1982 PLP 56 (PTD)

SAWANT, J. The assessee along with five others .started construction of a property for which purpose the assessee and his two brothers had to borrow money as loan. However, in spite of these borrowings which were spent for the construction of the property, the property could not be completed for shortage of funds. Hence, further funds were obtained by all the six from the Bombay Mercantile Co‑operative Bank Ltd., by mortgaging the property under construction and the construction of the property was completed. The shares of all the six co‑owners of the property were known and certain. The assessee claimed deduction of the interest paid by him on the loan raised by him personally for contributing his share of the cost of construction contributed by him originally before it was pledged to the said Bank. This deduction was claimed by him under clause (vi) of section 24 (i) of the I: T. Act, 1961 (hereinafter referred to as "the said Act"), from out of his share of the income from the said property, under the head "income from house property". The I.‑T. O. made an assessment against all the six co‑owners treating them as an association of persons in respect of the income from the said property. He computed the income after deducting the interest paid by the six co‑owners to the Bank on the loan collectively raised by them for further construction of the property. One‑sixth of the income so computed was transposed by him to the assessee's assessment, as admittedly all the six co‑owners possessed equal shares in the said pro perty. He, however, rejected the assessee's claim for the deduction of the interest paid by him on the loan individually raised by him for the acquisition and construction of his one‑sixth share in the property on the ground that such deduction was not permissible under section 26 of the said Act. The assessee was thus assessed for four assessment years from 1963 64 to 1966‑

67. The assessee preferred appeals against all the four assess ment years before the A. A. C., who accepted the assessee's stand and allowed the deduction of the interest paid by him on the loan individually taker, by him. Again the decision of the A. A. C., the revenue preferred appeals before the Tribunal and contended that the decision of the A. A. C. was inconsistent with the express provisions contained in se‑lion 26 of the said Act. The Tribunal rejected the said contention of the revenue by observing that the assessee was entitled to the deduction of the amount o: interest paid by him on the loan taken by him individually which was admittedly spent for acquiring and constructing his one‑sixth share in the said property. The Tribunal further observed that these deductions had to be given in addition to the deduction of the interest amount paid on the loan taken collectively by the six co‑owners for the completion of the remaining construc tion of the said property. The revenue having applied for stating the case under section 256 (1) of the said Act, the following question has been referred to this Court by the Tribunal : "Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of the interest paid by him on the loan raised by him individually for contributing his share of the price and cost of construction of the property in the computation of his income under the head 'Income from house property' ?" On the admitted facts themselves we should have thought that the position in law was simple. It is not disputed that before the property was mortgaged, the assessee and five other co‑owners had started the construction of the property by contributing equally towards the cost of construction. It is also not disputed that a part of his share of the cost of construction was raised by the assessee by borrowings. It is only after the construction had come to a certain stage and it was found that the moneys raised by each of the co‑owners fell short of the required funds for completing the construction, that the property was mortgaged to the Bombay Mercantile Co‑operative Bank Ltd., and a further sum was raised from the bank by all the six co‑owners by mortgaging the property to the bank and thus the remaining construction of the property was completed. It is also an admitted fact that all the co‑owners had equal, definite and determined shares in the property and the income therefrom. Part 'C' in Chap. IV of the said Act relates to income from house pro perty. This part consists of sections 22 to

27. Section 22 states that the annual value of the property consisting of any buildings or lands appurtenant thereto such as the property in the present case shall be chargeable to income‑tax under the head "Income from house property". Section 23 then lays down the manner in which the annual value of the house pro perty is to be determined. Section 24 then permits certain deductions from the income from house property. One of the deductions so allowed is mentioned clause (vi) of subsection (1) of the said section 24 and the same is the amount of any interest payable on capital when the property has been acquired, constructed, repaired, renewed or re‑constructed with borrowed capital. We are not concerned with section 25 of the said Act which lays down the amounts which are not permissible to be deducted. Then comes section 26 which is important from our point of view and which is as follows :‑ "

26. Where property consisting of building or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such persons in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income." The Explanation to the said section which is as follows was added subsequently and was not available at the time of the assessment in question "Explanation.‑For the purposes of this section, in applying the provi sions ' of subsection (2) of section 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub‑section." The sum and substance of the said section 26 is to prohibit the assessment of co‑openers of the house property as an association of persons and t direct that the share of each such person be computed in accordance with sections 22 to 25 and included in his total income where the shares of such persons in the house property are definite and ascertainable. A reading of sections 22 to 26 makes it clear that where the property is owned by co-owners who have definite and ascertainable shares, the gross income of such property is first to be ascertained on the basis of the provision of section

23. From such gross income, deductions permissible under sec tion 24 are to be made which will give the net income of the total property as available to all the co‑owners. This net income is further to be allocated to each of the co‑owners according to their shares. After each of the co--owners is thus allocated his share in the income of the joint property, it becomes an income from the house property within the meaning of sections 22 and 23 of the said Act. From that income again, each of these owners is entitled to deductions under section

24. He is further individually entitled to such deductions of interest on the amount of the money which he might have borrowed for the construction or acquisition of his share in the pro perty as in the present case. What the I.‑T. O. however, had done was to interpret section 26 as a provision for a further allowance of deduction under section 24 in the case of individual borrowings for the purpose of acquisition of individual shares. That was in fact to undo the provisions of section 26 and to bring to tax the total income from the house property although the section in terms states that where the shares are definite and ascertainable the income of such property from each of the joint owners is to be computed in accordance with sections 22 to 25 before it is included in his total income. In other words, although the I: T. O. omitted the income of all the joint owners from the said property, computed in accordance with sections 22 to 25, he did not permit the income of each of the individual owners to be computed and included in the manner Laid down in section

26. That was, according to us, rightly negatived by the Tribunal. To uphold the decision of the I.‑T. O. would mean that whereas the loan taken collectively by the joint owners from the bank was alone entitled to be treated as loan or borrowed capital within the meaning of clause (vi) of section 24(1), the capital borrowed by one of the joint owners such as the assessee for the acquisition of his share in the property would not be entitled to be so treated. This is against the pLaln meaning of the provisions of sections 23, 24 and

26. We may also point out that a similar view has been expressed by this Court in a decision in C. I. T. v. Nauser K. Kanga ((1979) 120 I T R 404). The same view has also been taken by the Delhi High Court in a decision in C. I. T. v. Shyam Sunder ((1980) 122 I T R 541). It is not necessary to discuss the said decisions in detail as according to us the point involved is very simple and does not require any elaborate argument. In the result, we answer the question referred to us in the affirmative, in favour of the assessee and against the revenue. The revenue to pay the costs. Questions answered in the affirmative.