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TMI Blog2012 (4) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... operty, being a hotel by the name M/s. Parmar Hotels and Restaurant, Sojati Gate, Jodhpur, run by one, Shri Buch Mal Parmar in open auction conducted by Rajasthan Financial Corporation (a Corporation established under the State Financial Corporation Act, 1951, with its Head Office at Jaipur) through the District Court sometime in, as it appears, late 1983 for Rs. 8.50 lacs. While Rs. 4.00 lacs was paid upfront, the balance selling price of Rs. 4.50, which carried interest @ 15% per annum, was to be paid as per following schedule:- On 26th March, 1984 Rs. 2.00 lacs On 26th March, 1985 Rs. 1.50 lacs On 26th March, 1986 Rs. 1.00 lac In case of default in the payment of any of the instalments, the interest rate for the period of default would be at 22.50% per annum. The normal interest (@ 15% per annum) was to be paid at quarterly rests, beginning quarter ending February, 1984. The other principal terms and conditions of the agreement to sell (dated 01-02-1984) entered between the assessee and Rajasthan Financial Corporation ('RFC' for short) (PB pages 1 to 7), as deemed relevant, are as under: (a) that the property is sold on 'as is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 2(28A) comprehensively to mean interest payable in any manner. The same would, therefore, also include interest on interest, which as per sale agreement forms part of the principal on which interest is to be charged for the subsequent period/s. No case, accordingly, for bifurcation of interest into its normal and penal components is made out. Reliance is placed on the decision in the case of CIT vs. Devendra Bros. & Co. (1993) 200 ITR 146 (All.). 3. We have heard the parties, and perused the material on record, as well as the case law cited. 3.1 At the very outset, we may reproduce the relevant provisions of the Act 'Definitions 2. In this Act, unless the context otherwise requires,- (28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised; Deductions from income from house property. 24. Income chargeable under the head "Income from house property" shall be computed after making the following de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased to that extent. 3.4 Two questions still remain, i.e., (C) whether the interest allowable would be at normal rate as against the penal rate? (D) whether the interest exigible would include interest on interest inasmuch as interest is chargeable on quarterly basis, which then forms part of the principal on which interest for next quarter is chargeable? We shall take up the two questions, being inter-related, together. The question (D) above stands comprehensively answered by the apex court in the case of Shew Kissen Bhatter v. CIT (supra), meeting the same argument as being advanced before us. As also explained by the Bench during hearing, the interest deductible u/s. 24(b) is on the capital borrowed, out of which the house property under reference, income from which is being computed, stands acquired, constructed, etc. Clearly, interest not paid, though capitalized, so as to be considered as part of the principal on which interest for the subsequent period is chargeable, is not utilised in any manner for the acquisition of the property. The capital borrowed for the acquisition of property stands crystallized thereat, at Rs. 4.50 lacs in the instant case, and would stand to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital as originally borrowed, which, even if at a higher rate, is to be allowed. It may appear that our decision in respect of question (D) is in conflict with our answer to questions (B) and (C), particularly considering the observations by the hon'ble apex court in the case of Shew Kissen Bhatter v. CIT (supra) (at pg. 64), stating that if no so held, it would leave the door open for evasion of tax, as where the assessee may choose not to liquidate his borrowing/s, but pay additional interest, utilising the amount required to be re-paid for some other purpose/s. The said observations are, however, to be read in the context of the question and the fact-situation before the apex court, and which was the allowance of interest at the simple rate, as against at the compound rate, i.e., the allowance of interest on interest. And, which it answered in favour of the simple rate of interest, as that was the only interest being charged on the amount under capital charge. The same cannot be read or construed to mean that it barred the allowance of interest in excess of that originally ordained under any circumstance. In this we are guided by the decision by the apex court in CIT v. Sun Engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) above, which is impermissible for deduction u/s. 24(b) of the Act. Also, we observe that the RFC has maintained a single account of the assessee in which the interest is charged each quarter; the same forming part of the principal amount on which interest is chargeable for the subsequent period/s. While the same may be adequate for its purposes, it would clearly be not so for the purpose of the break-up of the interest as stipulated hereinabove, i.e., in view of the requirement of law. As such, for working out the interest as required, the same may have to be computed from the very beginning, i.e., from the first quarter. The AO shall verify the same and allow the deduction of interest accordingly. In case he differs with the determination of the interest figure/s as computed by the assessee, he shall state explicitly his reasons for the same. We may also clarify that the deduction allowable would only be in respect of interest liability accruing or arising to the assessee-borrower for the relevant year/s. This would also meet the assessee's reliance on CIT v. Devendra Bros. & Co. (supra), wherein it has been clarified that it is the interest payable, i.e., whether paid or not, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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