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Income Tax Appellate Tribunal, H Bench, Mumbai
Before: Shri Manoj Kumar Aggarwal & Shri Ravish Sood
O R D E R
Per Ravish Sood, JM
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-10, Mumbai, dated 21.12.2015, which in turn arises from the order passed by the A.O under Sec.143(3) r.w.s. 147 of the Income Tax Act, 1961 (for short „Act‟), dated 31.12.2013 for A.Y 2010-11. The revenue assailing the order of the CIT(A) has raised before us the following ground of appeal: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O to allow the claim of interest u/s 24 (b) of Income Tax Act against the rental income from Dhanwatay House even though the same was not made either in the original return of income or in the return filed in response to notice u/s 148 of Act.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow the claim of interest u/s 24 (b) of I.T Act against the rental income from Dhanwatay P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. House without appreciating the fact that the assessee had not received any the rent from the tenants but it was deposited in the bank account of AOP namely M/s. M.D. Dhanwatay & Others as the property was in dispute and the suit for partition of the property amongst the original co-owners and restraining the co-owners from intermeddling the suit property is pending in the Hon’ble Bombay High Court.
3. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in not following the ratio of decision of Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. C.I.T. (284 ITR 323) wherein it was held that the claim of deduction cannot be entertained otherwise than by filing revised return of income. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and the order of the A.O be restored. The appellant craves leave to amend or alter any ground and/or add any other grounds which may be necessary.”
2. Briefly stated, the assessee company had filed its return of income for A.Y 2010-11 on 30.09.2010, declaring total income of Rs.12,34,630/-. The return of income was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was reopened under Sec. 147 to verify the correctness of deduction under Sec. 24(b) of the Act, as a similar discrepancy of claiming of excess deduction was noticed while concluding the assessment for A.Y 2009- 10 and the same was brought to tax in the said year. The assessee in compliance to the notice issued under Sec. 148 filed its return of income declaring total income of Rs.13,98,758/-.
3. The issue involved in the present appeal lies in a narrow compass. During the course of the assessment proceedings, it was noticed by the A.O that the assessee in its „Original‟ return of income had not shown any income from Dhanwatay House property. However, in the return filed by the assessee in response to notice issued under Sec. 148, it had shown rent from Dhanwatay House property of RS. ,34,464/- and after claiming deduction under Sec. 24(a) shown the income of Rs. 1,64,125/-. It was observed by the A.O that the assessee had claimed deduction under Sec. 24(b) of Rs. 1,04,51,564/- against income from house property, namely, Dhapla House. However, it P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. was the contention of the assessee that it had paid interest of Rs. 54,35,564/- for Dhapla House property, and interest of Rs. 50,16,000/- for Dhanwatay House property. The A.O being of the view that the assessee had in its return of income claimed deduction of interest only in respect of the Dhapla House property, thus declined to accept the claim of deduction of interest in respect of the Dhanwatay House property. The claim of the assessee that a consolidate claim of deduction of interest under Sec. 24(b) was raised in respect of both of the aforementioned properties viz. (i) Dhapla House property; and (ii). Dhanwatay House property, did not find favour with the A.O. In order to fortify his aforesaid observation, the A.O took support of the judgment of the Hon‟ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT 284 ITR 323 (SC), and observed that as the assessee had failed to claim deduction of interest under Sec. 24(b) in respect of the Dhanwatay House property in its return of income, thus the same could not be allowed. Alternatively, it was observed by the A.O that as observed by his predecessor while framing the assessment in the case of the assessee for A.Y 2009-10, due to disputes amongst the members of Dhanwatay family the rent received from the tenants was being deposited in the bank account standing in the name of M/s M.D Dhanwatay & Others, AOP. It was thus observed by the A.O, that as the facts during the year under consideration remained the same, thus the rent received by the AOP was liable to be brought to tax in its hands. On the basis of his aforesaid observations, the A.O referring to Sec. 67A of the Act, observed that the share of profit in the form of rent in the hands of the assessee (as a member of the AOP), as per Sec. 67A(2) was liable to be assessed under the head “Income from house property”. On the basis of his aforesaid observations, the A.O concluded that as per Sec. 67A(3), any interest paid by a member on capital borrowed for investing in the AOP was to be deducted from his P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. share of income chargeable under the head “Profits and gains of business or profession”. It was thus, in the backdrop of the aforesaid facts, observed by the A.O that no deduction of the interest expenditure was to be allowed against the share of income of the assessee from the AOP. Further, the A.O after necessary deliberations restricted the claim of deduction of interest in respect of Dhapla House property to an amount of Rs. 40,15,572/- and assessed the income at Rs. 83,84,750/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee submitted before the CIT(A), that it had utilised all the funds for purchase of the property viz. (i).Dhapla House property; and (ii). Dhanwatay House property or on its repairs/maintenance or for repayment of old loans that were raised for the aforesaid purpose. The CIT(A) after necessary deliberations observed that a similar issue as regards the entitlement of the assessee towards claim of deduction of interest expenditure under Sec. 24(b) had earlier came up before him, in the case of the assessee for A.Y 2008-09 and A.Y 2009-10. It was observed by the CIT(A) that while disposing off the said respective appeals, he had noticed that the nexus between the borrowed funds and their utilisation towards the properties under consideration was not properly worked out. Thus, in the backdrop of the said facts, he had suggested a method to the A.O to work out the nexus between the interest bearing borrowed funds and their utilisation towards the said properties viz. (i).Dhapla House property; and (ii). Dhanwatay House property. The CIT(A) referring to his earlier view, thus directed the A.O to follow the same method for the year under consideration. Still further, the CIT(A) following the view taken by him while disposing off the appeal of the assessee for A.Y 2008-09 and A.Y 2009-10, observed that as the Dhanwatay House property was fully owned by the assessee company to the extent of its P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. share of AOP from A.Y 2010-11, therefore the said property would get all the benefits available to house property income in line with the benefit available to Dhapla House property. In terms of his aforesaid observations, the CIT(A) directed the A.O to allow the benefits of the house property in respect of the Dhanwatay House property. However, as a word of caution, the CIT(A) directed the CIT(A) to restrict the entitlement of the benefits of the house property of Dhanwatay House property, only to the extent of the share of AOP received by the assessee company.
5. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. D.R relied on the order of the A.O. It was averred by the ld. D.R that as the assessee had not claimed any deduction of the interest expenditure under Sec. 24(b) in respect of the Dhanwatay House property, either in its „Original‟ return of income or in the return of income filed in compliance to notice issued under Sec. 148 of the Act, thus the CIT(A) had erred in allowing the same. In support of his aforesaid contention the ld. D.R relied on the judgment of the Hon‟ble Apex Court in the case of viz. Goetze (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC). It was averred by the ld. D.R that now when the assessee had failed to raise the aforesaid claim of interest expenditure, therein the only recourse available to it was to have raised the same by filing a revised return of income. Per contra, the ld. A.R relied on the order of the CIT(A). It was submitted by the ld. A.R that the CIT(A) had rightly followed the view as was earlier taken by him while disposing off the appeals of the assessee for A.Y 2008-09 and A.Y 2009-10.
We have heard the authorised representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find that it is the claim of the assessee that it P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. had in its return of income filed in compliance to Notice issued under Sec. 148 of the Act, had not only shown its income in respect of the Dhanwatay House Property, but had also claimed deduction of the interest expenditure of Rs. 50,16,000/- in respect of the said property under Sec. 24(b) of the Act. Further, it is the claim of the assessee before the lower authorities that a consolidate claim of deduction in respect of interest expenditure under Sec. 24(b) aggregating to Rs. 1,04,51,564/- was claimed in respect of both of the properties viz. (i) Dhapla House property; & (ii) Dhanwatay House property. It was submitted by the assessee that as there was no provision for raising of separate claim of deduction under Sec. 24(b) in the return of income filed in „Form V‟, thus a consolidate claim of deduction of the interest expenditure was raised. We find that the said claim of the assessee was not accepted by the A.O for the reason that as per him the assessee had claimed deduction of interest expenditure under Sec. 24(b) only in respect of the Dhapla House property. The A.O was of the view that as per the judgment of the Hon‟ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT 284 ITR 323 (SC), he remained under a statutorily obligation to restrict the entitlement of the assessee towards deduction which were raised by him in the return of income, and was vested with no jurisdiction to allow any such claim which had not been raised by the assessee. However, on appeal the CIT(A) observing that while disposing off the appeals of the assessee for the A.Y. 2008-09 and A.Y. 2009-10, a similar issue as regards the entitlement of the assessee towards the claim of deduction in respect of the interest expenditure pertaining to the aforementioned property, viz. Dhanwatay House Property, came up before him. It was observed by the CIT(A) that while disposing of the aforesaid appeals it was observed by him that as a proper nexus between the interest bearing borrowed funds and utilization of the same towards P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. the aforementioned properties was not worked out, hence he had suggested a method of working out the nexus of funds and their utilization towards the properties. On the basis of the aforesaid observations the CIT(A) directed the A.O to follow the same method for working out the nexus of funds and their utilization towards the aforementioned properties, viz. (i) Dhapla House property; and (ii) Dhanwatay House property. We find that the revenue is aggrieved with the aforesaid observations of the CIT(A), which thus had entitled the assessee for claim of deduction of the interest expenditure under Sec. 24(b) in respect of the Dhanwatay House Property, despite the fact that no such interest expenditure in respect of the said property was claimed in its return of income for the year under consideration. We are of the considered view that the reliance placed by the A.O on the judgment of the Hon‟ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT 284 ITR 323 (SC) is well in order, and as such the A.O is restrained from allowing any such claim of deduction which had not been raised by the assessee in its return of income. However, in our considered view, on a perusal of the aforesaid judgment of the Apex Court, it can safely be gathered that the said restriction in no way confines the powers of the appellate authorities. