Section 24/Income-tax Act

[2004] 140 taxman 505 (Cal.)

High Court of Calcutta

Akash & Ambar Trust

v.

Commissioner of Income-tax

Aloke Chakrabarti and S.K. Gupta, JJ.

Income-tax Reference No. 11 of 1998

November 24, 2003

Where on advance towards price of flat interest is paid only
because of delayed delivery of possession, such payment is
nothing but penalty/liquidated damage and it will not be
deductible as interest on borrowed capital

Section 24 of the Income-tax Act, 1961 - Income from house property - Deductions - Assessment years 1985-86 and 1986-87 - Business of assessee was to construct flats and sell them at profit - Assessee was paid in advance, price of flat by its purchaser - No interest was payable on such advance - However, it was stipulated that if flat was not delivered within stipulated period, assessee would be liable to pay interest to purchaser - As flat could not be delivered within stipulated period, assessee had to pay interest to purchaser - Apparently, assessee did not construct flat on borrowed capital - Whether even if payment made by assessee to purchaser was termed as interest, it was in nature of penalty or liquidated damages and, therefore, deduction was not permissible under section 24(1)(vi) - Held, yes

Facts

The assessee was engaged in the business of construction of flats and he sold them at a profit. The assessee was paid in advance the price of the flats by its purchaser with a condition that if the flat was not delivered within stipulated period, the assessee would be liable to pay interest to the purchaser. As the flats could not be delivered during the stipulated period, the assessee had to pay interest to the purchaser. The assessee claimed that interest amount should be deducted from the business income and, therefore, claimed deduction under section 24(1)(vi). The claim was rejected by the assessing authority. The Commissioner (Appeals) affirmed the order of the assessing authority. The Tribunal also dismissed the appeal holding that there was no material to record a finding that advance received by the assessee for sale of flats was utilized in the construction of the said flats.

On reference :

Held

The law permits for computation of income chargeable under the head ‘Income from house property’, and also deduction of amount of interest payable on capital when property has been constructed on borrowed capital. In the instant case, apparently, the assessee did not construct the flat on borrowed capital. The assessee was paid in advance, the price of the flat by its purchaser and from the materials on record, it appeared that no interest was payable on the said advance payment of consideration money. The assessee had claimed that he was to pay interest only if the flat was not delivered within the stipulated time and, consequently the assessee having failed to deliver the flat within the stipulated time, paid the interest. [Para 7]

The amount paid by the assessee to the purchaser was not interest payable on any borrowed capital with which the said flat was constructed. The Tribunal had come to a finding that there was no material on which a contrary finding could be arrived at. The payment made by the assessee to the purchaser on his failure to deliver the flat within the stipulated time, even if it was termed as interest, was in the nature of penalty or liquidated damages. [Para 8]

Therefore, deduction was not permissible under section 24(1)(vi), and the reference was answered in favour of the revenue.

Case referred to

CIT v. Parekh Kothi Ltd. [1986] 160 ITR 864/26 Taxman 233 (Cal.) [Para 4]

A.K. Roy Chowdhury and S. Roy for the Applicant. P.K. Mallick and Dipak Deb for the Respondent.

Judgment

Aloke Chakrabarti, J. - The facts relevant for the present reference are that the business of the appellant is to construct flats and sell at profit. Interest has been paid by the appellant in pursuance of an agreement entered into between the appellant and M/s. Sagar Shipping Co. Ltd., whereunder the appellant was paid an advance of Rs. 4,33,000 as price of the flat deliverable within a stipulated period. As the flat could not be delivered during the stipulated period under the agreement the appellant had to pay interest to M/s. Surendra Overseas Ltd., with which M/s. Sagar Shipping Co. Ltd. had since been amalgamated. It is contended by the appellant that income out of the business transaction should be assessed as business income and the interest amount of Rs. 6,74,602 should be deducted from the business income. This deduction has been claimed under section 24(1)(vi) of the Income-tax Act, 1961.

2. The two assessment years 1985-86 and 1986-87 are involved in the present reference and by the respective assessment orders passed for the said years, the claim of the assessee has been refused. The appeals taken before the Commissioner of Income-tax (Appeals) were decided by a common judgment rejecting the aforesaid contention. In the appeal before the Income-tax Appellate Tribunal also the assessee did not succeed on the aforesaid ground. The Tribunal has also recorded a finding that there is no material to record a finding that the advance received by the assessee for sale of flat was utilised in the construction of the said flat.

3. Heard Mr. A.K. Roy Chowdhury, learned senior counsel for the appellant and Mr. P.K. Mallick, learned senior counsel for the respondent.

4. The contention of the appellant-assessee is that the amount paid to the assessee for purchase of the flat was utilised for construction of the flat and has to be treated as capital borrowed by the assessee for construction of the flat and, therefore, the interest paid thereon is liable to be deducted under section 24(1)(vi). Learned counsel relied on the judgment in the case of CIT v. Parekh Kothi Ltd. [1986] 160 ITR 8641  (Cal.).

5. On behalf of the respondent-Revenue, it has been contended that this matter being a reference made under section 256(1) of the Income-tax Act, 1961, the findings of facts arrived by the Tribunal having reached a finality, cannot be reopened in this proceeding. It is further contended that though the amount paid by the assessee to the purchaser of the flat has been claimed to be an interest, the same is actually of the nature of liquidated damages or penalty as the amount had to be paid only because the assessee failed to deliver the flat to the purchaser within the stipulated period.

6. For considering the above contentions between the parties the relevant provision of law requires a consideration and section 24(1)(vi) of the said Act is set out hereinbelow :

“24. Deductions from income from house property.—(1) Income chargeable under the head ‘Income from house property’ shall, subject to the provisions of sub-section (2), be computed after making the following deductions, namely :—

(vi) where the property has been acquired, constructed, repaired, renewed, or reconstructed with borrowed capital, the amount of any interest payable on such capital.”

7. Therefore, it appears that the law permits for computation of income chargeable under the head “Income from house property”, deduction of amount of interest payable on capital when property has been constructed on the said borrowed capital. In the present facts apparently the assessee did not construct the flat on borrowed capital. The assessee was paid in advance the price of the flat by its purchaser and on the materials on record, it appears that no interest was payable on the said advance payment of consideration money. The assessee has claimed that he was to pay interest only if the flat was not delivered within the stipulated time and, in the present case, the assessee having failed to deliver the flat within the stipulated time paid the interest amounting to Rs. 77,940.

8. Considering the said facts and the law, we are of the opinion, that the amount so paid by the assessee to the purchaser was not interest payable on any borrowed capital with which the construction of the said flat was made. The Tribunal has come to a finding that there is no material on which a contrary finding could be arrived at. The payment made by the assessee to the purchaser on his failure to deliver the flat within the stipulated time, even if it is termed as interest, is in the nature of penalty or liquidated damages. In our opinion, in such facts deduction is not permissible under section 24(1)(vi) of the Income-tax Act, 1961.

9. In view of the above finding, the reference made to this Court by the Tribunal is answered in favour of the revenue.

Gupta J. - I agree.

nn

 

 [S1]1. 26 Taxman 233.