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Md. Hussain Habib Pathan v. Asst. CIT - (Income Tax Appellate Tribunal) (05 Mar 2020)

A genuine arrangement cannot be disregarded when same results or operates to minimize Assessee’s tax liability


Direct Taxation

Present is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals), partly allowing the assessees’ appeal. The only issue therefore requiring adjudication is that raised by the assessee is in respect of house property income qua the assessee’s residential house property.

The assessee has claimed a loss of Rs.15,32,120 qua the said property on account of interest (on borrowed capital) at Rs. 21,62,120, adjusting it against the rental income of Rs. 9 lakhs. The said rent was, on the basis of a field enquiry by the Assessing Officer (AO), found to be from the assessee’s major son, and major daughter, residing there at along with the assessee’s other family members. Nobody would, in the view of the AO, charge rent (for residence) from his own son and daughter, particularly considering that both are unmarried and living together with their family at its’ self-owned abode. The arrangement was therefore regarded merely as a tax-reducing device adopted by the assessee, liable to be ignored. Treating the house property as a self-occupied property, the AO restricted the claim of interest under Section 24(b) of Income Tax Act, 1961 to Rs. 1,50,000, and which was confirmed by the CIT(A) in appeal for the same reason/s.

The Assessee’s claim was that there is nothing to show that the arrangement, which is duly supported by written agreements, furnished in the assessment proceedings, is fake or a make-believe. Rental income cannot be overlooked or disregarded merely because it arises from close family members.

Surely, the arrangement is highly unusual, particularly considering that the rent is in respect of a self-owned property (i.e., for which no rent is being paid), which constituted the family’s residence, with, further, the assessee’s son and daughter being unmarried. That, however, may not be conclusive of the matter. Being a private arrangement, not involving any third party, not informing the cooperative housing society may also not be of much consequence. The Revenue has rested merely by doubting the genuineness of the arrangement, without probing the facts further.

It could be that the assessee’s major son and daughter are financially independent (or substantially so), with independent incomes, sharing the interest burden of their common residence with their father. And, as such, instead of transfer of funds to him per se, have regarded, by mutual agreements, the same as rent, as that would, apart from meeting the interest burden to that extent, also allow tax saving to the assessee-father. A genuine arrangement cannot be disregarded as the same results or operates to minimize the assessee’s tax liability.

On quantum, however, the assessee’s stand is infirm. The assessee’s interest claim therefore cannot be allowed in full and shall have to be suitable proportioned, even as agreed, restricting the interest claim relatable to the self occupied part thereof to, as allowed, Rs. 1.50 lakhs. The assessee’s appeal is partly allowed.


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