ABRAR HUSSAIN NAQVI, Judicial Member.-1. This is an appeal filed by an individual deriving income from property. The only moot point in this appeal is the disallowance of interest amounting to Rs.
22,800/- claimed to have been paid by the assessee on borrowed capital from Habib Bank Ltd. The assessee allegedly constructed a property by taking a loan from her daughter. In order to pay of the loan to her daughter she obtained a bank. Loan by mortgaging her residential House No. 43-A, New Muslim Town, Lahore, which is self occupied and is not one of those properties out of which the income is derived by the assessee. The assessing officer disallowed the entire claim on the ground that the loan w>as obtained by the assessee from the bank in order to liquidate the liability owned to her daughter. According to the learned assessing officer such an interest is allowable only if the loan had been obtained in respect of the same property which yielded rental income. Since a residential house has been mortgaged any interest payable on such loan, according to the 1TO is not allowable. The assessee's appeal having been dismissed the assessee has approached this Tribunal.
2. It was contended that under Section 20 of the Income-tax Ordinance the interest paid by the assessee in the circumstances of the case was allowable. He cited the case of Indian Citizen Properties v. CIT 55 ITR 262 and Dalmia Jain &. Co. Ltd. v. CIT 65 ITR p. 408. It was stated that in these cases it has been laid down by the Indian Courts: "The interest paid on a fresh loan utilized in repaying the original loan taking for the above specific could be equally deductible".
3. I have considered the arguments of the learned counsel. The deduction has been claimed under Section 20(1)(e) of the Income-tax Ordinance. However, from the perusal of the orders of the officers belown it appears that mistakenly the claim was considered under clause (f) of the afore- said section which is entirely a different clause. In clause (e) the only requirement is that the property in question is acquired, constructed renovated or re-constructed with the borrowed capital. Nothing has been said in regard to these requirements by either of the officers below. No enquiry seems to have been made as to whether in fact the property in question was acquired or constructed with the borrowed capital. If it is proved that the property was constructed with a borrowed capital, the mere fact that the borrower is changed, would not debar the assessee from claiming the allowance, and the interest cannot be disallowed merely on the ground that it is not the original capital with which the property has been constructed. The intention of the legislature seems to be encourage the construction of houses even with a borrowed capital and it is for that end that tax exemption has been given to the interest paid on borrowed capital. The two cases of the Indian courts support this view.
4. Since no enquiry has been made as to whether, in fact, the property in dispute was constructed with borrowed capital from the assessee's daughter I set aside the orders of the officers below remitting the case back to the 1TO with the direction that enquiry be conducted as to whether the construction of the property in question was made through the capital borrowed from the assessee's daughter. If as a result of the enquiry, it is found that the property was acquired, constructed or reconstructed with the borrowed capital and it is further found that the loan obtained from Habib Bank Ltd., was in order to repay the earlier loan from her daughter the interest claimed by the assessee should be allowed subject to verification. The appeal is accepted to the extent indicated above.