2025 (7) TMI 431 - AT - Income Tax

Disallowance of excess interest claimed u/s 24(b) - whether interest claimed was not exclusively linked to the loan utilized for the acquisition of the 19th-floor property which is let out? - AO noticed that the assessee has let out its house property at 19th Floor in Lodha Costeria Mumbai and property was bought out of the borrowed funds and the interest paid thereon has been claimed as deduction u/s 24(b) HELD THAT - The undisputed fact is that the assessee has borrowed loan from SBI UBI Bank of Baroda. The loans taken from SBI UBI are coming from earlier years and fresh loan is from Bank of Baroda. It is also not in dispute that the loan taken from Bank of Baroda has been utilised for the purchase of Flat at 18th Floor of Lodha Costerja. It is also not in dispute that the assessee has shown rental income of Rs. 33, 00, 000/- for the period January 2014 to March 2014. Since the assessee has shown rental income then the assessee is very much entitled for the claim of deduction of interest u/s 24(b) of the Act. We therefore do not find any reason to interfere with the findings of the ld. CIT(A). This ground is accordingly dismissed. Addition u/s 56(2)(vii)(ii) - difference between the agreement value and stamp value - HELD THAT - As difference between the agreement value and stamp value is much less than 10% the decision of Joseph Mudaliar 2021 (9) TMI 701 - ITAT MUMBAI squarely applies wherein as held wherever the statute provides for adoption of the value determined by the stamp valuation authority as the deemed sale consideration in case it exceeds declared sale consideration exceptions have also been provided not to adopt the market value if the difference between the value declared by the assessee and determined by the stamp duty authority is within a permissible limit. The reason for not providing such an exception in section 56(2)(vii)(b)(ii) is patent and obvious. As could be seen the amendments to sections 50C 56(2)(x) and 43CA providing for exception in case of marginal difference between the declared sale consideration and value determined by the stamp valuation authority were introduced to the statute by Finance Act 2018 with effect from 1-4-2019. Meaning thereby the legislature did not felt the necessity of introducing such an exception to section 56(2)(vii)(b)(ii) simply for the reason that such provision was applicable for a period between 1st October 2009 to 1st April 2017. Therefore non-introduction of similar exception to section 56(2)(vii(b)(ii) cannot be held against the assessee. Rather section 56(2)(vii)(b)(ii) has to be harmoniously construed along with sections 50C 56(2)(x) and 43CA and the exceptions provided in the later three provisions have to be read into section 56(2)(vii)(b)(ii) to provide true meaning to the intention of the legislature. This according to us clearly answers submissions of learned departmental representative regarding absence of a provision identical to third proviso to section 50C(1) in section 56(2)(vii)(b)(ii). Thus in our considered opinion the assessee would be eligible to get the benefit of ten per cent margin difference in the valuation between the value determined by the stamp duty authority and the declared sale consideration. Thus if the variation between the aforesaid two values falls within the range of ten per cent no addition can be made. Revenue appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the Assessing Officer (AO) was justified in disallowing interest of Rs. 76,66,066/- claimed under Section 24(b) of the Income Tax Act on the ground that the interest was not exclusively linked to the loan utilized for acquisition of the let-out 19th-floor property;

(b) Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the disallowance of the aforesaid interest amount;

(c) Whether the AO was correct in making an addition of Rs. 3,26,58,000/- under Section 56(2)(vii)(b)(ii) on account of difference between the stamp duty value and the agreement value of the property purchased by the assessee;

(d) Whether the CIT(A) erred in deleting the addition made under Section 56(2)(vii)(b)(ii) on the ground that the difference between the stamp duty value and agreement value was less than 10% and thus not taxable;

(e) Whether the amendments to Section 56(2)(vii)(b)(ii) and related provisions apply retrospectively or prospectively;

(f) Whether the assessee was entitled to claim deduction of interest paid on the loan taken for the 18th-floor property which was subsequently let out;

(g) The scope and applicability of the provisions of Sections 24(b), 50C, 56(2)(vii)(b)(ii), 56(2)(x), and 43CA of the Income Tax Act in the context of valuation differences and interest deductions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Interest under Section 24(b)

Relevant legal framework and precedents: Section 24(b) allows deduction of interest on borrowed capital used for acquisition of a property. The deduction is permissible only if the interest is exclusively and directly linked to the loan taken for acquisition of the let-out property.

Court's interpretation and reasoning: The AO disallowed interest amounting to Rs. 76,66,066/- paid on a loan from Bank of Baroda, contending that this loan was used for acquiring the 18th-floor flat and not the 19th-floor let-out property. The CIT(A) deleted this disallowance after noting that the 18th-floor flat was a bare shell during the relevant period and was subsequently let out, generating rental income of Rs. 33,00,000/- from January to March 2014, and Rs. 1,32,00,000/- from April 2014 to March 2015.

Key evidence and findings: Bank statements and loan utilization details showed loans from SBI and UBI for the 19th-floor property and a fresh loan from Bank of Baroda for the 18th-floor flat. The assessee demonstrated rental income from the 18th-floor flat during the relevant assessment year.

Application of law to facts: Since the 18th-floor property was let out during the year and rental income was earned, the interest paid on the loan for this property is eligible for deduction under Section 24(b). The Tribunal concurred with the CIT(A) that the assessee was entitled to the interest deduction.

Treatment of competing arguments: The revenue argued that the interest paid on loans for properties other than the let-out 19th-floor property should not be allowed. The Tribunal rejected this, emphasizing the subsequent letting out and rental income earned from the 18th-floor property.

