Panaji ITAT Upholds Disallowance of Interest on Loan for Family Settlement Payment

The Panaji ITAT upheld the CIT(A) order confirming the disallowance of interest paid on a loan used to compensate the Assessee’s family members as per an arbitral award on a family settlement. The Assessee claimed a deduction of the interest against the long-term capital gains (LTCG) arising from the sale of a capital asset. However, the ITAT rejected this claim, stating that the interest is not covered under any of the specified heads of expenses in Section 48.

In the assessment year 2009-10, the Assessee, an individual governed by the Portuguese Civil Code, sold a jointly-owned land property for Rs. 5.50 crore. The Assessee offered 50% of the consideration as LTCG in their name and the remaining amount in the name of communion, after claiming an exemption under Section 54F. Alongside this, the Assessee claimed an interest expense of Rs. 20.55 lakh paid on a loan taken to compensate their brother and sister according to the arbitral award on the family arrangement.

The Revenue disallowed the deduction claimed for the interest expenses from the Assessee’s capital gains. They argued that the family arbitration award was unrelated to the LTCG and the interest was not allowable under Section 48. The CIT(A) confirmed the Revenue’s decision.

The ITAT also rejected the Assessee’s claim for interest paid on the loan taken to compensate their siblings as per the arbitration award. The ITAT determined that the Assessee did not incur any cost of acquisition, as the property was gifted to them by their parents through a registered gift deed. The ITAT emphasized that the arbitration awards for family settlement are separate from the issue of LTCG.

Additionally, the ITAT noted that the interest paid on the loan was not related to the cost of acquisition, cost of improvement, or cost of transfer of the asset sold. Consequently, the ITAT concluded that none of the specified heads of expenses for computing capital gains under Section 48 are applicable in this case. The ITAT agreed with the Revenue’s argument that the payment of interest on the loan had no connection to the long-term capital gains from the sale of the capital asset. Therefore, the Assessee’s appeal was dismissed. The decision was in favor of the Revenue.

[Sanjay Atchut Poy Raiturcar v. ITO, Goa [TS-376-ITAT-2023(PAN)] – Date of Judgement: 07.07.2023 (ITAT Panaji)]

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