Find a Lawyer

I . T . A . No. 1268 of 1982‑83, decided on 8th November, 1984

‑‑‑S.20(1)(e)‑‑Income from house property‑‑Deductions‑‑Interest on borrowed capital‑‑ Assessee constructed a property by taking a loan from her daughter‑‑In order to pay loan to her daughter she obtained a bank loan by mortgaging her residential house‑‑Assessing Officer disallowed entire claim on ground that loan was obtained by assessee from bank in order to liquidate liability owed to her daughter‑‑Held, if it was proved that property was concreted with a borrowed capital mere fact that creditor was changed would not debar assessee frog claiming allowance on account of interest paid to other creditor.

Indian Citizen Properties v. C.I.T. 55 1 T R 262 and Dalmia Jain & Cti. Ltd. v. C. I. T. 65 I T R. 408 rel.

Siraj Khalid for Appellant.

M. Arshad Pervez, AC, DR. for Respondent.

Date of hearing: 18th April 1984

This is an appeal filed by an individual deriving income from property. The only moot point in this appeal is the disallowance of interest amounting to Rs.22,800 claimed to have been paid by the assessee on borrowed capital from Habib Bank Ltd. The assessee allegedly constructed a property by taking a loan from her daughter. In order to pay off the loan to her daughter she obtained a bank loan by mortgaging her residential House No.43‑A, New Muslim Town, Lahore, which is self‑occupied and is not one of those properties out of which the income is derived by the assessee. The assessing officer disallowance the entire claim on the ground that the loan was obtained by the assessee from the bank in order to liquidate the liability owed to her daughter. According to the learned assessing officer such an interest is allowable only if the loan had been‑obtained in respect of the same property, which yielded rental income. Since a residential house has been mortgaged any interest payable on such loan, according to the I . T .0. is not ‑ allowable. The assessee's appeal having been dismissed the assessee has approached this Tribunal.

It was contended that under section 20 of .the Income‑tax Ordinance the interest paid by the assessee in the circumstances of the case was allowable. He cited the cases of Indian Citizen Properties v . C . I . T . 55 I T . R 262 and Dalada Jain & Co. Ltd. v . C . I T . 65 IT R 408. It was stated that in these cases it has been laid down by the Indian Courts:

"The interest paid on a fresh loan utilized in repaying the original loan taken for the above specific could be equally deductible. "

I have, considered the arguments of the learned counsel. The deduction has been claimed under section 20(1)(e) of the Income‑tax Ordinance. However, from the perusal of the orders of the officers below it appears that mistakenly the claim was considered under clause (f) of the aforesaid section, which is entirely a different clause. In clause (a) the only requirement is that the property in question is acquired, constructed, renovated or reconstructed with the borrowed capital. Nothing has been said in regard to these requirements by either of the officers below. No enquiry seems to have been made as to whether in fact the property in question was acquired or constructed with the borrowed capital. If it is proved that the property was construc ted with a borrowed capital, the mere fact that the creditor is changed, would not debar the assessee from claiming the allowance, and the interest cannot be disallowed merely on the ground that it is not the original capital with which the property has been constructed. The intention of the Legislature seems to be to encourage the construction of houses even with a borrowed capital and it is for that end that tax exemption has been given to the interest paid on borrowed capital. The two cases of the Indian Courts support this view. .

Since no enquiry has been made as to whether, in fact, the property in dispute was constructed with borrowed capital from the assessee's daughter I set aside the orders of the officers below remitting the case back to the I.‑T.O. with the direction that enquiry be conducted as to whether the construction of the property in question was made through the capital borrowed from the assessee's daughter. If as a result of the enquiry, it is found that the property was acquired, constructed or reconstructed with the borrowed capital and it is further found that the loan' obtained from Habib Bank Ltd., was in order to repay the earlier loan from her daughter the interest claimed by the assessee should be allowed subject t verification. The appeal is accepted to the extent indicated above.

M. B. A. Case remanded.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.