By TIOL News Service

HYDERABAD, JAN 07, 2016: THE issue is - Whether the mere fact that the loan was obtained by the assessee after completion of construction on the lease rentals cannot be the sole reason to come to the conclusion that the assessee has not incurred expenditure on the acquisition of property. YES is the answer.

Facts of the case

The assessee firm, the owner of a property at Sarojini Devi Road, Secunderabad, entered into a development agreement with one of its sister concern M/s. Shalivahana Associates for construction of a commercial complex on the said land with their own funds vide development agreement. The said complex was completed in 2004 and thereafter the assessee entered into registered lease deeds with M/s. Secunderabad Hotels P. Ltd., for lease of the above mentioned constructed property. Thereafter, the assessee obtained a loan on lease rentals from UCO Bank to repay a loan obtained by the developer M/s. Shalivahana Associates from Oriental Bank of Commerce. The assessee claimed the interest paid to UCO Bank from ‘the income from house property’ as interest paid for acquisition or improvement of the property u/s 24(b) for the first time during A.Y 2005-06. During scrutiny u/s 143(3) for the A.Y. 2005-06, the AO called for the details of the loan advanced to the sister concern and after considering the details filed by the assessee, allowed the claim of assessee. Thereafter, the CIT exercising jurisdiction u/s 263 sought to revise the assessment orders for A.Ys. 2006-07 and 2007-08 on the ground that the assessee had obtained loans from UCO Bank against lease rentals and not for construction or improvement of the property and therefore, the interest on such loan was not allowable u/s 24(b).

The CIT observed that the sharing ratio in the original development agreement as well as supplementary agreement was 50:50 and the mention in the supplementary agreement of the sharing ratio in the original agreement being 65:35 was not correct as in the original agreement itself the sharing ratio was 50:50. He therefore held that the supplementary deed was a make believe deed to claim that assessee had provided some funds to the developer. He further observed that even in the lease deeds entered into with M/s. Secunderabad Hotels P. Ltd., there was no mention of the supplementary deed. Thus, he held the supplementary deed to be a colourable device introduced by the assessee to claim interest expenditure from the rental income. He accordingly held that the assessment order allowing the claim of interest u/s 24(b) as erroneous and prejudicial to the interest of revenue and directed the AO to further examine the allowability of the claim of the assessee u/s 24(b). The AO while giving effect to the order of the CIT u/s 143(3) r/w/s 263 disallowed the claim u/s 24(b). On appeal, the ITAT quashed the order passed u/s 263 by holding it to be unsustainable. Thereafter, on the basis of the disallowance of the claim of interest in the earlier years, the returns of income processed u/s 143(1) were reopened by issuance of notice u/s 148 to bring the amount to tax. Since, there was no compliance by the assessee to the said notices, the assessment was completed u/s 144 r/w/s 147 on the basis of the material available on record. The AO thereafter disallowed the claim of interest u/s 24(b) on the same grounds on which the CIT sought to revise the assessments u/s 263.

Having heard the parties, the Tribunal held that,

++ the only dispute in this appeal is whether the assessee had borrowed funds for construction of the building and if so, whether the assessee is entitled to the interest on such borrowed funds as deduction from the rental income. There is no dispute as regards the date of development agreement but the dispute is with regard to the sharing ratio mentioned in the development agreement and also about the existence of the supplementary deed and whether the assessee has advanced funds to the developer for the purpose of acquisition of property. To disbelieve the existence of the supplementary deed, the AO and the CIT(A) have relied upon the lease deeds entered into by the assessee with M/s. Secunderabad Hotels P. Ltd., wherein there is no mention of the supplementary deed even though they were stated to be executed after the execution of the supplementary agreement. They have observed that there is a mention of only the original development agreement in the registered lease deeds. Further, the AO has also considered the fact that the ratio of sharing between the assessee and the developer was mentioned as 50:50 even in the original development deed. As regards the assessee’s claim of taking loan from UCO Bank Ltd. for acquisition of the property, the AO has observed that the loan has been taken after the execution of the lease deeds with M/s. Secunderabad Hotels P. Ltd., and therefore, the loan is on the rental income and not for construction of the building. The counsel for assessee, in order to rebut this finding of the authorities below, has drawn our attention to the development agreement to demonstrate that originally the sharing ratio was 65:35 only. He has also drawn our attention to the application form for the sanction/renewal/enhancement of the sanction of credit limits made to the Manager of the UCO Bank. On perusal of the said application, we find that as regards the purpose for which the credit limits are applied for, it is mentioned as "loan under rent scheme" and the purpose is mentioned as "to repay loan of M/s. Salivahana Associates taken from Oriental Bank of Commerce", and the amount mentioned is "Rs.3 crores". From the details of the property, it is clear that the very same building ‘Bhuvana Towers’ was mortgaged with the Oriental Bank of Commerce. Thus, though the assessee has taken the loan from UCO Bank after construction of the building, we find that the same has been taken to repay the loan taken from Oriental Bank of Commerce by its associate concern. The fact that the title deeds of Bhuvana Towers have been mortgaged with the Oriental Bank of Commerce raises the presumption that the loan must have been taken by the developer in relation to the said property. Since the construction of the property was completed in 2004 and the lease deeds were entered into on 01.01.2005, the contention of the assessee that the loan had been obtained by the developer for construction of the building is probable as no Bank would probably give a loan on a building which is not yet completed for any other purpose;

