,121/- against the income of Rs. 65,00,000/-. 5. The learned below authorities failed to appreciate that the source for the money paid as advance was out of the loan taken from the Bank. The compensation paid by the vendor is nothing but to compensate for interest expenses incurred by the appellant. There is a clear trial of movement of the funds. The loan taken by the appellant is utilized for payment towards acquisition of the property. This being the case, the interest paid is exclusively for earning the income and hence deserves to be allowed in full on facts and circumstances of the case. 6. The learned below authorities failed to appreciate that the compensation paid by the vendor was to cover the losses that was incurred by the appellant due to non-performance of the contract, hence the compensation received has to be taxed under Income from other sources and the expenditure incurred wholly and exclusively for the purpose of the income deserves to allowed in terms of Section 57(14 7. The learned authorities below erred in holding that the expenditure incurred is towards buying of immovable property ignoring the fact that the appellant has not taken possession of the immovable property. The claim of the assessee is similar to the provisions of Sec 56(2)(ix) which states that the forfeiture of advance received for transfer of capital asset shall be treated as income from other sources, similarly the compensation received for forfeiture or cancellation of agreement for transfer of capital

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asset also would be income from other sources. This being the case, applying the provision of Section 57(iii) the entire interest paid deserves to be allowed in full. 8. The Hon'ble dispute resolution panel (DRP) erred in holding that deduction in respect of interest on loan borrowed for purchase of property is allowed only against the income from the property without considering the facts and circumstances of the case. The Hon'ble DRP failed to appreciate that no where in the act is there any mention about allowance of interest only against the income from House Property and also failed to appreciate that the wordings used in the Section 57(iii) is "any other expenditure" would include interest as the same is not excluded specifically. 9. The learned authorities below failed to appreciate that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of Sec. 57(iii) and that purpose must be making or earning of income. Sec. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. This has been held by the Hon'ble Supreme Court of India in the case of Commissioner of Income Tax, West Bengal III Calcutta Vs Rajendra Prasad Moody 1979 AIR 373, 1979 SCR (1)1047 and I.T.A. No. 12127 of 66-67 10. The appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal. 11. For the above and other grounds that may be urged at the time of hearing of the appeal, the appellant prays that the appeals may be allowed and justice rendered.”

2.

The brief facts of the case are that the assessee is a NRI residing at Singapore having income from business, capital gains and other sources. He filed his return of income on 19.02.2021 declaring loss of Rs.35,12,661. The case was selected for scrutiny and statutory notices

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were issued to the assessee. During the course of assessment proceedings, it was noticed that the assessee has received Rs.65 lakhs as compensation on cancellation of sale agreement of certain property, against which the assessee has claimed Rs.53,33,121 as deduction u/s. 57 on the interest on loan for purchase of property. In this regard, the assessee submitted as under:-

“5.1 The assessee vide his reply dated 22.02.2022 submitted that, "the assessee had entered in an agreement to sell with Mr. Manohar Dayaram Chatlani (seller) for purchase of property for Rs. 9,00,00,000/- the advance consideration of Rs. 7,00,00,000/- was paid after deducting applicable TDS to the seller. The same is evidenced in form 26AS. However, negotiation failed, and the transaction was not successful, and the parties have entered into cancellation agreement. As the contract was cancelled by the seller at his behest, he has paid a compensation of Rs. 65,00,000/- to the assessee for cancelling the agreement. The same has been offered to tax an income from other sources." The assessee has submitted the cancellation agreement in support of his claim and his statement of Transactions in Loans account of RBL Bank. 5.2. In respect of deduction claimed u/s 57, the assessee submitted that, "the assessee has paid the advances for purchase of property out of the borrowed funds which is subjected to periodical interest. During the year the assessee has incurred interest expenses of Rs. 53,33,121/- which is qualified for deduction u/s 57 of the Act against the income offered under section 56. The expenses claimed is purely in relation to the income earned during the year under the head income from other sources and the same is deductible expenditure."

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3.

Further in reply to notice u/s. 142(1) dated 14.3.2022 as to why 50% of Rs.65 lakhs should not be allowed as deduction u/s. 57, the assessee on 14.03.2023 submitted that the entire interest expenditure of Rs.53,33,121 should be allowed as per section 57(iv). The AO noted that the interest is towards the home loan taken by the assessee towards purchase of property that stands cancelled, whereas the income of Rs.65 lakhs received by the assessee is the compensation consequent to cancellation of agreement of purchase of immovable property. Accordingly, the assessee has not laid out the expenses (interest on home loan) wholly and exclusively for the purpose of making or earning such compensation of Rs.65 lakhs. Accordingly draft assessment order was passed. The assessee filed objection before the ld. DRP against the Draft Assessment order.

