ISSUE FOR CONSIDERATION
Section 24
of the Income-tax Act grants a deduction for interest payable on the borrowed capital
for acquisition, etc. of a house property in computing the income under the
head ‘Income from House Property’. This
deduction is allowed for interest for the pre-acquisition period in five equal
annual instalments from the year of acquisition, and for the period
post-acquisition, annually in full, subject, however, to the limits specified
in section 24.
Section 48
of the Act grants a deduction for the cost of acquisition and improvement of a
capital asset in computing the income under the head ‘Capital Gains’. That for
the purposes of section 48 interest paid or payable on borrowings made for the
acquisition of a capital asset is includible in such a cost and is allowable as
a deduction in computing the capital gains, is a settled position in law.
The above
understandings, otherwise settled, encounter difficulty in cases where an
assessee, after having claimed a deduction over a period of years, for the same
interest u/s 24 in computing the income from house property, claims a deduction
for such interest, in aggregate, paid or payable over a period of the
borrowings again u/s 48, in computing the capital gains. It is here that the
Revenue authorities reject the claim for deduction u/s 48 on the ground that
such an interest has already been allowed u/s 24 and interest once allowed
cannot be allowed again in computing the total income.
The issue of
double deduction for interest, discussed above, has been the subject matter
of conflicting decisions of different benches of the Income Tax Appellate
Tribunal some of which are examined here and their implications analysed for a
better understanding of the subject.
THE C. RAMABRAHMAM CASE
The issue was first examined by the Chennai Bench of the Appellate
Tribunal in the case of ACIT vs. C. Ramabrahmam, 57 SOT 130 (Mds).
In that case the assessee, an individual, had purchased a house property with
interest-bearing borrowed funds at T. Nagar, Chennai on 20th
January, 2003 for an aggregate cost of Rs. 37,03,926. An amount of Rs. 4,82,042
in aggregate was paid as interest on the housing loan taken in 2003 for
purchasing the property which was claimed as deduction u/s 24(b) in the A.Ys.
2004-05 to 2006-07. He sold the property on 20th April, 2006 for Rs.
26.00 lakhs and in computing the capital gains, he claimed the deduction for
the said interest u/s 48 of the Act. The A.O. disallowed the claim for
deduction of interest u/s 48 since interest in question on the housing loan had
already been claimed as deduction u/s 24(b) in the A.Ys. 2004-05 to 2006-07,
and the same could not be taken into consideration for computation u/s 48
inasmuch as the legislative provision of section 48 did not permit inclusion of
the amount of deduction allowed u/s 24(b) of the Act. The A.O. added back the
interest amount to the income of the assessee from short-term capital gains vide
the assessment order dated 24th November, 2009.
The assessee
preferred an appeal against the assessment order, wherein the addition made by
the A.O. was deleted by the CIT(A) on the ground that the assessee was entitled
to include the interest amount for computation u/s 48, despite the fact that
the same had been claimed u/s 24(b) while computing income from house property.
The Revenue challenged the CIT(A)’s order in an appeal before the Tribunal.
Before the
Tribunal, the Revenue prayed for restoring the additions made by the A.O. on
the ground that once the assessee had availed deduction u/s 24(b), he could not
include the very same amount for the purpose of computing capital gains u/s 48.
On the other hand, the assessee sought to place reliance on the CIT(A)’s order
as well as the findings contained therein, and in the light thereof, prayed for
upholding his order and sought dismissal of the Revenue’s appeal.
On due
consideration of the rival submissions of both the parties at length and the
orders of the authorities on the issue of capital gains, the Tribunal noted
that there was hardly any dispute that the assessee had availed the loan for
purchasing the property in question and had declared the income under the head
‘house property’ after claiming deduction u/s 24(b) and that there was no
quarrel that the assessee’s claim of deduction was under the statutory
provisions of the Act and, therefore, he succeeded in getting the deduction.