++ it is found that initially the said deed was disbelieved by the CIT u/s 263 wherein, he has reproduced the portion of both the development agreement as well as supplementary agreement, wherein the sharing ratio of parties has been mentioned as 50:50. The AO during the relevant A.Ys also has reproduced the same portion reproduced by the CIT in his order u/s 263 to hold that the original agreement itself stipulated the sharing ratio as 50:50 and therefore the supplementary deed is a make believe document. However, from the copy of the development agreement, we find that the developer had agreed to complete the construction of the building with its own funds and the sharing ratio is mentioned as 65:35. The reason for changing the sharing ratio is mentioned in the supplementary deed as providing of funds by the owner to the developer for the construction work. During the proceedings before the CIT, the assessee had stated that the developer had failed to pay the interest free nonrefundable deposit of Rs.80,00,000 due to which the sharing ratio has been changed. There is no finding on this contention of the assessee by any of the authorities below. Further, the reason for advancing the sum of Rs.300 lakhs has been mentioned as payment for finishing works @ Rs.300 per sq. feet for letting out the constructed area. It is not clear whether any agreement has been entered into for this purpose. However, since no copy of any such agreement is filed before us, it is presumed that there is no such written agreement. As seen from both the development agreement as well as the supplementary agreement, the developer shall complete the total construction including RCC civil works, and shall bear all costs of architects, engineers, civil works, finishing and shall indemnify Shalivahana Estates against any claims in this respect. Therefore, it is not clear as to what are the finishing works for which it was agreed to pay Rs.300 per sq. feet. The fact that the loan was obtained by the assessee after completion of the construction on the lease rentals cannot be the sole reason to come to the conclusion that the assessee has not incurred expenditure on the acquisition of the property. The time when the liability of the assessee has arisen is to be seen. If the assessee has agreed to pay the developer for the works outside the development agreement for making it fit for letting out the property with all amenities, it is the expenditure incurred by the assessee for acquisition or improvement of the property. The mode or time of payment would not determine the nature of the expenditure. Therefore, all these facts need verification by the AO which has not been carried out for the relevent A.Ys;

++ as rightly held by the CIT(A), the observations of ITAT in the 263 proceedings may not be entirely relevant for the proceedings u/s 144 r/w/s 147 but as seen from the copy of the assessee’s submissions before the AO, we find that the assessee had submitted that it had requested the builder to complete their share of constructed area for which the assessee shall reimburse the expenses incurred for providing all the amenities and that the availing of the loan was to reimburse the developer for such finishing works. Since the assessment for A.Y 2005-06 was completed u/s 143(3) after calling for various details and scrutiny of the same, it is to be presumed that the AO has verified the details and accepted the assessee’s contentions after being satisfied about their acceptability. It has been held by the Supreme Court in the case of Radhaswami Satsang vs. CIT, that though, strictly speaking, res judicata is not applicable to the income tax proceedings as each assessment year is a unit and what was decided in one year might not apply in the following year, where a fundamental aspect permeating through different assessment years has been found as a fact in one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. Thus, there has to be consistency and uniformity in the approach of the Revenue in the assessee’s own case in the subsequent A.Ys on the same set of facts. Since the AO has accepted the assessee’s claim after verification and the revenue has not taken any steps to revise or reopen the assessment for A.Y. 2005-06, the assessee cannot be asked to prove the same set of facts from year to year. Therefore, we are of the opinion that the disallowance of the claim of interest on the loan borrowed by the assessee from UCO Bank u/s 24(b) is not sustainable.

(See 2016-TIOL-38-ITAT-HYD)