MICHELLE Y. POONAWALLA,PUNE vs. DCIT-CIR-7, PUNE , PUNE

The assessee has raised the following common grounds of appeal except the variance in amount in both the AYs. “On facts and circumstances of the case and in law, 1] The learned CIT(A) erred in confirming the disallowance of interest of Rs.1,22,59,620/- u/s 24(b) of the Act. 2] The learned CIT(A) erred in holding that the assessee had borrowed money and the said borrowed money was paid to the statutory payment for vacating the property and the interest on such borrowed money could not be allowed as a deduction u/s 24(b) of the Act.

3] The learned CIT(A) failed to appreciate that the assessee had taken loan and utilize the said amount for paying to the statutory payment and accordingly, the interest on such loan taken was allowable as a deduction u/s 24(b) of the Act. 4] The learned CIT(A) failed to appreciate that payment of consideration (with aid of borrowed funds) had a direct nexus with the acquisition of possession of impaired property from the statutory tenant and hence, the assessee was justified in claiming deduction of the interest paid u/s 24(b) of the Act. 5] The learned CIT(A) failed to appreciate the fact that – a. Appellant purchased a tenanted flat and by paying compensation to the statutory tenant appellant acquired possession of said flat after eleven years from the date of acquiring its title hence, interest on money borrowed for paying compensation to the statutory tenant was allowable U/sec. 24 of the Income Tax Act. b. Acquisition of property for the purposes of section 24 means not only the ownership of property but also getting possession simultaneously therefore, interest on borrowed money utilized for payment of compensation to the statutory tenant was allowable as deduction (if not U/sec.23) U/sec. 24 of the IT Act' 1961. c. Borrowed money was utilized for acquiring another capital asset i.e. tenancy rights hence, assuming income from property is assessable U/sec.22/23 still, such interest is deductible U/sec.57(iii) of the Income Tax Act'1961. d. The ratio of the decision of ITAT in the case of Virendra Singh [104 ITD 365] is not comparable with the facts of the appellant & hence, its ratio is inapplicable to appellant's case. 6] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal at the time of appeal hearing.”

While claiming deduction of interest I have referred and relied on Sec.24(b). Sec 24(b) grants deduction of interest where, the property is acquired, constructed, repaired, renewed or reconstructed with borrowed capital in the present case, though I purchased the title of the fiat along with the 'Statutory tenant, I was deprived of possession of the same till the statutory tenant relinquished his possession right of said flat on getting monetary consideration from me. Hence, relinquishment of tenancy rights enabled me to acquire possession of said flat.

I invite your kind attention towards provision of Sec 23 which deals with determination of annual value. Sec 23 also states that determination of annual let-able value is, the sum for which the property might be reasonably expected to let from year to year or, where, the property or part of it is let by the owner, the actual rent received for such property and, higher of these two is taxable u/s 22 r.w.s 23 of the Income Tax Act.

In the present case, the undisputed fact is, I owned title of the flat without its possession. Following table shows receipt of rent for said flat (i.e. "Flat No. 11" which was occupied by the statutory tenant earlier) admeasuring '3049' sq.ft. in a priced locality of Mumbai i.e. "Breach Candy" over a period of years.

The facts stated in part “B-4” above clearly show the fall rental value of said flat when it was let-out to a person other than the statutory tenant it also shows how my financial treat were jeopardized because of the tenant in the past. The rental income increased by 31,943% ub A.Y. 2013-14 if compared with rent received from the statutory tenant during AY 2011-12. This fact shows that had it been a case that, ‘statutory tenant’ was occupying the property then, besides me even in the exchequer was also at a financial loss (for its pie in the tax liability of the rental income I offered to tax later on).