Conclusion: The disallowance of Rs. 76,66,066/- interest was rightly deleted by the CIT(A), and the Tribunal upheld this finding.

Issue 2: Addition under Section 56(2)(vii)(b)(ii) on Difference Between Stamp Duty Value and Agreement Value

Relevant legal framework and precedents: Section 56(2)(vii)(b)(ii) mandates that if consideration for transfer of immovable property is less than the stamp duty value by an amount exceeding Rs. 50,000, the difference is taxable as income under "Income from Other Sources" in the hands of the buyer. Section 50C similarly applies to the seller. Amendments introduced via Finance Acts in 2018 and 2020 introduced tolerance bands (initially 5%, later increased to 10%) for differences between declared consideration and stamp duty value, exempting marginal differences from being treated as income.

Several judicial precedents, including decisions of coordinate benches, have held that these amendments are curative and apply retrospectively.

Court's interpretation and reasoning: The AO made an addition of Rs. 3,26,58,000/- under Section 56(2)(vii)(b)(ii) due to the difference between the stamp duty value and the agreement value of the 18th-floor flat. The CIT(A) deleted this addition, reasoning that the difference was less than 10%, and the flat was a bare shell at the time of purchase, thus the agreement value should be taken as nil.

The Tribunal, relying on the coordinate bench decision in Joseph Mudaliar vs. DCIT and other precedents, held that the tolerance band of 10% applies to the valuation difference under Section 56(2)(vii)(b)(ii) even though the provision itself does not explicitly contain such an exception. The Tribunal emphasized that Sections 50C, 56(2)(x), and 43CA contain similar provisions and exceptions, and these must be harmoniously construed with Section 56(2)(vii)(b)(ii).

Key evidence and findings: The difference between the stamp duty value and agreement value was less than 10%. The property was a bare shell at the time of purchase and not in a condition to be let out.

Application of law to facts: The Tribunal applied the principle of harmonious construction and retrospective applicability of amendments, concluding that no addition under Section 56(2)(vii)(b)(ii) should be made if the difference is within the 10% tolerance band.

Treatment of competing arguments: The revenue contended that the absence of a proviso similar to Section 50C(1) third proviso in Section 56(2)(vii)(b)(ii) precluded application of the tolerance band. The Tribunal rejected this, explaining the legislative intent and retrospective application of the amendments.

Conclusion: The addition of Rs. 3,26,58,000/- under Section 56(2)(vii)(b)(ii) was rightly deleted by the CIT(A), and the Tribunal upheld this deletion.

Issue 3: Retrospective Application of Amendments to Section 56(2)(vii)(b)(ii) and Related Provisions

Relevant legal framework and precedents: Amendments made by the Finance Act, 2018, introduced exceptions to valuation differences under Sections 50C, 56(2)(x), and 43CA, with retrospective effect from 1-4-2019. Tribunal decisions have consistently held these amendments to be curative and applicable retrospectively.

Court's interpretation and reasoning: The Tribunal observed that the amendments were intended to provide relief against marginal valuation differences and to harmonize the treatment of buyers and sellers. The absence of a similar exception in Section 56(2)(vii)(b)(ii) was due to its limited applicability period (1-10-2009 to 1-4-2017) and not due to legislative oversight.

Key evidence and findings: Judicial precedents including decisions in Sandip Patil, Maria Fernandes Cheryl, and Joseph Mudaliar were cited to support retrospective application.

Application of law to facts: The Tribunal applied these principles to the facts, allowing the assessee the benefit of the tolerance band retrospectively.

Treatment of competing arguments: The revenue's argument for prospective application was rejected based on the curative nature of the amendments and consistent Tribunal jurisprudence.

Conclusion: Amendments to the valuation provisions apply retrospectively, benefiting the assessee.

3. SIGNIFICANT HOLDINGS

"Since the assessee has shown rental income of Rs. 33,00,000/- for the period January, 2014 to March, 2014, the assessee is very much entitled for the claim of deduction of interest u/s 24(b) of the Act."

"If the variation between the value determined by the stamp duty authority and the declared sale consideration falls within the range of ten per cent, no addition can be made under section 56(2)(vii)(b)(ii) of the Act."

"The legislature did not feel the necessity of introducing such an exception to section 56(2)(vii)(b)(ii) simply for the reason that such provision was applicable for a period between 1st October, 2009 to 1st April, 2017. Therefore, non-introduction of similar exception to section 56(2)(vii)(b)(ii) cannot be held against the assessee. Rather, section 56(2)(vii)(b)(ii) has to be harmoniously construed along with sections 50C, 56(2)(x) and 43CA and the exceptions provided in the later three provisions have to be read into section 56(2)(vii)(b)(ii) to provide true meaning to the intention of the legislature."

"The amendments made by Finance Act, 2018 with effect from 1-4-2019 are curative in nature and beneficial provisions, and therefore apply retrospectively."

"There cannot be two different fair market values in respect of the very same property, i.e., one at the hands of the seller and the other at the hands of the buyer."

Final determinations:

- The disallowance of interest of Rs. 76,66,066/- under Section 24(b) was rightly deleted as the property was let out and rental income was earned.

- The addition of Rs. 3,26,58,000/- under Section 56(2)(vii)(b)(ii) was rightly deleted as the difference between stamp duty value and agreement value was less than 10%, falling within the tolerance band.

- The amendments to the relevant valuation provisions apply retrospectively, and the benefit of the tolerance band must be extended to the assessee.

- The Tribunal dismissed the appeal filed by the revenue, upholding the order of the CIT(A).