I bought a site from a government body on instalments and pay interest on the unpaid instalments. There is no bank and no loan document. The officer says there is no borrowed capital, so no s.24(b) deduction. Is he right?
No. Where a buyer agrees with the seller to pay the price in instalments carrying interest, the seller becomes the lender as regards the unpaid purchase price and the buyer becomes the borrower, and the unpaid purchase price is borrowed capital for s.24(b). The Punjab and Haryana High Court held the interest component of the instalments deductible and dismissed the Revenue's appeals.
Decided by the High Court (Jawahar Lal Gupta J and N.K. Sud J) on 2002-02-11, reported as (2002) 254 ITR 103 (P&H); ITA Nos.211, 143 and 144 of 2001 and ITR Nos.26, 187, 188 and 226 to 228 of 1999. It bears on section 24, section 24(b) of the Income Tax Act 1961, in House Property, Deductions & Disallowances and How Tax Law Is Read matters.
The answer to any objection that the lender is not a bank. The Revenue's argument here was the general one, that cash must actually have been borrowed and paid over and that there must be a lender-borrower relationship with the person receiving the interest, so unpaid purchase price cannot be capital borrowed. The Court rejected it and said the provision is an incentive to promote construction of buildings and cannot be read narrowly. That reasoning carries directly to interest paid to a relative, to a private party or on an unsecured borrowing: what matters is that the liability is relatable to the acquisition of the property, not who the creditor is. The Court was careful about the limit of that: it distinguished its own decision in Four Fields (P) Ltd., where a continuing partner took over all the assets and liabilities of a dissolved firm and paid interest to the outgoing partners, because there no particular asset could be said to have been taken over with the aid of the amounts due to them. It also distinguished Metro Theatre Bombay, where the assessee had not acquired the property at all. So the deduction turns on tracing the liability to the specific property, and that is exactly what an officer will ask a taxpayer who has borrowed from a relative to show.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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A bunch of income-tax appeals and references raising a common question was disposed of by a single order, the facts being taken from ITA No.211 of 2001. The assessee, an individual, filed his return for 1992-93 on 31 August 1992 declaring income of Rs 96,187, one source being rent from immovable properties assessable under the head income from house property. He had purchased a commercial site, SCO No.865, Manimajra, at an auction from the Notified Area Committee, Manimajra, the price being payable according to a schedule of instalments fixed by the Committee, and had constructed on it. He claimed a deduction of Rs 80,000 under s.24(1)(vi) for the interest component of the instalments paid to the Committee. The Assessing Officer disallowed it on the ground that the amount could not be treated as interest paid on capital borrowed for the purpose of acquisition, construction, repair, renewal or reconstruction of the property. The CIT(A) allowed the claim on 31 May 1993, and the Tribunal dismissed the Revenue's appeal on 29 November 2000, from which the Revenue appealed. For the Revenue it was argued that cash must actually have been borrowed and paid against the purchase price and that there must be a relationship of borrower and lender with the person to whom interest is paid, relying on Bombay Steam Navigation Co. Private Limited v. CIT (1965) 56 ITR 52, CIT v. Four Fields (P) Ltd. (1998) 231 ITR 262, Metro Theatre Bombay Ltd. v. CIT (1946) 14 ITR 638 and K. Govinda Bhatt v. CIT (1999) 235 ITR 528.
All the Revenue's appeals were dismissed and the references were answered in favour of the assessee and against the Revenue. The unpaid purchase price payable in instalments carrying interest is borrowed capital within the meaning of s.24(1)(vi), and the interest portion of the instalments paid to the Notified Area Committee is an allowable deduction in computing income from house property.
The Court framed the short question as whether the unpaid purchase price can be treated as capital borrowed for acquiring the property. If interest on a loan raised to acquire property is admissible, it could make no difference that instead of raising a loan from a third person the buyer arranges with the seller to pay the price in instalments together with interest; the moment such an arrangement is entered into, the seller becomes the lender as regards the unpaid purchase price and the buyer becomes the borrower, which is precisely why the instalments carry interest from the date of sale to the date of payment. Section 24(1)(vi) provides the deduction as an incentive to promote construction of buildings and cannot be interpreted narrowly so as to defeat that purpose. The Court drew support from the Calcutta High Court in CIT v. R.P. Goenka and J.P. Goenka (1998) 233 ITR 123. It distinguished Bombay Steam Navigation, where the Supreme Court was construing 'capital borrowed' in s.10(2)(iii) of the 1922 Act in the context of business income and held 'capital' there meant money, though the interest was allowed under s.10(2)(xv); Metro Theatre Bombay, where the claim under s.9(1)(iv) of the 1922 Act failed because ownership had not passed to the assessee, which was not the position here since the assessee had acquired the property and was earning rent from it; and Four Fields (P) Ltd., where the continuing partner had taken over all assets and liabilities of a dissolved firm and no particular asset could be said to have been taken over with the aid of the amounts due to the outgoing partners, whereas here the liability was clearly relatable to the acquisition of the property.
