COMMISSIONER OF INCOME TAX Vs. RAJAH DHANRAJGIRIJI

JUDGEMENT

(1.) The following question is referred for our opinion under s. 256(1) of the I.T. Act, 1961 :

(2.) The assessee was deriving income from different sources including house property. He owned two houses, viz., on me at Bombay know as "Dhanraj Mahal" and another at Pune known as "Pudumjee Terrace". The assessee had raised certain loans both for the purpose of constructing the said houses and also to meet his personal needs. While it is not necessary to set out the history of the dealings between the assessee and his creditors, it is sufficient to mention that, so far so the house "Dhanraj Mahal" at Bombay is concerned, a suit (O.S. No. 452 of 1954) was filed by the creditor, M/s. Secunderabad Trading Syndicate, represented by Sri. M. M. Malani, against the assessee. The suit was decreed and the suit property was brought to sale in execution of the decree. The sale was notified to be held on 2/12/1959. But before the sale was held a settlement was arrived at between the assessee and the creditor. The said building "Dhanraj Mahal" was under requisition by the Government of India for accommodating the Government offices and for other public purposes. The Government of India lent a sum of Rs. 29,00,000 to the assessee by taking a mortgage of the entire house in its favour. The credits was paid off from this amount. Under the mortgage exerted by the assessee in favour of the Government of India, the assessee agreed to pay interest at a particular rate and also stipulated that, if the interest was not paid as agreed, it would be added to the principal and further interest would be calculated. A charge was created in respect of both principal and interest on the said property. Now, coming to the Pune house, "Pudumjee Terrace", it was found on an account being taken, that, the at the end of Diwali year 1963-64, the assessee was owing an amount of Rs. 3,33,753. The creditor insisted on some security being offered in addition to the promissory note execute by the assessee. Accordingly, the assessee created an equitable mortgage in respect of the said house by deposit of title deeds. Under this equitable mortgage, he agreed to pay interest at the rate of 8% per annum.

(3.) The assessee was paying interest in respect of both the mortgages i.e., to the Government of India as well as to the other credit in respect of the Pune house property. This was being allowed as deduction from out of the income arising from the house property till the assessment year 1968-69. But after the Finance Act, 1968, amended clause (iv) of sub-s. (1) of s. 24 of the I.T. Act the ITO disallowed the said interest as a deduction. This was challenged by the assessee in appeal before the AAC. The matter ultimately went before the Tribunal. The Tribunal held that the deduction is allowable. It held that, on the facts and in the circumstances of the case, the deduction fell within clause (iv) of sub-s. (1) of s. 24. Thereupon, the Revenue asked for and obtained this reference.