Above facts clearly demonstrate that the compensation paid by me to the statutory tenant for vacating the premises has nexus with acquiring possession of said flat by me and then it had direct impact on actual rent receipt. Hence, deduction of interest is justified from the annual let-able value itself assuming provisions of Sec. 24 are ignored. I am stating this fact without prejudice to my alternate claim that though you fee interest is not deductible u/s 24(b) (for which I am separately giving contentions below) still, same is deductible while computing income u/sec 22 r.ws 23 itself. For this legal proposition, I invite your kind attention towards the decision of Mumbai bench of ITAT in the case of "Verma Family Trust vs ITO reported at 7 ITD 392". AY 2017-18 “Vide e-filed submissions dated 21st June 2019, I clarified that I have claimed deduction of interest U/sec 24(b) amounting to Rs.80,47,414/- while computing income U/Sec. 22/23. Besides, I would like to clarify how I am legally justified while claiming deduction of interest paid U/sec. 24(b) which amounts to Rs. 80,47,414/-? I'm clarifying factual & legal position below a. I have purchased a property at B C. House, Flat No. 11. B. D. Road, Mumbai 400026. While purchasing it was let-out by the seller to a tenant who occupied said flat for a long time because of which he was protected as 'Statutory Tenant under the Mumbai Rent Control Act. The purchase agreement of this flat exposes this fact since the rental receipts issued by seller, copy of electric meter was in the name of said statutory tenant were enclosed to the purchase agreement, in short, through purchase agreement I purchase the flat but I was deprived of its possession right from day one of its purchase. You may be aware about the fact that once a tenant gets protection under rent control act then the landlord is unable to compel him to evacuate from such flat b. Copy of the agreement with the statutory tenant for surrendering tenancy rights of Flat No. 11, B. C. House, B.D. Road, Mumbai, is enclosed at 'Annexure-H' to these submissions. Tenant (who is having protection under Bombay Rent Control Act) was paid total consideration amounting to Rs.9.99 crores out of which Rs.8.68 crores were moppedup with the aid of borrowed money by me from the financial institutions. Said fact was explicitly stated at note no.2 of my statement of total income" enclosed at 'Annexure-f' to these submissions c. In support of my claim for interest deduction, I request you to refer provisions of Sec. 24(b) and compare it with copy of my purchase agreement (of said flat dated 06th September 2001 enclosed at 'Annexure-J' to these submissions). I trust/believe that, if one uses and substantiates the fact that borrowed funds were used for acquisition, construction repair renewal or reconstruction of any/house property then, interest paid on d on such borrowed funds is deductible. I have relied on this provision of Sec. 24(b) while claiming deduction of interest. d. Besides, I am reproducing below the fact with respect to rent realized from the statutory tenant & after acquiring its possession from the statutory tenant and when it was let to other licensees. Assessment Year Amount of Rent Remarks 2009-10 Rs.20,813/- Actual rent received from the statutory Tenant. 2010-11 Rs.21,521/- Actual rent received from the statutory Tenant. 2011-12 Rs.21,521/- Actual rent received from the statutory Tenant. 2012-13 Rs.12,50,000/- Rent fetched for part of the year when property was let after ‘statutory tenant’ vacated said flat 2013-14 Rs.68,75,000/- Actual rent received for full year from Tenant. 2014-15 Rs.76,25,000/- Actual rent received for full year from Tenant. 2015-16 Rs.67,50,000/- Actual rent received for full year from Tenant. 2016-17 Rs.60,00,000/- Actual rent received for full year from Tenant. 2017-18 Rs.60,00,000/- Actual rent received for full year from Tenant.

Aggrieved, the assessee carried the matter before the Ld. CIT(A) who upheld the order of the Ld. AO by recording his findings and observations which are common (except the variance in amount of claim) in both the AYs as under : “The above grounds of appeal ratates to the disallowance of sterest on borrowed capital u/s 24(b) of the Act amounting to Rs 1.22.09.020. The submissions made by the appellant with respect to this are not acceptable. The AO has exhaustively dealt with the issue and only thereafter has made the said disallowance and the relevant excerpts from the assessment order are as under: "It is therefore, not possible to accept the claim of the assessee that getting back the tenancy rights would fall within the fold of meaning of acquired/renewed, appearing in section 24(b). The section having manifested clearly that the property that is being referred to is the property consisting of buildings and land appurtenant thereto, the assessee would be eligible for the deduction under section 24(b) in respect of interest paid on amounts borrowed only if the borrowed monies have been utilized for acquiring buildings or land appurtenant thereto and not in respect of monies utilized for paying the tenant for handing over the possession of the property, or in other words, for surrendering the tenancy rights in the property. For this, reliance is placed on the decision of the ITAT Delhi in the case of assistant commissioner of income-tax, circle 29(1), New Delhi vs Virender Singh, [2007] 104 ITD 365 (DELHI). It is not clear from the above that the loan was actually taken for the purpose of acquiring tenancy right. Because usually the property which is acquired is given as security to the bankers. But in this case, some other property is given as security Also it is a practice of the bankers to pay the loan money directly to the beneficiaries/third parties for which the loan is actually obtained. The reason why a company i.e. M/s Intervalve is party to the loan is also not clear This loan was subsequently taken over by Kotak Mahindra Bank. The agreement copy provided by Kotak Mahindra Bank also indicates that the loan was secured against the Flat 11 & 12 both. All the above facts cumulatively indicate that the assessee wanted to make some inadmissible claim which is otherwise not allowable under the express provision of the act. It is also not a case that the said claim of deduction was made by the assessee inadvertently or erroneously as during the assessment proceedings, assessee had vehemently defended her claim with premeditated conviction. Thus, as discussed above, the claim of the assessee in respect of interest paid on borrowed capital in respect of Flat No. 11 at Breach Candy Garden, Mumbai amounting to Rs.1,22,59,620/- is not allowable u/s. 24(b) and accordingly the same is added back to the total income of the assessee." On-going through the facts of the case, it is seen that the appellant's case was completed u/s 143(3)/263 of the Act. The Pr. CIT has specifically noticed the issue and directed the AO to revise the assessment order by disallowing claim of deduction claimed u/s 24(b) of the IT Act. During assessment proceedings the AO has specifically and elaborately discussed the case on this issue and disallowed interest on borrowed capital amounting to Rs.1,22,59,620/- u/s 24(b) of the Act. In the reply filed the appellant assessee has again reiterated the same facts that getting back the tenancy rights would fall within the fold of meaning of acquire/renewed in the ambit of sec 24(b) of the IT Act. Here, it is important to discuss the provisions of section 24(b) of the I.T. Act. 1961:- Deductions from income from house property.