The Tribunal also noted that after the property was sold, the assessee also
chose to include the said interest amount in the cost while computing capital
gains u/s 48.
The Tribunal
observed that deductions u/s 24(b) and u/s 48 were covered by different heads
of income, i.e., ‘income from house property’ and ‘capital gains’, respectively; that a perusal
of both the provisions made it unambiguous that none of them excluded the
operation of the other; in other words, a deduction u/s 24(b) was claimed when
the assessee concerned declared income from house property, whereas the cost of
the same asset was taken into consideration when it was sold and capital gains
was computed u/s 48; that there was not even the slightest doubt that the
interest in question was indeed an expenditure in acquiring the asset.
The Tribunal
proceeded to hold that since both provisions were altogether different, the
assessee in the instant case was certainly entitled to include the interest
amount at the time of computing capital gains u/s 48 and, therefore, the CIT(A)
had rightly accepted the assessee’s contention and deleted the addition made by
the A.O. The Tribunal, qua the ground, upheld the order of the CIT(A).
The decision
of the Chennai Bench has since been referred to with approval in the following
decisions to either allow the double deduction of interest on the borrowed
capital, and in some cases to allow the deduction u/s 48 where no deduction was
claimed u/s 24: Ashok Kumar Shahi, ITA No. 5155/Del/2018 (SMC)(Delhi);
Gayatri Maheshwari, 187 TTJ 33 (UO)(Jodhpur); Subhash Bana, ITA 147/Del/2015
(Delhi); and R. Aishwarya, ITA 1120/Mds/2016 (Chennai).
CAPT. B.L. LINGARAJU’S CASE
The issue
came up for consideration before the Bangalore Bench of the Tribunal in the
case of Capt. B.L. Lingaraju vs. ACIT, ITA No. 906/Bang/2014. The
facts as gathered from the notings of the Tribunal are that in this case the
total income computed by the assessee, an individual, included income from
house property of Rs. 1,09,924, which meant that the interest expenditure on
the housing loan was already allowed. A revised computation submitted during
the assessment by the assessee before the A.O. along with the return of income,
recomputed the income at Rs. 2,59,924. The assessee had claimed deduction for
housing loan interest restricted to Rs. 1.50 lakhs because the house property
in question was self-occupied and the deduction on account of interest was
restricted to Rs. 1.50 lakhs as per the provisions of section 24(b) of the I.T.
Act. The assessee appears to have sold the house property during the year and
the capital gains thereon, computed after claiming the aggregate interest of
Rs. 13,24,841 u/s 48, was included in the total income returned for the A.Y.
2009-10. The A.O. seems to have disallowed the claim of interest in assessing
the capital gains u/s 48 of the Act and the CIT(Appeals), vide his order
dated 1st April, 2014
confirmed the action of the A.O.
The
assessee, aggrieved by the orders, had filed an appeal before the Tribunal
raising the following grounds:
‘1. The order of the Learned Assessing Officer is
not justified in disallowing capitalisation of interest for computing short
term capital gains.
2. The Learned CIT(A) II has wrongly interpreted
the term cost of acquisition under sections 48, 49 and section 55(2). The
Learned CIT(A) II is of the opinion that the cost of acquisition cannot be
fluctuating, but it should be fixed, except in circumstances when the law permits
substitution. Learned CIT(A) II has disallowed the interest paid on loan
amounting to Rs. l3,24,841 in his order without considering the facts of the
case and the CIT and ITO has ignored the decision in the case of CIT
vs. Hariram Hotels (P) Ltd. (2010) 229 CTR 455 (Kar) which
is in favour of appellant.
3.
……………………………………….
On the basis
of above grounds and other grounds which may be urged at the time of hearing,
it is prayed that relief sought be granted.’
