Section 24 of the Income-tax Act, 1961

Last updated: 09 October 2007

Court :
IN THE ITAT DELHI BENCH ‘A’

Brief :
Section 24 of the Income-tax Act, 1961 - Income from house property - Deductions - Assessment years 1998-99 and 2001-02 - Assessees were co-owners of lease-hold rights in respect of a property situated at New Delhi - They had sublet said property to one ‘R’ but were not able to get back possession of said property - Considering time involved in getting back possession through court of law, assessees borrowed money from third parties and made payment to ‘R’ for getting back vacant possession of property - 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)(vi) on amount of interest paid on borrowed sum - Whether since borrowed amount was paid to sub-tenant to get vacant possession of property and by doing so, assessees did not acquire any interest over property, in such circumstances, interest paid on borrowed sum would not be eligible for deduction under section 24(1)(vi) - Held, yes Facts The assessees were co-owners of the lease-hold rights in respect of a property situated at New Delhi. They had sublet the property to one ‘R’ at a certain rent but were not able to get back possession of said property from the sub-tenant. Considering time involved in getting back possession through Court of law, the assessees borrowed moneys to make payment to ‘R’ and paid interest on such borrowing. ‘R’ in consideration of said money surrendered vacant possession of property. The assessees thereafter let out the property afresh by way of sub-lease to others and derived higher rental income. The assessees offered their share of rental income to tax under the head ‘Income from house property’ and claimed deduction under section 24(1)(vi) on the amount of interest paid on borrowed sum. 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 asset and the assessees acquired more tenancy rights by paying borrowed funds to ‘R’, and that, therefore, the interest amount paid by the assesses was allowable as deduction under section 24(1)(vi). On revenue’s appeal :

Citation :
Assistant Commissioner of Income-tax, Circle 29(1), New Delhi v. Rahul Chaudhaery

Held In the instant case, the assessees had only a lease-hold interest over the property. As lessees they had the right to sublet 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 loose their lease-hold 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, considering the time involved in getting back possession through the Court of law and the demand of the assessees for eviction being found to be in conformity with the provisions of the Delhi Rent Control Act (DRCA). The borrowing was, therefore, not in connection with acquiring the property. Hence, the Commissioner (Appeals) was wrong in allowing deduction under section 24(1)(vi). [Para 7] Hence, the appeal was to be allowed. [Para 8]