Dissatisfied, the assessee in appeal before the Tribunal in both the AYs and all the grounds of appeal relate thereto.

The matter was called on 20.06.2024 and thereafter on 01-07-2024. None appeared on behalf of the assessee. However, the Ld. DR was present on both these dates. We, therefore, proceeded to decide the matter after hearing the Ld. DR.

At the outset of the hearing, the Ld. DR submitted that the issue involved in both the AYs under considerations is covered issue and have been the subject matter of adjudication before the Tribunal in assessee’s own case in earlier years as well. The Pune Bench of the Tribunal in assessee’s own case has decided the identical issue on allowability of interest paid on borrowed funds u/s 24(b) of the Act in favour of the Revenue in for AY 2013-14 vide its order dated 15.07.2022 and ITA No. 75/PUN/2020 for AY 2014-15 vide its order dated 28.07.2022.

We have heard the Ld. DR and perused the material available on record. We have also perused the order of the Co-ordinate Bench of the Tribunal in assessee’s own case in (supra) and observe that the impugned issue has been considered elaborately under the identical set of facts and stands decided in favour of the Revenue by the Tribunal. The said decision (supra) has been followed by the Co- ordinate Bench in subsequent AY 2014-15 in ITA No. 75/PUN/2020. The Relevant observations and findings of the Tribunal in pertaining to AY 2013-14 are as follows : “7. Heard both the parties and perused the material available on record. We note that the assessee purchased scheduled mentioned property vide Deed of Apartment on 06-09-2001 which is evident from Page No. 43 wherein the assessee has been addressed as “purchaser” and the sellers being Z.M. Investments and Traders Pvt. Ltd. and J.P. Hotels Pvt. Ltd. Further, the agreement for the relinquishing/surrendering of the statutory tenancy is at Page No. 56 of the paper book which is entered on 05-04-2011 between the assessee being addressed as “landlord” and Mr. Homi K. Erani and Mrs. Aban H. Erani being addressed as “statutory tenants”. It is noted from Para B of the said relinquishing agreement that the assessee is clearly addressed as absolute owner of the residential Apartment/Flat No. 11 which clearly supports the view of PCIT that the assessee has been legal owner of property since 06-09-2001. Further, It is noted that the assessee being addressed as landlord issued monthly rent receipts to statutory tenants 1 and 2 which is clear from Para C of the said agreement. In Para Nos. E and F establishes that they entered in to an agreement for the relinquishing of the statutory tenancy for agreed compensation of Rs.9,99,00,000/- shows that the said compensation paid for relinquishing the tenancy rights, in the sense, for bettering the title as rightly opined by the PCIT, not fitting in the conditions laid down u/s. 24(b) of the Act. Therefore, we are unable to accept the arguments of ld. AR that the statutory tenants is to be read as owner in terms of the provisions u/s. 27(iiib), Circular 495 dated 22-09-1987 and the finding of Hon’ble Supreme Court in the case of Podar Cement (P.) Ltd. (supra). Thus, in our opinion, all the above referred does not support the contention of ld. AR in treating the statutory tenants as owner of the property.

Admittedly, the assessee availed loan from Reliance Home Finance Limited for Rs.8,68,50,000/- and paid interest thereon @ 12.50%. Admittedly, the said borrowed loan was paid to statutory tenants in pursuance of relinquishing deed dated 05-04-2011. The PCIT held the interest paid on such borrowed amount does not fit into provisions of clause (b) of section 24 of the Act. The PCIT reproduced the said provisions in the impugned order at Para No.

On plain reading the said clause (b) of section 24 of the Act explains that the deduction is allowable where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. In the present case, as discussed above the agreement at Page No. 42 clearly shows that the assessee purchased the said property in the year 2001 and the relinquishment agreement at Page 56 shows that the assessee as “landlord”, therefore, as rightly pointed by the PCIT, the claim of the assessee is not entitled to claim interest as deduction u/s. 24(b) of the Act. On perusal of the assessment order dated 31-12-2015 clearly shows there was no discussion or reference to deduction claimed and how deduction is allowed. Therefore, the AO had wrong assumption of facts and by applying incorrect law without due application of mind allowed claim of interest paid on borrowed capital u/s. 24(b) of the Act. Therefore, in our opinion, the PCIT correctly exercised its jurisdiction in holding the assessment order dated 31-12-2015 is erroneous and prejudicial to the interest of Revenue. Thus, we do not find any infirmity in the order of PCIT and it is justified and the grounds raised by the assessee are dismissed.”

Respectfully following the decision(s) (supra) of the Co-ordinate Bench of the Tribunal in assessee’s own case for AYs 2013-14 and 2014- 15, we hereby uphold the order of Ld. CIT(A) and dismiss the grounds of appeal raised by the assessee.

In the result, the appeals of the assessee for both the AYs 2013-14 and AY 2017-18 are dismissed.