The moment such an arrangement in entered into, the seller become the lender qua the unpaid purchase price and the purchaser becomes the borrower.
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Handle my notice → Ask a CA on WhatsAppNo. Where a buyer agrees with the seller to pay the price in instalments carrying interest, the seller becomes the lender as regards the unpaid purchase price and the buyer becomes the borrower, and the unpaid purchase price is borrowed capital for s.24(b). The Punjab and Haryana High Court held the interest component of the instalments deductible and dismissed the Revenue's appeals. This was decided by the High Court (Jawahar Lal Gupta J and N.K. Sud J) and bears on section 24, section 24(b) of the Income Tax Act 1961. It is reported as (2002) 254 ITR 103 (P&H); ITA Nos.211, 143 and 144 of 2001 and ITR Nos.26, 187, 188 and 226 to 228 of 1999. The answer to any objection that the lender is not a bank. The Revenue's argument here was the general one, that cash must actually have been borrowed and paid over and that there must be a lender-borrower relationship with the person receiving the interest, so unpaid purchase price cannot be capital borrowed. The Court rejected it and said the provision is an incentive to promote construction of buildings and cannot be read narrowly. That reasoning carries directly to interest paid to a relative, to a private party or on an unsecured borrowing: what matters is that the liability is relatable to the acquisition of the property, not who the creditor is. The Court was careful about the limit of that: it distinguished its own decision in Four Fields (P) Ltd., where a continuing partner took over all the assets and liabilities of a dissolved firm and paid interest to the outgoing partners, because there no particular asset could be said to have been taken over with the aid of the amounts due to them. It also distinguished Metro Theatre Bombay, where the assessee had not acquired the property at all. So the deduction turns on tracing the liability to the specific property, and that is exactly what an officer will ask a taxpayer who has borrowed from a relative to show. If it applies to you, the first step is this: Do not concede merely because the creditor is not a bank; the statute says 'borrowed capital', not 'loan from a financial institution'.
A bunch of income-tax appeals and references raising a common question was disposed of by a single order, the facts being taken from ITA No.211 of 2001. The assessee, an individual, filed his return for 1992-93 on 31 August 1992 declaring income of Rs 96,187, one source being rent from immovable properties assessable under the head income from house property. He had purchased a commercial site, SCO No.865, Manimajra, at an auction from the Notified Area Committee, Manimajra, the price being payable according to a schedule of instalments fixed by the Committee, and had constructed on it. He claimed a deduction of Rs 80,000 under s.24(1)(vi) for the interest component of the instalments paid to the Committee. The Assessing Officer disallowed it on the ground that the amount could not be treated as interest paid on capital borrowed for the purpose of acquisition, construction, repair, renewal or reconstruction of the property. The CIT(A) allowed the claim on 31 May 1993, and the Tribunal dismissed the Revenue's appeal on 29 November 2000, from which the Revenue appealed. For the Revenue it was argued that cash must actually have been borrowed and paid against the purchase price and that there must be a relationship of borrower and lender with the person to whom interest is paid, relying on Bombay Steam Navigation Co. Private Limited v. CIT (1965) 56 ITR 52, CIT v. Four Fields (P) Ltd. (1998) 231 ITR 262, Metro Theatre Bombay Ltd. v. CIT (1946) 14 ITR 638 and K. Govinda Bhatt v. CIT (1999) 235 ITR 528. The matter was decided on 2002-02-11 by the High Court (Jawahar Lal Gupta J and N.K. Sud J). On those facts the High Court held as follows. All the Revenue's appeals were dismissed and the references were answered in favour of the assessee and against the Revenue. The unpaid purchase price payable in instalments carrying interest is borrowed capital within the meaning of s.24(1)(vi), and the interest portion of the instalments paid to the Notified Area Committee is an allowable deduction in computing income from house property.
