ITAT Disallows Interest Paid On Loan Taken For Paying Compensation To Family Members Pursuant To Arbitral Award On Family Settlement

The Panaji Bench of the Income Tax Appellate Tribunal (ITAT) has disallowed the interest paid on a loan that was taken for paying compensation to the assessee’s family members pursuant to an arbitral award on family settlement.

The bench of R.S. Syal (Vice President) and Partha Sarathi Chaudhury (Judicial Member) has observed that the expenses incurred by the assessee for paying interest on the loan taken are not related either to the cost of acquisition, the cost of improvement, or the cost of transfer of the asset sold. The interest claimed by the assessee, therefore, does not come within any of the heads of expenses specified in Section 48 of the Income Tax Act.

The assessee or appellant is an individual deriving income from salary, rent, and other sources, and he is covered by the Portuguese Civil Code and thus by Section 5A of the Income Tax Act.

The AO completed the assessment under Section 143(3), determining the total income. The AO made a single addition towards the disallowance of interest claimed against the capital gains in the hands of the communion and 50% thereof in the hands of the assessee.

The assessee contended that the interest claimed was deductible as the cost of acquisition from the sale value since the capital asset sold during the previous year was used for payment of compensation to the other legal heirs by way of family arrangement.

The AO disallowed interest claimed as a deduction from the capital gains.

The assessee submitted that there was an arbitration award relating to the family members of the assessee, and as per this award, the assessee had to pay Rs. 1.91 crore to the assessee’s brother along with interest of 12%. Hence, the assessee borrowed a loan from M/s.Fabrica De Gas Pvt. Ltd. to pay the amount to his brother, and interest paid to the said company was claimed as a deduction.

The AO held that the ownership of the property sold by the assessee was conveyed to the assessee by a gift deed dated September 12, 2005, registered with the Sub-Registrar, Ilhas, Panaji, on September 13, 2005, by his parents. Hence, the assessee had exclusive right and title to the property, and the interest claimed by the assessee was disallowed by the AO as the same was not allowable as per the provisions of Section 48.

The CIT (A) upheld the findings of the AO by observing that the assessee had absolute right and title over the property sold since it was gifted by his parents as per a registered gift deed.

The ITAT held that none of the heads of expenses for computation of capital gains as defined under Section 48 are applicable in the case of the assessee. The deduction of interest paid is not related to the cost of acquisition, improvement, or transfer of the asset sold.

Case Title: Sanjay Atchut Poy Raiturcar Versus ITO

Case No.: ITA No.185 /PAN/2018

Date: 07/07/2023

Counsel For Appellant: Priyanka Kamat

Counsel For Respondent: N. Shrikanth

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