COMMISSIONER OF INCOME-TAX VS R. P. GOENKA AND J.P. GOENKA, 2000 PTD-CALCUTTA-HIGH-COURT-INDIA 853 (1998)

Income-tax--

----Income from house property ---Deductions---Assessee initially borrowing a certain sum from B for purchase of house and paying part consideration-- Balance sale consideration agreed to be paid to vendor in yearly instalments ---Assessee borrowing further amount for payment of unpaid purchase price of house and also interest due thereon ---Unpaid sale price is to be treated as borrowed capital ---Assessee entitled to deduction of all interest paid to vendor on balance purchase price as well as interest paid to B on such sum borrowed subsequently for payment of principal sum of unpaid purchase price to vendor---Indian Income Tax Act, 1961, S.24(1)(vi).

The assessee purchased a property for a consideration of Rs.11,50,000 from Jaipur Investment Co. Ltd., the vendor. The assessee initially borrowed Rs.3,50,000 from B and paid part of the consideration. The balance sum of Rs.8 lakhs was agreed to be paid by the assessee to the vendor in yearly instalments of Rs.1 lakh each with interest at 8 percent. per annum. Thereafter, the assessee further borrowed a sum of Rs.8 lakhs from B for payment of the unpaid price of the house and also interest due thereon. The Income-tax Officer allowed interest only on capital borrowed initially and did not allow interest to the assessee on the subsequently borrowed money. The Commissioner of Income-tax (Appeals) directed the Income-tax Officer to allow the deduction in respect of interest on monies borrowed from B which had been utilised to pay the mortgagee together with interest thereon to the vendor company. The Tribunal- held that the assessee was entitled to deduction of interest paid to B on Rs.3,50,000 and also entitled to deduction of all interest paid to the vendor on the balance of the purchase price and was further entitled to deduction of interest paid to B on such borrowing for payment of the principal sum of the unpaid purchase price of the vendor, but that, however, the assessee was trot entitled to deduction of interest on the amount borrowed from B for payment of interest to the vendor on the unpaid purchase price. On a reference:

Held, that the unpaid sale price had to be treated as borrowed capital within the meaning of section 24(1)(vi) of the Income Tax Act, 1961, and that the assessee was entitled to deduction of all interest paid to the vendor company on-the balance purchase price as well as interest paid to B on such sum borrowed subsequently for payment of the principal sum of the unpaid purchase price to the vendor company.

Standing Counsel for the Commissioner.

JUDGMENT

Y. R. MEENA, J.---In compliance with our direction in an application under section 256(2) of the Income Tax Act, 1961, the Tribunal has referred the following question alongwith the statement of the case for our opinion:

"Whether the Tribunal misdirected itself in law in admitting that the unpaid sale price could be treated as borrowed capital within the meaning of clause (vi) of subsection (1) section 24 of the Income-tax Act, and in that view whether the Tribunal was justified in holding that the assessee was entitled to deduction of all interest paid to the vendor, company on the balance of purchase price as (well as?) interest paid to Badridas Keshav Prosad on such sum borrowed subsequently for payment of principal sum of unpaid purchase price to the vendor company?"

The assessee had filed the return on June 19, 1980. In the return the assessee claimed a deduction of Rs.2,55,4000 paid to Badridas Keshave Prosad which was paid as interest to Badridas Keshav Prosad. The Income tax Officer has allowed interest only on capital borrowed initially for the purpose of acquiring the house.

In appeal, the Commissioner of Income-tax (Appeals) has directed the-Income-tax Officer to allow deduction in respect of interest on the monies borrowed from Badridas Keshav Prosad, which had been utilised to pay the mortgagee together with interest thereon to the vendor company.

In appeal before the Tribunal, the Tribunal has taken a view that the assessee is entitled to deduction of interest paid to Badridas Keshav Prosad on Rs.3,50,000 borrowed for purchasing house and he is also entitled to deduction of all, interest paid to the vendor on the balance of the purchase price and is further entitled to deduction of interest paid to Badridas Keshav Prosad on such borrowing for payment of principal sum of unpaid purchase price of the vendor. However, the assessee is not entitled to interest on the amount borrowed from Badiidas Keshav Prosad for payment of interest to the vendor on the unpaid purchase price.

Heard the learned Advocates for the parties. The facts are not in dispute that the assessee has purchased a house from Jaipur Investment Co. Ltd. for a consideration of Rs.11,50,000 by a registered deed, dated January 25, 1973. The assessee initially borrowed Rs.3,50,000 from Badridas Keshav Prosad, a firm of his family members and paid part of the consideration. The balance sum of Rs.8,00,000 was agreed to be paid by the assessee to the vendor in yearly instalments of Rs.1 lakhs each with interest at 8 percent. per annum. Thereafter, the assessee further borrowed the amount from Badridas Keshav Prosad for payment of -the unpaid price of the house and also interest due thereon. The Income-tax Officer did not allow any interest on the subsequent borrowed money. However, the Tribunal has allowed the interest on the initially borrowed money, i.e., Rs.3,50,000, and also allowed the interest on the amount which was borrowed for payment of the unpaid purchase price of the house. This amount was payable to the vendor and the Tribunal did not allow interest on the borrowed money which was borrowed for payment of interest to Badridas Keshav Prosad.

The provisions of section 24(1)(vi) are as follows:

"Whether the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. "

Clause (vi) of subsection (1) of section 24, provides that any interest payable on such borrowed capital which has been invested for acquiring the house or construction of a house or for repairing of the house or reconstruction of the house, the interest payable on that borrowed capital is deductible from the income of the house property. When the facts are not in dispute that the total cost of the house was Rs.11,50,000 and Rs.3,50,000 was paid after borrowing the said amount from Badridas Keshav Prosad the interest on that borrowed capital has been allowed. Subsequently, the assessee has further borrowed an amount for payment of the balance amount of unpaid purchase price, i.e., Rs.8 lakhs. How the interest paid on that subsequent borrowing which is borrowed for payment of unpaid price of the house can be denied.

Learned counsel for the Revenue failed to show us any authority as to how the case of the assessee is not covered within the provisions of clause (vi) of section 24(1). Once the capital is borrowed for acquiring the house property, interest paid thereon should be deducted from the income of the house property. Accordingly, we do not find any infirmity in the view taken by the Tribunal.

In the result so far as whether the Tribunal misdirected itself in law in admitting that the unpaid sale price could be treated as borrowed capital within the meaning of clause (vi) of section 24(1) of the Income-tax Act is concerned, we answer this question in the negative, i.e., in favour of the assessee and against the Revenue. So far as whether the Tribunal was justified in holding that the assessee was entitled to deduction of all interest paid to the vendor company on the balance purchase price as well as interest to Badridas Keshav Prosad on such sum borrowed subsequently for payment of principal sum of unpaid purchase price to the vendor company is concerned; we answer it in the affirmative, i.e., in favour of the assessee and against the Revenue.

BIJITENDRA M0OHAN MITRA, J.---I agree.

M.B.A./3331/FC Reference answered.