The Court framed the short question as whether the unpaid purchase price can be treated as capital borrowed for acquiring the property. If interest on a loan raised to acquire property is admissible, it could make no difference that instead of raising a loan from a third person the buyer arranges with the seller to pay the price in instalments together with interest; the moment such an arrangement is entered into, the seller becomes the lender as regards the unpaid purchase price and the buyer becomes the borrower, which is precisely why the instalments carry interest from the date of sale to the date of payment. Section 24(1)(vi) provides the deduction as an incentive to promote construction of buildings and cannot be interpreted narrowly so as to defeat that purpose. The Court drew support from the Calcutta High Court in CIT v. R.P. Goenka and J.P. Goenka (1998) 233 ITR 123. It distinguished Bombay Steam Navigation, where the Supreme Court was construing 'capital borrowed' in s.10(2)(iii) of the 1922 Act in the context of business income and held 'capital' there meant money, though the interest was allowed under s.10(2)(xv); Metro Theatre Bombay, where the claim under s.9(1)(iv) of the 1922 Act failed because ownership had not passed to the assessee, which was not the position here since the assessee had acquired the property and was earning rent from it; and Four Fields (P) Ltd., where the continuing partner had taken over all assets and liabilities of a dissolved firm and no particular asset could be said to have been taken over with the aid of the amounts due to the outgoing partners, whereas here the liability was clearly relatable to the acquisition of the property. In the words reproduced by the source cited on this page: "The moment such an arrangement in entered into, the seller become the lender qua the unpaid purchase price and the purchaser becomes the borrower." The decision followed or applied CIT v. R.P. Goenka and J.P. Goenka (1998) 233 ITR 123 (Cal.) — relied upon as support; Bombay Steam Navigation Co. Private Limited v. CIT (1965) 56 ITR 52 (SC) — distinguished; Metro Theatre Bombay Ltd. v. CIT (1946) 14 ITR 638 (Bom.) — distinguished; CIT v. Four Fields (P) Ltd. (1998) 231 ITR 262 (P&H) — distinguished; K. Govinda Bhatt v. CIT [1999] 235 ITR 528 (Mad.) — cited for the Revenue; not dealt with in the judgment; contrary view.
It was decided by the High Court on 2002-02-11 and is reported as (2002) 254 ITR 103 (P&H); ITA Nos.211, 143 and 144 of 2001 and ITR Nos.26, 187, 188 and 226 to 228 of 1999. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 24, section 24(b), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All the Revenue's appeals were dismissed and the references were answered in favour of the assessee and against the Revenue. The unpaid purchase price payable in instalments carrying interest is borrowed capital within the meaning of s.24(1)(vi), and the interest portion of the instalments paid to the Notified Area Committee is an allowable deduction in computing income from house property. It arises in House Property, Deductions & Disallowances and How Tax Law Is Read matters, on section 24, section 24(b) of the Income Tax Act 1961, and was decided by Jawahar Lal Gupta J and N.K. Sud J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put the nexus between the borrowing and the specific property in writing at the outset: the allotment or sale agreement showing the instalment schedule and the interest rate, or in a private borrowing a loan confirmation identifying the property, the date the money was applied, and the bank trail from the lender to the seller or builder. Where interest is paid to a relative or private party, obtain the third proviso certificate from that person specifying the interest payable for the acquisition or construction; s.24(b) requires it and its absence is the easiest ground of disallowance. Be ready for the lender's own position to be examined: interest received is that person's income and, where s.194A applies, tax has to be deducted, so check the payer's obligations before the officer does. Distinguish Four Fields (P) Ltd. on the facts if it is cited against you, by showing the borrowing is relatable to this property and not to a bundle of assets and liabilities taken over together. Check your jurisdiction before relying on this. In Madras the contrary decision in K. Govinda Bhatt [1999] 235 ITR 528 holds unpaid purchase consideration is not borrowed capital, and it was never dealt with in Sunil Kumar Sharma.
High Courts differ on this point. A full later-treatment check was not run and no Supreme Court proceeding was traced. What was actually verified: the same High Court followed this decision in CIT v. Master Sukhwant Singh, (2005) 196 CTR (P&H) 122, decided 7 February 2005 by N.K. Sud J and Satish Kumar Mittal J, which was read in full at https://indiankanoon.org/doc/1441024/?type=print and answered the identical question on instalment allotment in favour of the assessee. There is a real divergence. The Madras High Court in K. Govinda Bhatt v. CIT [1999] 235 ITR 528, decided 4 March 1997, read at https://indiankanoon.org/doc/1351518/?type=print, answered the converse question in the negative and against the assessee, holding that 'An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan' and that unpaid purchase money secured by mortgage is not capital borrowed for s.24(1)(vi). That decision was cited for the Revenue in the present case and the Punjab and Haryana High Court did not deal with it. The Punjab and Haryana line was followed by the same Court in CIT v. Master Sukhwant Singh (7 February 2005). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The retrieved text opens with 'JUDGMENT / N.K. Sud, J.' and closes 'Sd/- Jawahar Lal Gupta, J.', so the judgment was authored by Sud J. sitting with Gupta J.; the report as retrieved does not print a separate court header. The Court quotes s.24(1)(vi) as 'Where the property has been acquired, considered, constructed repaired, renewed or reconstructed with borrowed capital', where the statute reads 'acquired, constructed'; 'considered' is a transcription error in the report. Small typographical slips appear elsewhere in the retrieved text ('bonowed', 'Nevigation', 'interpretting'). The citation (2002) 254 ITR 103 (P&H) is taken from the Punjab and Haryana High Court's own reference to this decision in CIT v. Master Sukhwant Singh, which was read separately. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All the Revenue's appeals were dismissed and the references were answered in favour of the assessee and against the Revenue. The unpaid purchase price payable in instalments carrying interest is borrowed capital within the meaning of s.24(1)(vi), and the interest portion of the instalments paid to the Notified Area Committee is an allowable deduction in computing income from house property.
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