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Pruthvi Broker and Share Holders Ltd (2012) 349 ITR 336 (Bom). The Hon‟ble High Court in its aforesaid order had observed that though an A.O in the backdrop of the judgment of the Hon‟ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC) cannot entertain a claim for deduction/relief which had not been raised by the assessee in its return of income, otherwise than by filing a revised return of income, however, the appellate authorities were vested with a jurisdiction to entertain such claim as long as the same was borne from the facts available on P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. record. We thus, without going into the intricacies of the facts as to whether the claim of deduction of interest expenditure of Rs. 50,16,000/- in respect of Dhanwatay House property, formed part of the claim of deduction of the interest expenditure of Rs. 1,04,51,564/- that was raised by the assessee in its return of income for the year under consideration, are of the considered view that on the basis of the judgment of the Hon‟ble High Court of Bombay in the case of Pruthvi Broker and Share Holders Ltd. (supra), no infirmity does emerge from the order of the CIT(A) who remaining well within his jurisdiction had directed the A.O to allow deduction of the interest expenditure under Sec. 24(b) to the assessee also in respect of the Dhanwatay House, as per the method which was suggested by him for establishing a nexus between the interest bearing borrowed funds and utilization of the same towards the aforementioned properties, viz. (i) Dhapla House property; and (ii) Dhanwatay House property. We thus finding ourselves to be in agreement with the view taken by the CIT(A), thus dismissed the Grounds of Appeal No. (i) and (iii) raised by the revenue before us.
We have further deliberated on the observations of the CIT(A) that the assessee would be entitled for claim of deduction of the interest expenditure under Sec. 24(b) in respect of the Dhanwatay House property, to the extent of his share of income from M/s M.D. Dhanwatay & others, AOP. We find that as per Sec. 67A(2) of the Act, the share of income in the hands of a member of an AOP is to be apportioned under the various heads of income, in the same manner in which the income or loss of the association or body has been determined under the said respective heads of income. In our considered view, in terms of the aforesaid mandate of law, the rental income received by the assessee as his share of income from the aforementioned AOP was liable to be assessed under the head “Income P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. from house property”. To the said extent, there is no controversy between the revenue and the assessee. However, thereafter the A.O by taking support of Sec. 67A(3) had observed that any interest paid by a member on capital borrowed by him for the purpose of investment in the association or body shall, in computing his chargeable under the head “Profits and gains of business and profession” in respect of a share in the income of the association is to be deducted from his share. On the basis of the aforesaid observations, the A.O was of the view that now when share of income of the assessee from the AOP was to be assessed under the head “Income from house property”, thus its claim of interest expenditure under Sec. 24(b) could not be accepted. We have given a thoughtful consideration to the observations of the A.O, and unable to persuade ourselves to subscribe to the interpretation of Sec. 67A(3) so accorded by him. Admittedly, the interest paid by a member on capital borrowed by him for the purpose of investment in the AOP shall, in computing his share chargeable under the head “Profit and gains of business or profession” is to be deducted from his said share of income. However, in case before us the claim of interest expenditure of the assessee, is not in context of any borrowed capital which had been utilized for making of an investment in the AOP. Rather, the aforesaid interest expenditure pertains to the capital which was borrowed by the assessee for an investment in the property, the rental income of which only pursuant to a pending litigation amongst the members of the Dhanwatay family before the Hon‟ble High Court, was deposited in the bank account standing in the name of M/s M.D. Dhanwatay and others, AOP. We are of the considered view, that the aforesaid interest expenditure pertaining to the funds which were utilized by the assessee in respect of Dhanwatay House property, cannot be placed at par with the interest on capital which was borrowed by the assessee P a g e | ITO, Ward-5(1)(3) Vs. Crimson Properties Pvt. Ltd. for the purpose of making an investment in the AOP. Interestingly, viewed from another angel, as the aforesaid interest bearing funds were utilized in respect of Dhanwatay House property, much prior to the existence of the AOP (which came into existence only pursuant to a dispute amongst the family members on the issue of the partition of the property), thus, the interest pertaining to such borrowed funds, on the said count also cannot be construed as interest pertaining to the funds borrowed by the assessee for the purpose of making an investment as a member in the AOP. We thus, in terms of our aforesaid observations are persuaded to subscribe of the view taken by the CIT(A) who in our considered view had rightly concluded that the share of profit in the form of rent received by the assessee was liable to be taxed under the “Income from house property”, and the assesses would be eligible to claim deduction of the interest expenditure against the said income, though with a rider that such deduction was not to exceed the share of income of the assessee as a member of the AOP. We thus, not finding any infirmity in the aforesaid observations of the CIT(A), uphold the same. The Ground of Appeal No. (ii) raised by the revenue is dismissed.
The appeal of the revenue is dismissed.