Interest paid on borrowings for purchase of house- SECTION 24 & SECTION 48

In computing the income from such house property, a deduction is allowed u/s. 24(b) of the Income Tax Act of interest on such borrowings subject to certain conditions contained in the said provisions.

The interest so paid, over the period of years, is paid for the purposes of acquiring a capital asset, namely, the house property, and accordingly, the interest paid constitutes the cost of acquisition or the cost of improvement for the purposes of section 48 and generally qualifies for deduction in computing the capital gains arising on transfer of such house property.

Cases have come up wherein the assesses, who are allowed a deduction u/s. 24(b) of interest paid in computing the income from house property, have, on transfer of the house property, claimed deduction for the said interest in computing the capital gains on the ground that such an interest was a part of the cost of acquisition /improvement of the said asset. Obviously the Income Tax department, in such cases, has refused to allow deduction for interest paid in computing the capital gains on the ground that a deduction was already allowed, in the past assessment years, in computing the income from house property.

Conflicting decisions by different benches of the Income Tax Appellate Tribunal have warranted attention to this interesting issue. The Chennai bench of the tribunal has held that the deduction in computing the capital gains for interest is allowable while the Bangalore bench has held that such a deduction is not permissible in computing the capital gains.

C. Ramabrahmam’s case
The issue arose in the case of ACIT v. C. Ramabrahmam, 57 SOT 130 (Chennai), for the A.Y 2007-08 during which year the assessee had transferred a house property for a valuable consideration. In computing the capital gains, on transfer of the said house property, a deduction was claimed for an amount of Rs. 4,82,042, which amount represented the interest paid on a housing loan, taken in the year 2003, for purchasing the property, a deduction for which was allowed u/s. 24(b), in computing total income for A.Y. 2004-05 to 2006-07. The Assessing Officer disallowed the claim for deduction of the said interest in computing the capital gains for A.Y. 2007-08. On appeal, the CIT(A) allowed the claim of the assessee, by holding that the assessee was entitled to claim the deduction for interest u/s. 48, despite the fact that the same had been claimed u/s. 24(b) while computing income from house property.

In appeal to the tribunal, the Revenue contended that once the assessee had availed a deduction u/s. 24(b) for interest, he could not claim again a deduction for the same amount for the purposes of computation of Capital Gains. In reply, the assessee relied upon the findings and the order of the CIT(A).

The tribunal noted that there was no dispute about the fact that the interest in question was claimed and allowed as a deduction in the past in computing the income from house property under the statutory provisions of section 24(b). It further noted that the assessee had chosen to claim the said interest again as a deduction in computing the Capital Gains.

The Chennai tribunal, on consideration of the facts and the law, held in Para 8 of the order that; “We are of the opinion that deduction u/s. 24(b) and computation of capital gains u/s. 48 of the “Act” are altogether covered by different heads of income i.e., ‘income from house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. In other words, a deduction u/s. 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed u/s 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains u/s 48 of the “Act”. Therefore, the CIT(A) has rightly accepted the assessee’s contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(A).”

Captain B. L. Lingaraju’s case
The issue once again arose in the case of Captain B L Lingaraju vs. ACIT, before the Bangalore bench of the tribunal in ITA No. 906/Bang/2014 for A.Y 2009-10. In that case, the claim of the assessee for deduction u/s.48, of interest paid on a loan amounting to Rs.13,24,841, was disallowed by the A.O. on the ground that the said interest was allowed as the deduction u/s.24(b), in computing the income from house property. The action of the A.O. was upheld by the CIT(A).

In appeal to the tribunal, the assessee filed a paperbook containing written submissions and supported his claim by relying on the decisions of the Karnataka high court in the cases of CIT vs. Sri Hariram Hotels (P) Ltd., 229 TR 455 and CIT vs. Maithreyi Pai, 152 ITR 247 and also on the decisions of the Delhi and Madras high courts. He however did not appear for hearing and the appeal was decided ex-parte, qua the assessee.