The Tribunal
has noted that the appeal was earlier fixed for hearing on 14th
January, 2016 and on that date the hearing was adjourned at the request of the
AR of the assessee and the next date of hearing was fixed on 21st April,
2016; the new date of hearing was intimated to the AR of the assessee at the
time of hearing on 14th January, 2016. None appeared on behalf of
the assessee on 21st April, 2016 and there was no request for
adjournment. Under the facts, the Tribunal proceeded to decide the appeal of
the assessee ex parte qua the assessee after considering the written
submissions of the AR of the assessee which were available on pages 1 to 8 of
the Paper Book. The Revenue supported the orders of the authorities below.
The
Tribunal, on due consideration of the written submissions filed by the AR of
the assessee and the submissions of the Revenue and the orders of the
authorities below, found that the
assessee had placed reliance on the judgments of the jurisdictional High Court
rendered in the case of CIT & Anr. vs. Sri Hariram Hotels (P) Ltd.,
229 ITR 455 (Kar) and CIT vs. Maithreyi Pai, 152 ITR 247 (Kar). It
noted the fact that the judgment rendered in the case of Sri Hariram
Hotels (P) Ltd. (Supra) had followed the earlier judgment of the
jurisdictional High Court rendered in the case of Maithreyi Pai (Supra).
The assessee had also placed reliance on the judgments of the Delhi High Court
and the Madras High Court and several Tribunal orders which were not found to
be relevant as the Tribunal had decided to follow the orders of the
jurisdictional High Court.
While examining the applicability of the judgments of the jurisdictional
High Court, it was found that the Court in the case of Maithreyi Pai
(Supra), had held that the interest paid on borrowing for the
acquisition of capital asset must fall for deduction u/s 48, but if the same
was already the subject matter of deduction under other heads like those u/s
57, it was not understandable as to how it could find a place again for the
purpose of computation u/s 48 because no assessee under the scheme of the Act
could be allowed a deduction of the same amount twice over; in the present
case, as per the facts noted by the A.O. on page 2 of the assessment order,
interest in question was paid on home loan and it was not in dispute that
deduction on account of interest on housing loan / home loan was allowable
while computing income under the head ?income from house property’; as per the
judgment of the jurisdictional High Court, if interest expenditure was
allowable under different sections including section 57, then the same could
not be again considered for cost of acquisition u/s 48.
In the
Tribunal’s considered opinion, in the present case interest on housing loan was
definitely allowable while computing income under the head ?house property’
and, therefore, even if the same was not actually claimed or allowed, it could
not result into allowing addition in the cost of acquisition.
The Tribunal
further noted that it was not the case of the assessee that the housing loan
interest in dispute was for any property used for letting out or used for
business purposes, and even if that be a claim, the interest could be claimed
u/s 24 or 36(1)(iii) but not as cost of acquisition u/s 48; it was seen that
interest expenditure was allowed as deduction u/s 24 to the extent claimed and,
therefore, interest on housing loan could not be considered again for the
purpose of addition in the cost of acquisition as per the judgment of the High
Court of Karnataka cited by the assessee in the grounds of appeal and by the AR
of the assessee in his written submissions. The Tribunal, in the facts of the
case, respectfully following the judgment of the High Court of Karnataka, held
that the claim of the assessee for deduction of interest u/s 48 in computing
the capital gains was not allowable.
OBSERVATIONS
The relevant
part of section 24 which grants deduction for interest payable on the borrowed
capital reads as: ‘(b) where the property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, the amount of any
interest payable on such capital…’
Likewise,
the part relevant for deduction of cost u/s 48 reads as: ‘the income
chargeable under the head “capital gains” shall be computed, by
deducting from the full value of the consideration received or accruing as a
result of the transfer of the capital asset the following amounts, namely: (i)
expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement
thereto:’
Apparently,
section 24 grants a specific deduction for interest in express terms subject to
certain conditions and ceilings. While section 48 does not explicitly grant a
deduction for interest, the position that such interest is a part of the cost
for section 48 and is deductible is settled by the decisions of various Courts
in favour of the allowance of the claim for deduction. There is nothing
explicit or implicit in the respective provisions of sections 24 and 48 that
prohibits the deduction under one of the two where a deduction is allowable or
allowed under the other. One routinely comes across situations where it is
possible to claim a deduction under more than one provision but dual claims are
not attempted or entertained due to the express pre-emption by the several
statutory provisions which provide for denial of double deductions. These
provisions in express terms lay down that no deduction under the provision
concerned would be allowable where a deduction is already claimed under any
other provisions of the Act. The Act is full of such provisions, for example,
in section 35 in its various alphabets and chapter VIA.
