TMI Blog2012 (4) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... urcating the interest into normal and penal components, as done by the Revenue. The agreement is clear. The capital is to be repaid as per a time schedule. If not paid thereat, additional interest would become chargeable for the period of default, i.e., till the payment of the installment. This would not be interest on interest, but a higher rate of interest on the capital borrowed and, thus, allowable u/s. 24(b) of the Act. Interest at normal rate allowed - Interest at panel rate allowed - Interest on Interest is not allowed. - IT Appeal NOS. 553 (Jodh.) of 2009 AND 324 (Jodh.) of 2010 - - - Dated:- 30-3-2012 - R.K. GUPTA, SANJAY ARORA, JJ. ORDER Sanjay Arora, Accountant Member These are a set of two Appeals by the assessee, arising out of separate orders by the Commissioner of Income Tax (Appeals), Jodhpur ('the CIT' for short) for two consecutive assessment years, being A.Y. 2006-07 (dated 07-08-2009) and A.Y. 2007-08 (dated 16-02-2010), dismissing the assessee's appeals contesting its assessments u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the respective years. 2.1 The appeals raise a common issue, i.e., the amount of interest exig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the joint names of himself and RFC; ( d ) the assessee would be entitled to recover rent from the three tenants w.e.f. 01/12/1983. He was, further, at liberty to get the premises vacated or get the rent increased. 2.2 The assessee ran into the problems and could not get the premises vacated and, accordingly, run a hotel, for which he had purchased the property. The pending legal suits, as well as those lodged by the tenants, could be not settled till much later, and the property was finally let out only with effect from the previous year relevant to the assessment year 2006-07, the first year under reference. While the assessee claims the entire interest, i.e., the normal as well as the penal, as deductible u/s. 24(b) of the Act, the stand of the Revenue is that the entire interest arises only on account of the failure of the assessee to adhere to the payment schedule as agreed to by him vide the Agreement to Sell dated 01/2/1984. Further, the interest on unpaid (capitalized) interest is not envisaged for allowance u/s 24(b), relying for the purpose on the decision in the case of Shew Kissen Bhatter v. CIT [1973] 89 ITR 61 (SC) and CIT v. Saifuddin M. Moonum [1990] T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include on any debt and, more importantly, the same is in respect of 'capital borrowed'. The word 'capital' is wider in scope than the term 'money', and under appropriate circumstances, as the present one, include part of the debt that the seller, a financial institution, has agreed to extend, on charge of interest, to the assessee purchaser. 3.3 The next question (B) would be as to whether the assessee's claim for deduction is to be restricted to the interest that it would be liable to pay had it adhered to the agreed schedule of repayment of the borrowing, i.e., as per the agreement. We do not think it as so; there being nothing in the language of sec. 24(b) to warrant so. The interest deductible is the actual interest payable by the assessee in respect of the capital borrowed, and not one which would have been payable under a different fact setting than the actual one. The interest payable, deduction for which is claimed, is only that charged in terms of the agreement entered into between the parties, so that it could not be limited or restricted with reference to some predefined or hypothetical circumstances, which may have obtained or were conceived to be so when the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Bhatter v. CIT ( supra ), arises on account of interest on such capital being not paid. The same is, therefore, akin to additional capital having been advanced by the borrower, i.e., to finance the interest cost. In fact, the assessee could, or may have to, as where the borrower is unwilling to grant this facility, actually avail of additional loan to pay the interest on the capital borrowed for acquisition, etc. of the property. This may in fact be preferable where the interest rates have fallen, and the additional loan is available at a lower rate of interest. The interest on such additional loan, save to the extent it goes to discharge the original loan, cannot be considered as capital borrowed for the acquisition of the property. The decisions relied upon by the Revenue are apposite and squarely on the point, and toward which we may also refer to the decision in the case of Jaswantrai P. Mehta v. CIT 192 ITR 577 (Guj.). 3.5 Finally, we turn to the question (C) above. In our considered view, there is no scope for bifurcating the interest into normal and penal components, as done by the Revenue. The agreement is clear. The capital is to be repaid as per a time schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver be the contracted rate, actually charged and on the basis of which liability in its respect has arisen or accrued, would only be interest on such capital and, thus, deductible u/s. 24(b). In fact, it is principally for these reasons, i.e., to prevent diversion of capital that the agreement stipulates a fifty per cent. increase in the interest rate (for the period of default). This, it may be appreciated, works out to much higher than interest on interest. Also, as it appears to us, the said penal interest does not attract compounding at quarterly intervals. So, however, if it does, without doubt it is only interest on interest - whether normal or penal, which is precluded from allowance u/s. 24(b) of the Act. The interest, whether at normal or penal rates, is only on the capital borrowed and, thus, deductible. Again, as it appears from the loan statement, the interest rates stand scaled down to 17.75% per annum and 19.75% per annum respectively. 4. Under the circumstances, and in view of the foregoing, we restore the matter back to the file of the AO to allow an opportunity to the assessee to furnish the details of the interest claimed by it for the relevant year (s), bifur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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