Interest on borrowed funds can be claimed if used for acquiring property.

I. Unexplained Investments – Addition Deleted Due to Mother’s Creditworthiness

Issue: Whether an investment made by the assessee, sourced as a loan from his mother, can be treated as unexplained under Section 69 of the Income-tax Act, 1961, when the mother’s creditworthiness is established.

Facts:

The assessee, along with his mother and brother, acquired a residential flat.
The assessee invested a certain amount in the property, claiming it was a loan from his mother.
The Assessing Officer (AO) doubted the mother’s creditworthiness and treated the investment as unexplained under Section 69.
The mother’s creditworthiness was later accepted by the AO in reopened assessment proceedings.

Decision:

The court held that since the AO had accepted the mother’s creditworthiness in the reopened assessment proceedings, it could no longer be questioned.
Therefore, the addition made under Section 69 was to be deleted.

Key Takeaways:

Once the AO accepts the creditworthiness of a person providing a loan, it cannot be subsequently doubted without fresh evidence.
If co-owners’ creditworthiness is doubtful, unexplained investments should be assessed in the hands of the respective co-owners.
Consistency in revenue’s stance is important.

II. Income from House Property – Interest Deduction Remanded for Verification

Issue: Whether the assessee is entitled to claim an interest deduction under Section 24 of the Income-tax Act, 1961, on borrowed capital for the purchase of a house property.

Facts:

The assessee, along with his mother and brother, acquired a residential flat.
The assessee claimed an interest deduction on borrowed capital for the purchase of the property.
The AO disallowed the interest claim, stating the assessee had never paid such interest and that his share of the property was not sourced from borrowed funds.

Decision:

The court held that interest on funds should be allowed if the assessee’s bank account, after receiving the borrowed funds, was utilized for acquiring the property to the extent of his initial investment.
Therefore, the issue was remanded back to the AO for verification.

Key Takeaways:

Interest deductions under Section 24 are allowable if the borrowed funds were used for acquiring the house property.
The AO must verify the utilization of borrowed funds through the assessee’s bank statements and other relevant documents.
Remanding the issue ensures a fair opportunity for the assessee to provide evidence and for the AO to verify the claim.
The court is taking a practical approach by asking the AO to verify the actual use of funds.

IN THE ITAT DELHI BENCH ‘A’

Ankur Goyal

Income-tax Officer, Ward 1 (1)

SATBEER SINGH GODARA, Judicial member
and Avdhesh Kumar Mishra, Accountant member

IT Appeal No.2524 (Del) of 2023
[Assessment Year 2012-13]

JANUARY 24, 2025

Sidhant Arora, CA for the Appellant. Ms. Pratibha Meena, Sr. DR for the Respondent.

ORDER

Avdhesh Kumar Mishra, Accountant Member. – This appeal for the Assessment Year (hereinafter, the ‘AY’) 201213 filed by the assessee is directed against the order dated 11.07.2023 passed by the Commissioner of Income Tax (Appeals), NFAC, New Delhi [hereinafter, the ‘CIT(A)’].

2. Vide 5 grounds of appeal; the assessee has raised two issues (i) taxability of investment of Rs.33,92,975/- under section 69 of the Income Tax Act, 1961 (hereinafter, the ‘Act’) and (ii) disallowance of interest of Rs.3,96,500/- claimed under section 24 of the Act.

3. The relevant facts giving rise to this appeal are that the assessee, a salaried employee, along with his mother and brother; namely, Smt. Sudha Goyal (Mother) and Shri Anuj Goyal (Brother), has acquired a residential flat in Mumbai, for Rs.1,24,26,616/- in the relevant year. The shares of these co-owners in the said property are as under:

S.N.	Owners	Share	Share in value	Actual payment
1	Shri Ankur Goyal	45%	Rs.62,13,308/-	Rs.97,05,366/-
2	Smt. Sudha Goyal	50%	Rs.55,91,977/-	Rs.27,21,250/-
3	Shri Anuj Goyal	5%	Rs.6,21,331/-	Nil

3.1 The assessee has made investment of Rs.97,05,366/- in the said property in the relevant year as against the required investment,as per his share, of Rs.53,19,563/-. During the course of assessment, the assessee has admitted the source of investment in the said property as under:

Source of Funds	Amount (Rs.)
Loan from NRI Mr. Anuj Goyal &Ms. Ruchi Goyal (brother & sister)	75,23,201
Gift from NRI Ms. Ruchi Goyal (Sister)	7,72,000/-
Transfer from Ms. Sudha Goyal (Mother)	33,92,975/-
Transfer from Mr. Vinod Goyal (Father)	8,48,900/-
Total Investment	1,25,37,076/-

3.2 The Assessing Officer (hereinafter, the ‘AO’), holding the credit worthiness of Ms. Sudha Goyal as doubtful, has held that the investment of Rs.33,92,975/-by the assessee sourced as loan from Ms. Sudha Goyal as unexplained and taxed the same under section 69 of the Act. Further, the AO, besides other additions, also disallowed the interest of Rs.3,96,500/- claimed under section 24 of the Act on the reasoning that the assessee has never paid such interest and the share of the assessee in the said property (only 45%) has not been sourced from the borrowed fund. Aggrieved, the assessee filed appeal before the Ld. CIT(A) which upheld the addition of Rs. 33,92,975/- and Rs. 3,96,500/-.