4.

The DRP rejected the objections filed by the assessee as follows:-

“3.2.1 Having considered the submissions, admittedly the assessee had availed loan for purchase of property and had paid interest on the amount so borrowed. However, the deduction in respect of interest on loan borrowed for purchase of property is allowed only against the income from the property. The said interest cannot be deducted from out of the income from Other Sources. In the case under review the assessee has not declared income from house property but has rightly declared the compensation received under the head Income from Other Sources. Further, the interest paid has not been expended wholly and exclusively for the purpose of earning the income by way of compensation. 3.2.2 In view of the above, the Panel is of the view that the AO has rightly disallowed the interest claimed of Rs.53,33,121/- from

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out of the compensation received. Accordingly, the grounds of objection of the assessee therefore rejected.” 5. Accordingly the AO passed the final assessment order disallowing the expenses of Rs.53,33,121 and setting it off against the returned loss and assessed income at Rs.18,20,460. Aggrieved, the assessee is in appeal before the Tribunal.

6.

The ld. AR submitted that both the authorities have wrongly decided the claim of the assessee. There was a direct nexus between the compensation received towards cancellation of the agreement for purchase of property and interest paid on loans which was taken for the purchase of property. He further submitted that had the assessee not taken the loan from bank, he would not been able to pay the advance for the purchase of property and he would not have got the compensation. The source for purchase of property was the loan. He submitted that both the authorities have wrongly treated it as a home loan and that home loan interest can be adjusted against income from house property.

7.

The ld DR relied on the orders of authorities below and submitted that the amount received by the assessee was compensation for cancellation of agreement for purchase of property. There was no nexus between the compensation received and interest paid towards the purchase of property. He relied on the judgment of Hon’ble Punjab & Haryana High Court in the case of Haryana State Small Industries Export Corporation Ltd. v. CIT, ITA No.79/2012 (O&M) dated 1.8.2012 at para no.9.

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8.

In the rejoinder, the ld AR submitted that the AO has wrongly held that compensation received is towards buying of immovable property ignoring the fact that the assessee has not taken possession of immovable property. The claim of the assessee is similar to provisions of section 56(2)(ix) which states that forfeiture of advance received for transfer of capital asset shall be treated as income from other sources. Similarly the compensation received for cancellation of agreement for transfer of capital asset also would be income from other sources. He submitted that the amount paid by the vendor is nothing but to compensate the interest expenses incurred by the assessee. There is clear trail of movement of funds and the loan taken by the assessee is utilized for payment towards acquisition of property. Therefore, applying the provisions of section 57(iii) of the Act, the entire interest paid on such loan shall be set off against the compensation received. He submitted that the decision cited by the ld. DR in the case of Haryana State Small Industries Export Corporation Ltd. (supra) is not applicable to the facts of the assessee’s case.

9.

Considering the rival submissions, I note that the assessee has made advance of Rs.7.00/- crores for purchase of property being Municipal No.14, situated at Bachhamal Road, Ward No.79, Sarvagna Nagar, Cox Town, Bangalore measuring to an extent of 23,900 sq.ft. for an agreed consideration of Rs.9.00/- crores. The assessee took loan for purchase of property and it was advanced to the seller of the property on which assessee paid interest of Rs.53,33,151. Later on, the seller was not inclined to sell the property and it was mutually

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decided to cancel the agreement and the seller agreed to refund the entire advance paid along with compensation of Rs.65 lakhs which was offered as income from other sources. The revenue authorities have declined the claim of the assessee of the interest expenditure of Rs.53,33,151 as deduction u/s. 57 towards interest paid on loan taken by the assessee. The authorities have held that it was a Home Loan taken for purchase of property and accepted the income under the head income from other sources, however, the claim of deduction on interest paid on loan for purchase of property is denied. The loan taken by the assessee was the source for advance to the seller for the purchase of property and without such loan the assessee could not have paid the advance amount nor received compensation on cancellation of agreement for purchase of property. There is a direct nexus between paying interest to the bank and earning the compensation. There is one important thing to note that for computing income from house property for determining the “Annual Value” the assessee should be owner of the House Property but here in this case the assessee is not the owner, therefore the determining the income from house property by the revenue authorities fails. In view of this , the assessee is eligible for claim of deduction u/s. 57 towards interest paid on loan. The decision of Haryana State Small Industries Export Corporation Ltd. (supra) relied on by the ld. DR is not applicable to the present case.

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10.

In the result, the appeal by the assessee is allowed.

Pronounced in the open court on this 31st day of July, 2023.

Sd/-

(LAXMI PRASAD SAHU ) ACCOUNTANT MEMBER Bangalore, Dated, the 31st July, 2023. /Desai S Murthy /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.

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