Prepayment charges payable on foreclosure of housing loan qualify as 'interest'; Charges deductible u/s 24(b) against house property income; 'Interest' definition u/s 2(28A) states 'any amount' which includes charges paid for not utilizing credit facility; Prepayment charges have direct and live link with obtaining loan.
Read the case details.
Case Title
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Windermere Properties Pvt. Ltd. vs. DCIT
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Court
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ITAT, Mumbai Bench,
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Appeal No./Citation
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ITA No. 7192/Mum/2010
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Section covered
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24(b), 2(28A)
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Order Result
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Appeal allowed. Decided in favour of assessee.
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Date of judgment
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22.03.2013
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Facts of the case:
In the computation of income under the head "Income from house property", the assessee claimed deduction of Rs. 11.05 crore towards interest u/s 24(b) of the Income-tax Act, 1961.
It includes prepayment charges of Rs. 1.56 crore paid on foreclosure of loan taken from HDFC Limited for the purpose of acquisition of the premises.
In the assessment order, the Assessing Officer held that the prepayment charges of Rs. 1.56 crore would not fall u/s 24(b) of the Act. Resultantly, the deduction was denied for such amount.
No relief was allowed in the first appeal.
Issues:
Whether the prepayment charges on foreclosure of loan is allowed as deduction as interest under section 24(b) of the Income-tax Act, 1961?
Arguments of the assessee:
Before the Tribunal, the assessee contended that the prepayment charges on foreclosure of loan falls under the definition of interest as defined in section 2(28A) of the Income Tax Act, 1961 and hence, the prepayment charges of Rs. 1.56 paid to the bank on foreclosure of loan is an allowable deduction as interest under section 24(b) in computing the income under the head "Income from house property".
Arguments of the department:
Before the Tribunal, the Ld. D/R relied upon the decision of the lower authorities.
The Decision:
The Tribunal held that the payment of such 'prepayment charges' cannot be considered as dehors the loan obtained for acquisition or construction or repair etc. of the property on which interest is deductible u/s 24(b) of the Act. Both the direct interest and prepayment charges are species of the term `interest' and ordered for the grant of deduction.
The addition of Rs. 1.56 crore made by the AO in the assessment order for the payment of prepayment charges on foreclosure of loan is deleted and allowed the same as a deduction under section 24(b).
Analysis:
The decision is in favor of the taxpayers and can be seen as a big relief to the home loan takers. It happens in many cases where a person prepays or forecloses a housing loan and the bank takes prepayment charges.
This judgment will clarify the query of many taxpayers who otherwise in a dilemma whether the prepayment charges on foreclosure of loan is allowed as deduction as interest under section 24(b).
When foreclosing a housing loan taken from a bank, the bank collects prepayment charges. If the loan is taken for acquisition or construction of a house property the deduction under section 24(b) is available from the ‘Income from House Property' computed under section 22. The prepayment charges are paid on loan closure in addition to and over and above the interest amount paid on the outstanding loan.
Full text of the judgment:
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “G”, MUMBAI
Before Shri R.K.Gupta, JM and Shri R.S.Syal, AM
I.T.A. No. 7192/Mum/2010
(Assessment Year: 2006-07)
M/s.Windermere Properties Pvt.Ltd.
HDFE House, CTS 154 & 155 Oshiwara District Centre, Garden Road Goregaon Road, Mumbai – 400 104. |
Vs
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The Dy.Commissioner of Income-tax Circle 9(3), Mumbai.
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PAN : AAACW5371M.
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Appellant
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Respondent
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Appellant by
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:
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Shri Nitesh Joshi
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Respondent by
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:
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Shri Javed Akhtar
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Date of Hearing
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:
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20.03.2013
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Date of Pronouncement
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:
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22.03.2013
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O R D E R
Per R.S.Syal (AM) :
This appeal by the assessee arises out of the order passed by the Commissioner of Income-tax (Appeals) on 06.08.2010 in relation to the assessment year 2006-2007.