4. At the outset, the Ld. AR submitted that the case of Smt. Sudha Goyal, subsequent to the assessment of the appellant/assessee (after 4 years from the assessment of the appellant/assessee), was also reopened under section 147 of the Act to tax the unexplained investment made by Smt. Sudha Goyal in the above-mentioned property. However, the reopened assessment of Smt. Sudha Goyal was completed accepting the returned income vide order dated 24.12.2019 by the Assistant Commissioner of Income Tax, Circle- 2(1)(1), Ghaziabad. It was argued that when the Assistant Commissioner of Income Tax, Circle- 2(1)(1), Ghaziabad, the Assessing Officer of Smt. Sudha Goyal, had not taken any adverse view in respect of investments, advances etc. made by Smt. Sudha Goyal; then the same should not be considered as unexplained in the hands of the appellant/assessee. It was further argued that Smt. Sudha Goyal was also one of the coowners of the said property and if any investments made in the said property directly or indirectly found unexplained, then the same should have been taxed in her hands and not in the case of the appellant/assessee. Accordingly, the Ld. AR, by submitting that the creditworthiness of Smt. Sudha Goyal being not doubtful at present in view of the above facts, requested for consequential relief on this score.In respect of second issue i.e. interest payment; the Ld. AR submitted that the actual payment of interest was not a precondition for allowability of interest under section 24 of the Act. Thus, he requested for consequential reliefon this score too.

5. Per contra, the Ld. Senior Departmental Representative (hereinafter, the ‘Sr. DR’) argued vehemently. He defended the order of the AO by submitting that the assessee had failed to explain deposits ranging from Rs.4,000/- to 1,00,000/- per day in the bank account of Smt. Sudha Goyal before receiving loan of Rs. 33,92,975/-. However, the Ld. Sr. DR was not able to justify the finding of the AO in the present case when we pointed out the specific query about not taxing the same, even on protective basis, in the hands of Smt. Sudha Goyal in reopened assessment proceedings. The Ld. Sr. DR further submitted that various co-owners had not made investment as per their shares. The investment in the said property was sourced from common/pooled fund and that was why the individual co-owners had not made investment in the said property in proportionate to their shares. She brought our attention to the fact that Smt. Sudha Goyal who required to make investment of Rs.62,13,308/- had made investment of Rs.27,21,250/- whereas the assessee-in-hand required to make investment of Rs.55,91,977/- had made investment of Rs.97,05,366/-. Whereas, Shri Anuj Goyal had not made any investment in the said property though required to do so as co-owner. It was further contended that Shri Anuj Goyal had given loan to the assessee for making investment, which was nothing but to assist the appellant/assessee to avoid taxes as no prudent man would make surplus investment of Rs.41,13,389/- (Rs.97,05,366/- minus Rs.55,91,977/-). Thus, she argued that the claim of interest under section 24 of the Act sourced from the borrowed fund had been rightly held as unjustified.

6. We have heard both the parties at length and have perused the material available on the record. We find force in the argument of the Ld. AR that the Revenue was required to assess the unexplained investments made directly or indirectly in the said property in the hands of the respective co-owners if their creditworthiness was doubtful. We are of the considered view that the ACIT, Circle 2(1)(1), Ghaziabad, by accepting the version of Smt. Sudha Goyal in reopened assessment proceedings has held that she has the creditworthiness for making investments/advances in the relevant year. Thus, the creditworthiness of Smt. Sudha Goyal does not remain questionable thereafter. Hence, we reversed the finding of the Ld. CIT(A) in this regard and delete the addition of Rs.33,92,975/-. Accordingly, the ground numbers 2 to 5 are allowed.

7. Next issue is in respect of the disallowance of deduction of Rs.3,96,500/- under section 24 of the Act. We have considered the facts of the case in entirety and we are of the considered view that the appellant/ assessee is required to make investment to the extent of his share i.e. Rs.55,91,977/-. Thus, we hereby direct the AO to verify from the record that whether the investment made by the assessee to the extent of his share i.e. Rs.55,91,977/- from the borrowed fund on interest. The initial investment of Rs.55,91,977/- has to be treated as assessee’s share. In case, the bank account of the assessee after taking borrowed fund is found utilized for the acquiring the property to the extent of initial investment of Rs.55,91,977/- (as any prudent man will invest to the extent of his share only and thereafter the surplus investment), then the interest on that fund should be allowed after proper investigation. The subsequent investment; i.e. after Rs.55,91,977/- even sourced from borrowed fund will not be eligible for the interest deduction under section 14 of the Act. For this limited purpose, this issue is restored back to the file of the AO. Consequently, 1^st ground appeal is allowed as above.

8. In the result, appeal of the assessee is partly allowed as above. Order pronounced in open Court on 24^th January, 2024.