In the
circumstances, it is tempting to conclude that in the absence of an express
prohibition, the deductions allowable under different provisions of the statute
should be given full effect to, more so in computing the income under different
heads of income. It is this logic and understanding of the law that has
persuaded the different benches of the Tribunal to permit the double deduction
in respect of the same expenditure, first u/s 24 and later u/s 48. For the
record it may be noted that most of the decisions have followed the decision in
the case of C. Ramabhramam (Supra). In fact, some of them have
followed this decision to support the claim of deduction u/s 48 even in cases
where they were not asked to deal with the issue of double deduction.
Having noted
this wisdom behind the allowance for double deduction, it is perhaps
appropriate to examine whether such deduction, under the overall scheme of the
Act, is ever permissible. One view of the matter is that under the scheme of
taxation of income, net of the expenditure, there cannot be any license to
claim a double deduction of the same expenditure unless such a dual deduction
is permissible by express language of the provisions. Under this view, a double
deduction is not a rule of law but can be an exception in exceptional
circumstances. A prohibition in the rule underlying the overall scheme of the
taxation of income and all the provisions of the Act is not required to
expressly contain a provision that prohibits a double deduction.
This view
finds direct favour from the ruling of the Supreme Court in the case of Escorts
Ltd. 199 ITR 43. The relevant parts in paragraphs 18 and 19 read as
follows: ‘In our view, it is impossible to conceive of the Legislature
having envisaged a double deduction in respect of the same expenditure, even
though it is true that the two heads of deduction do not completely overlap and
there is some difference in the rationale of the two deductions under
consideration. On behalf of the assessees, reliance is placed on the following
circumstances to support the contention that the statute did not intend one
deduction to preclude the other: …We think that all misconceptions will vanish
and all the provisions will fall into place if we bear in mind a fundamental,
though unwritten, axiom that no Legislature could have at all intended a double
deduction in regard to the same business outgoing; and, if it is intended, it
will be clearly expressed. In other words, in the absence of clear statutory
indication to the contrary, the statute should not be read so as to permit an
assessee two deductions, both under section 10(2)(vi) and section 10(2)(xiv) of
the 1922 Act, or under section 32(1)(ii) and section 35(2)(iv) of the 1961 Act qua
the same expenditure. Is then the use of the words “in respect of the same
previous year” in cl. (d) of the proviso to section 10(2)(xiv) of
the 1922 Act and section 35(2)(iv) of the 1961 Act a contra-indication which
permits a disallowance of depreciation only in the previous years in which the
other allowance is actually allowed? We think the answer is an emphatic
“no” and that the purpose of the words above referred to is totally
different.’
The position
laid down by the Apex Court continues with force till date. It is also
important to take note of the fact that none of the decisions of the Tribunal
have examined the ratio and the implication of this decision and,
therefore, in our respectful opinion, cannot be said to be laying down the
final law on the subject and have to be read with caution.
It is most
appropriate to support a claim for deduction u/s 48 for treating the interest
as a part of the cost with the two famous decisions of the Karnataka High Court
in the cases of Maithreyi Pai and Sri Hariram Hotels
(Supra). At the same time it is important to note that the same
Karnataka High Court in the very decisions has observed that the double
deduction was not permissible in law and in cases where deduction was already
allowed under one provision of the Act, no deduction again of the same
expenditure under another provision of the Act was possible, even where there
was no provision to prohibit such a deduction. The relevant part of the
decision of the High Court in the Maithreyi Pai case reads as
under:
‘8.
