Income from house property – Deductions

Last updated: 24 September 2007

Court :
IN THE ITAT DLEHI BENCH ‘A’

Brief :
Section 24 [as it stood prior to substitution by the Finance Act, 2001, with effect from 1-4-2002] of the Income-tax Act, 1961 – Income from house property – Deductions – Assessment year 1998-99 – Assessees were co-owners of lease hold rights in respect of a property situated at New Delhi – Assessees had sub-let said property to one R at a certain rent – Assessees paid certain amount to R and in consideration thereof R surrendered vacant possession of property to assessees – Assessees thereafter let out property afresh by way of sub-lease to others and derived higher rental income – Assessees offered their shares of rental income to tax under head income from house property and claimed deduction under section 24(1)(b) on amount of interest they paid on moneys borrowed to pay R from income chargeable to tax under head income from house property – Whether since assessees had only lease-hold rights over property and by making payment to R they did not acquire any interest over property, borrowing was not in connection with acquiring property – Held, yes – Whether, therefore, assessee were not entitled to deduction of interest paid in question – Held, yes FACTS The assessees were co-owners of the lease-hold rights in respect of a property situated at New Delhi. The assessees had sub-let the property to one R at a certain rent. The property was capable of fetching much greater rent than what was being paid by R. The assessees could not get back possession from the sub-tenant, as the tenancy was subject to the Delhi Rent Control Act. The assessees, therefore, paid certain amount to R and in consideration of receipt of such payment R surrendered vacant possession of the property to the assessees. The assessees borrowed moneys to make payment to R and paid interest on such borrowing. The assessees let out the property afresh by way of sub-lease to others and derived higher rental income. The assessees offered their share of rentral income to tax under the head ‘Income from house property’ and claimed deduction under section 24(1)(vi) on the amount of interest they paid on moneys borrowed to pay R from the income chargeable to tax under the head income from house property. The Assessing Officer disallowed the deduction holding that the money paid by the assessees to R could not be said to be for acquiring any property, that it was only the money borrowed and paid to owner of the same property for acquiring same rights from him that could be considered under section 24(1)(vi), and that the sub-tenant had no such rights, which he could part with for consideration to others. On appeal, the Commissioner (Appeals), however, allowed the deduction holding that tenancy right in a property was a capital assets and the assessees acquired more tenancy rights by paying borrowed funds to R and that therefore, the interest amount paid by the assessees was allowable as deduction under section 24(1)(vi). On appeal to the Tribunal:

Citation :
Assistant Commissioner of Income-tax, Circle 29(1), New Delhi v Rahul Chaudhaery N. V. Vasudevan, Judicial Member And R. C. Sharma, Accountant Member IT Appeal Nos. 4689 to 4694 (Delhi) of 2003

In the instant cases, the assessees had only a lease-hold interest over the property. As lessees they had the right to sub-let and derive rental income from the property. This rental income was brought to tax under the head ‘Income from-house property’. Under section 24(1)(vi) where capital is borrowed to acquire the property the rental income from which is brought to tax under the head ‘Income from house property’, the interest paid on such borrowed capital is allowed as a deduction. The crucial expression used in section 24(1)(vi) is ‘where the property has been acquired’. In the instant case, what was acquired by the assessees was a lease-hold interest over the property. Admittedly the money in question was not paid to the person from whom lease-hold rights were acquired. By granting sub-lease of the property the assessees did not lodge their leasehold rights over the property. They continued to be lessees of the property. The money paid to the sub-tenant was only to get vacant possession of the property and terminate the sub-lease. By doing so, the assessees did not acquire any interest over the property. The assessees paid the sum in question for better augmenting their income from the property. They incurred the expenditure in question as a prudent man would do. The borrowing was, therefore, not in connection with acquiring the property. Hence, the Commissioner (Appeals) was wrong in allowing deduction under section 24(1)(iv). [para 7] Hence, the appeal was allowed. [para 8]