The tribunal, on consideration of the written submissions and the decisions relied upon by the assessee therein, noted that the Court in the case of Sri Hariram Hotels (supra) had followed its earlier decision in the case of Maithreyi Pai (supra) to hold in Hariram Hotels case, that an interest paid on borrowings for the acquisition of capital asset must fall for deduction u/s.48 only if the same was not allowable as deduction u/s.57 of the Act and that no assessee under the scheme of the Act could be allowed a deduction of the same amount twice over. On the facts in B L Lingaraju’s case, the tribunal noted that the assessee had claimed a deduction of interest of Rs.1,50,000 in computing the income from self-occupied house property as per section 24(b) of the Act. Relying on the decision of the jurisdictional Karnataka high court in the case of Maithreyi Pai (supra), the tribunal held that no deduction u/s.48 could be allowed for the same interest in computing the Capital Gains, where it was allowed as deduction or was allowable as a deduction. The appeal of the assessee was thus dismissed by the tribunal.

Observations
Section 24(b) reads as under:

“Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—
(a) …………………………………..

Provided ………………………………”

The relevant part of Section 48 reads as under:

“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;

Provided ……………………………”

The principle that the cost of acquisition is a dynamic and a fluctuating number is by now widely accepted; it may increase in a subsequent year as a result of a liability or expenditure incurred after the date of acquisition. The cost of acquisition can increase on account of the interest paid, post acquisition of asset, on borrowings made for the acquisition of the asset. CIT vs. Mithlesh Kumar 92 ITR 9(Delhi), CIT vs. K.S Gupta 119 ITR 372 (AP), CIT vs. A.R Damodara Mudaliar & Co. 119 ITR 583 (Madras), CIT vs. K Raja Gopala Rao 252 ITR 459 (Madras) and CIT vs. Maithreyi Pai 152 ITR 247 (supra).

While the above stated principle permits increase in the cost of acquisition by the amount of interest, such an increase has been made conditional by the Karnataka high court in Maithreyi Pai’s case(supra), by observing that an interest which had already been allowed as revenue expenditure could not be virtually deducted again u/s 48 MLG Enterprise vs. CIT 167 ITR 11.

Usually unless otherwise prohibited, a deduction under a specific provision cannot be denied under a different provision for the same expenditure. The Act has a few parallels wherein such deductions or allowances are found by the courts to be allowable; for example the investments in depreciable assets are treated as an application for charitable purposes, and depreciation on such assets has been held to be eligible for deduction again from income u/s 11, in computing the income of a charitable institution.

The Income Tax Act is replete with examples of the provisions which specifically provide that no deduction under any other provision of the Act would be allowable in the cases where a deduction is allowed under a particular provision; e.g. section 35AD(3). The present day’s trend therefore appears to be that the legislature, wherever intended, makes a specific provision for denying double deductions. No such express provision is found either in section 24(b) or in section 48, as has been confirmed by the Chennai bench of the tribunal. These provisions operate in different fields and that too for computation of income under two different heads of income. Further the deduction in one case is a statutory deduction, whereas in the other, it is on capital account. One may at the same time have to look into the reasons behind the observations of the Karnataka high court in the case of Maithreyi Pai (supra) wherein the court observed that an interest for which a deduction had already been allowed could not be allowed twice over while computing the capital gains u/s. 48. Apparently, one does not find any express provisions in any of the provisions of the Act, at least not in section 48 and section 24(b), which could have formed the basis for the court to have observed as it did.

One may also ascertain whether there is anything in the law of taxation that has prompted the court to hold that a deduction u/s. 48 was not allowable once it was allowed in the past. The Supreme court held in Escorts Ltd vs. UOI, 191 ITR 43 a double deduction could not be a matter of inference; it must be provided for in clear and expressive language, regard being had to its unusual nature and its serious impact on the revenues of the State. Having noted the findings of the apex court, one is required to appreciate that the case of the assessee, in the issue under consideration, is not a case of having claimed a deduction for revenue expenditure at all. In the facts of the case, under the issue, a specific deduction is allowed u/s. 24(b) in computing the income from house property and, in another case, the interest constitutes the cost of acquisition and is therefore claimed as a deduction representing the capital expenditure. Considering the distinction, it may be possible to contend that the case under consideration, is not squarely covered by the decision of the Supreme court in Escort’s case. Whether it is a case of double deduction, at all, is the question that remains to be concluded.

In B. L. Lingaraju’s case, the deduction for interest was restricted to Rs.1,50,000/-, though actual interest paid was much higher than the said amount, leaving open a possibility for claiming a deduction u/s. 48, at least for the balance unclaimed amount of interest, that was not allowed and was not even allowable.