Prepayment charges on a loan allowed as deduction from house property income Facts Windermere Properties Pvt. Ltd. (the taxpayer) availed a loan for acquisition of premises, the income from which was charged to tax under the head ‘Income from house property’. The taxpayer paid certain prepayment charges for foreclosure of the loan and claimed a deduction for the prepayment charges as interest under section 24(b) of the Income Tax Act, 1961 (‘the Act’). The Assessing Officer denied the deduction on the ground that prepayment charges would not fall under section 24(b) of the Act. The Commissioner of Income Tax (Appeals) upheld the disallowance. Issues before the Mumbai Tribunal Whether the prepayment charges paid for foreclosure of loan are deductible under section 24(b) of the Act? Observations and Ruling of the Mumbai Tribunal Section 24(b) of the Act provides that where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of interest payable on such capital shall be allowed as deduction in the computation of income under the head ‘Income from house property’. ‘Interest’ as defined in section 2(28A) of the Act includes any charge paid for not utilizing the credit facility. Prepayment charges have a live and direct link with the obtaining of the loan. The payment of such ‘prepayment charges’ cannot be considered de hors the loan obtained for acquisition of the property on which interest is deductible under section 24(b). Both, direct interest and prepayment charges are species of the term ‘interest’. Prepayment charges paid towards foreclosure of a loan obtained for acquisition of a house property is therefore deductible under section 24(b) in the computation of income under the head ‘ Income from house property’. Comments Though this decision is in the case of a company, individual tax payers, on the basis of this decision, could claim a deduction for prepayment charges in the computation of Income from house property in their return of income. However, in the absence of a High Court / Supreme Court decision on the issue, employers may not be willing to grant a deduction for such charges in the computation of withholding taxes on employees’ salaries. Source:Windermere Properties Pvt. Ltd. v. DCIT, Mumbai, ITA No.7192/Mum/2010 dated 22 March 2013.
Posted on: Thu, 01 Aug 2013 19:12:37 +0000
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