Mr. Bhat, however, submitted that section 48 should be examined independently
without reference to section 57. Section 48 provides for deducting from the
full value of consideration received, the cost of acquisition of the capital
asset and the cost of improvement, if any. The interest paid on the borrowings
for the acquisition of capital asset must fall for deduction under section 48.
But, if the same sum is already the subject-matter of deduction under other
heads like under section 57, we cannot understand how it could find a place
again for the purpose of computation under section 48. No assessee under the
scheme of Income-tax Act could be allowed deduction of the same amount twice
over. We are firmly of the opinion that if an amount is already allowed under
section 57, while computing the income of the assessee, the same cannot be
allowed as deduction for the purpose of computing the “capital gains” under
section 48.
9.
The statement of law thus being made clear, it is not possible to answer the
question one way or the other, since there is no finding recorded by the
Tribunal in regard to the contention raised by the Department that it would
amount to double deduction. We, therefore, decline to answer the question for
want of a required finding and remit the matter to the Tribunal for fresh
disposal in the light of observations made.’
This being
the decision of the High Court directly on the subject of double deduction, judicial
discipline demands that due respect is given to the findings therein in
deciding any claim for double deduction. In that case, the Karnataka High Court
was pleased to allow the deduction u/s 48 of the interest on capital borrowed
for acquisition of the capital asset being shares of a company, that was
transferred and the gain thereon was being brought to tax under the head
capital gains. The Court, however, pointed out, as highlighted here before,
that such a deduction would not have been possible if such an interest was
allowed as a deduction u/s 57 in computing the dividend income.
The view
that the deduction u/s 48 is not possible at all once a deduction was allowable
under any other provision of law, for example, u/s 24, even where no such deduction
was claimed thereunder, is incorrect and requires to be avoided. We do not
concur with such an extreme view and do not find any support from any of the
Court decisions to confirm such a view.
A note is
required to be taken of the decision of the Ahmedabad bench in the case of Pushpaben
Wadhwani, 16 ITD 704, wherein the Tribunal held that it
was not possible to allow a deduction u/s 48 for interest in cases where a
deduction u/s 24 for such an interest was allowed. The Tribunal, in the final
analysis, allowed the deduction u/s 48 after confirming that the assessee was
not allowed any deduction in the past of the same interest. In that case the
Tribunal in paragraph 6 while allowing the claim u/s 48, in principle, held:
‘In the case of Maithreyi
Pai (Supra), the Hon’ble High Court has held that the interest paid on
the borrowed capital for the purposes of purchase of shares should form part of
“the cost of acquisition” provided the assessee has not got deduction in
respect of such interest payment in earlier years. In the instant case, from
the order of the ITO it is not clear as to when the assessee acquired the flat
in question and whether she was allowed deduction of interest payments in
computing the income from the said flat under the head “Income from house
property” in earlier years. If that be so, then the interest paid on the loan
cannot be treated as part of “the cost of acquisition”. However, if the
assessee has not been allowed such deduction in earlier years, then in view of
the decision in the case of Maithreyi Pai (Supra), the interest
should form part of “the cost of acquisition” of the asset sold by her. Since
this aspect of the matter requires investigation, I set aside the orders of the
income-tax authorities on this point and restore the case once more to the file
of the ITO with a direction to give his decision afresh keeping in mind the
observations made in this order and after giving an opportunity of being heard
to the assessee in this regard.’
However, two views on the subject
are not ruled out as is made apparently clear by the conflicting decisions of
the different benches of the Tribunal; it is possible to contend that a view
favourable to the taxpayer be adopted till the time the issue is settled. The
case for double deduction is surely on better footing in a case where the
deduction is being claimed in computing the income under different heads of
income and in different assessment years
