By TIOL News Service

MUMBAI, FEB 13, 2017: THE ISSUE IS - Whether an owner can claim deduction u/s 24b on account of interest on borrowed capital which has been utilized in the acquisition, construction & repairs of the property, only when he has paid tax u/s 23 in respect of bonafide ALV. YES is the answer.

Facts of the case:

The assessee company was incorporated with the aim and objective of making investment in immovable properties and letting out such properties to earn rental income. For this purpose, the assessee had purchased two properties by investing borrowed moneys. It was contended that the transaction of both the premises were completed before 31-03-2007 and occupation certificate was obtained by the builder on 28-12-2006 from the municipal Corporation of greater Mumbai for occupying the buildings "Times Tower" and builder forwarded the same to the assessee company in January 2007. The assessee tried to let out the property but could not do in these two assessment years as there was slum in rental market. The assessee company paid interest to its holding company Bennett, Coleman & Co. Ltd. at Rs.3,25,23,707/- at the rate of 8% on the total unsecured loan and advance of Rs.40,65,46,342/- for the A.Y. 2008-09. The assessee claimed the deduction of this interest u/s 24b of the Act amounting to Rs.3,25,23,707/- and consequently loss arising out of this deduction amounting to Rs.3,21,65,827/- is claimed to be allowed as carry forward u/s 71B of the Act. The AO noted that the assessee has not let out these properties as only purchased the same as incomplete, the deduction u/s 24(b) was not allowable. On appeal, CIT(A) confirmed the action of AO.

On appeal, the ITAT held that,

++ it is provided in the section 23 that the assessee has to pay tax in respect of bonafide ALV determined in accordance with the provisions of these Sections. What is charged u/s 22 is the annual value of the ownership of the property irrespective of the fact whether or not any income was either actually received or had accrued to the assessee. Therefore, it cannot be stated that by reason of the fact that the property is not let out, the assessee will escape income tax. Here, in the present case also, in case the assessee determines ALV of the property and offer the same for assessment, he will be eligible for the claim of deduction u/s 24b on account of interest on borrowed capital which has been utilized in the acquisition, construction, repairs, renewal or reconstruction of the property the income wherefrom is being computed for charge of income tax. The AR conceded the position that as per section 23(1)(a), for purpose of section 22, ALV of these commercial properties shall be determined by the assessee and only then the claim of deduction u/s 24b will be allowed. In the present case, we set aside this issue to the file of AO to first determine the ALV of these two commercial properties as per Section 23(1)(a) for the purpose of Section 22, i.e. the annual value shall be deemed to be the sum for which property might reasonably be expected let from year to year. Then, the AO will allow the claim of deduction u/s 24b on account of interest on borrowed capital, which is not in dispute. In term of the above, we remand the matter back to the file of AO for fresh adjudication.

(See 2017-TIOL-110-ITAT-MUM)