Interest paid on partner’s cap was allowable if cap was used to construct property from which rental income was earned

HIGH COURT OF BOMBAY

Commissioner of Income-tax-12, Mumbai

v.

Sane & Doshi Enterprises*

Section 22, read with section 28(i), of the Income-tax Act, 1961 – Income from house property – Chargeable as (Business income v. House property income) – Whether rental income received from unsold portion of property constructed by assessee, a real estate developer, is assessable as income from house property and not business – Held, yes – Whether once it is held that income is derived from property, treatment given in books of account as stock-in-trade would not alter character or nature of income – Held, yes [Paras 22 & 25] [In favour of assessee]

Section 24 of the Income-tax Act, 1961 – Income from house property – Deductions (Interest) – Assessee-firm’s business was to construct flats or commercial units and sell them at profit – Interest was paid to partners on capital contributed by them which was utilised for purpose of construction of property from which assessee earned rental income – Same had been allowed by Tribunal under section 24(b) on ground that such claim was allowed by Commissioner (Appeals) and later approved by Tribunal in earlier year – Whether entire interest paid on partners’ capital which was utilized for construction of property from which rental income was earned was allowable – Held, yes [Paras 40, 41 & 42] [In favour of assessee]