2. First ground of the appeal is against the confirmation of the action of the Assessing Officer in disallowing prepayment charges amounting to Rs. 1,56,68,640 paid to HDFC Limited for closure of loan taken from HDFC Limited for the purpose of acquisition of the premises. Briefly stated the facts of this ground are that in the computation of income under the head “Income from house property”, the assessee claimed deduction of Rs. 11.05 crore towards interest u/s 24(b) of the Income-tax Act, 1961 (hereinafter called Rs. the Act’). On perusal of its details, the Assessing Officer noticed that it comprised of the interest of Rs. 9.48 crore and prepayment charges of Rs. 1.56 crore. On being called upon to explain as to why the deduction should not be denied in respect of prepayment charges, the assessee tendered its reply which has been reproduced in the assessment order. Not convinced with the assessee’s contention, the Assessing Officer held that the prepayment charges of Rs. 1.56 crore would not fall u/s 24(b) of the Act. Resultantly, the deduction was denied for such amount. No relief was allowed in the first appeal.
3. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee availed loan for acquisition of certain premises, the income from which was shown and accepted under the head “Income from house property”. The assessee claimed deduction of Rs. 11.05 crore u/s 24(b) of the Act. The Assessing Officer did not allow deduction of Rs. 1.56 crore paid as prepayment charges for the closure of the loan account which was taken for acquisition of property fetching the extant house property income. Under these circumstances the question arises as to whether such amount of Rs. prepayment charges’ paid to HDFC for closure of loan account is deductible u/s 24(b) of the Act. This provision provides that : “where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital” shall be allowed as deduction in the computation of income under the head “Income from house property”. The term “interest” has been defined in section 2(28A) to mean : “interest payable in any manner in respect of any moneys borrowed or debt incurred …. and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”. The definition of interest u/s 2(28A) makes it manifest that it has basically two components, viz., firstly, the amount with nomenclature of interest for moneys borrowed and secondly, the amount paid by whatever name called in respect of the money borrowed or debt incurred. The second category may also encompass any charge paid for not utilizing the credit facility. When we incorporate the definition of Rs. interest’ in section 24(b), the position which emerges is that not only the amount paid designated as interest but also any other amount paid by whatever name called in relation to such debt incurred also qualifies for deduction.
4. Adverting to the facts of the instant case, it is noticed that the assessee obtained loan from HDFC Limited for acquisition of property. Later on it arranged the money from other sources and repaid the loan which was taken for acquisition of property. The bank accepted the early repayment of loan on receipt of prepayment charges. By such repayment, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction u/s 24(b) during the continuation of loan. It is obvious that these prepayment charges have live and direct link with the obtaining of loan which was availed for acquisition of property. It is beyond our comprehension as to how the amount paid as interest for the loan taken is allowable as deduction but the amount paid as prepayment charges of the very same loan is not deductible. In our considered opinion the payment of such Rs. prepayment charges’ cannot be considered as de hors the loan obtained for acquisition or construction or repair etc. of the property on which interest is deductible u/s 24(b) of the Act. Both the direct interest and prepayment charges are species of the term Rs. interest’. We, therefore, set aside the impugned order on this issue and order for the grant of deduction.
5. Ground no.2 about the deduction in respect of property tax amounting to Rs. 2.03 lakh and ground no.3 against the confirmation of disallowance of Rs. 3,96,243 being various expenses incurred against the house property income were not pressed by the learned AR. Both these grounds stand dismissed.
6. In the result, the appeal is partly allowed.
Order pronounced on this 22nd day of March, 2013
This appeal by the assessee arises out of the order passed by the Commissioner of Income-tax (Appeals) on 06.08.2010 in relation to the assessment year 2006-2007.
2. First ground of the appeal is against the confirmation of the action of the Assessing Officer in disallowing prepayment charges amounting to Rs. 1,56,68,640 paid to HDFC Limited for closure of loan taken from HDFC Limited for the purpose of acquisition of the premises. Briefly stated the facts of this ground are that in the computation of income under the head “Income from house property”, the assessee claimed deduction of Rs. 11.05 crore towards interest u/s 24(b) of the Income-tax Act, 1961 (hereinafter called Rs. the Act’). On perusal of its details, the Assessing Officer noticed that it comprised of the interest of Rs. 9.48 crore and prepayment charges of Rs. 1.56 crore. On being called upon to explain as to why the deduction should not be denied in respect of prepayment charges, the assessee tendered its reply which has been reproduced in the assessment order. Not convinced with the assessee’s contention, the Assessing Officer held that the prepayment charges of Rs. 1.56 crore would not fall u/s 24(b) of the Act. Resultantly, the deduction was denied for such amount. No relief was allowed in the first appeal.
3. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee availed loan for acquisition of certain premises, the income from which was shown and accepted under the head “Income from house property”. The assessee claimed deduction of Rs. 11.05 crore u/s 24(b) of the Act. The Assessing Officer did not allow deduction of Rs. 1.56 crore paid as prepayment charges for the closure of the loan account which was taken for acquisition of property fetching the extant house property income. Under these circumstances the question arises as to whether such amount of Rs. prepayment charges’ paid to HDFC for closure of loan account is deductible u/s 24(b) of the Act. This provision provides that : “where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital” shall be allowed as deduction in the computation of income under the head “Income from house property”. The term “interest” has been defined in section 2(28A) to mean : “interest payable in any manner in respect of any moneys borrowed or debt incurred …. and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”. The definition of interest u/s 2(28A) makes it manifest that it has basically two components, viz., firstly, the amount with nomenclature of interest for moneys borrowed and secondly, the amount paid by whatever name called in respect of the money borrowed or debt incurred. The second category may also encompass any charge paid for not utilizing the credit facility. When we incorporate the definition of Rs. interest’ in section 24(b), the position which emerges is that not only the amount paid designated as interest but also any other amount paid by whatever name called in relation to such debt incurred also qualifies for deduction.
4. Adverting to the facts of the instant case, it is noticed that the assessee obtained loan from HDFC Limited for acquisition of property. Later on it arranged the money from other sources and repaid the loan which was taken for acquisition of property. The bank accepted the early repayment of loan on receipt of prepayment charges. By such repayment, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction u/s 24(b) during the continuation of loan. It is obvious that these prepayment charges have live and direct link with the obtaining of loan which was availed for acquisition of property. It is beyond our comprehension as to how the amount paid as interest for the loan taken is allowable as deduction but the amount paid as prepayment charges of the very same loan is not deductible. In our considered opinion the payment of such Rs. prepayment charges’ cannot be considered as de hors the loan obtained for acquisition or construction or repair etc. of the property on which interest is deductible u/s 24(b) of the Act. Both the direct interest and prepayment charges are species of the term Rs. interest’. We, therefore, set aside the impugned order on this issue and order for the grant of deduction.
5. Ground no.2 about the deduction in respect of property tax amounting to Rs. 2.03 lakh and ground no.3 against the confirmation of disallowance of Rs. 3,96,243 being various expenses incurred against the house property income were not pressed by the learned AR. Both these grounds stand dismissed.
6. In the result, the appeal is partly allowed.
Order pronounced on this 22nd day of March, 2013
Sd/-
(R.K.Gupta)
JUDICIAL MEMBER |
Sd/-
(R.S.Syal)
ACCOUNTANT MEMBER |
Mumbai; Dated: 22nd March, 2013.
Suggested readings:
Understanding Set-off of Loss from House Property
Joint Ownership in House Property-Income Tax Implications
Deduction for interest paid on loan is limited to Rs. 30000
Similar
Decision / Case Law:
Foreclosure charges paid by the assessee to ICICI Bank
housing loan amounts to interest u/s 2(28A) and hence eligible for deduction
under section 24(b) in the computation of income under the head ‘Income from
house property.’
Decision of Windermere Properties (P) Ltd. Vs. DCIT
(2013) followed by ITAT Delhi in ITA No.691/Del/2014 in the case of Subha
Singhvi vs ACIT,Circle-32(1),New Delhi. Order Pronounced on 19.06.2015
Suggested readings:
Understanding Set-off of Loss from House Property
Joint Ownership in House Property-Income Tax Implications
Deduction for interest paid on loan is limited to Rs. 30000
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