An Allahabad High Court ruled that interest would be allowed as a deduction even if the same is not actually paid by the assessee.
A person may borrow money for acquisition or construction of house property and for this purpose he is required to make payment of interest on such borrowing. A very important question arises as to whether interest would be allowed as a deduction even if the same is not actually paid by the assessee during the year under consideration. Well this issue has been long settled by the Allahabad High Court in the case of CIT v. Devendra Brothers & Co. 200 ITR 146.
In this case the issue that was answered was whether interest in respect of money borrowed for housing would be deductible on accrual basis specially when the interest was not actually paid during the accounting year. When this issue came up before the Hon’ble Judges of the High Court, the Hon’ble Judges opined that Section 24 of the Income-tax Act, 1961, permits a deduction in respect of interest (payable) on borrowed capital utilized for construction etc. of the property.
The Hon’ble Judges further went on to say that the deduction has not been made dependent on the actual payment of the amount claimed as a deduction and that if the amount of interest sought to be deducted had fallen due or liability in that regard had been incurred in the previous year relevant to the concerned assessment year, then in such a situation the amount of interest in respect of the housing loan whether it is paid or not would be a permissible deduction in terms of Section 24 of the Income-tax Act, 1961.
Finally the Hon’ble Judges of the High Court opined that since the Income-tax Tribunal has found that there was a nexus between the borrowed capital as also the acquisition of the house property it was justified in allowing deduction of interest on such borrowed capital in terms of Section 24.
As the question relating to allowability or otherwise of accrued interest in respect of housing loan is really very important. Hence, for ready reference the facts of the Allahabad High Court decision in respect of CIT v. Devendra Brothers & Co. (IBID) are mentioned hereunder:-
The assessee enjoyed income from letting of godowns as one of the sources of its income. In computation of its taxable income, the assessee sought a deduction of Rs.73,414/- being the amount of interest payable to the Allahabad Bank on the borrowing invested in the construction of the godowns. The Income-tax Officer assessed the rental income from the godowns under the head “Profits and gains of business or profession”. He considered the admissibility of the claim for deduction under section 36(1) (iii) of the Act and disallowed the same on the grounds, inter alia, that, as the assessee had not maintained books of account, it was not entitled to take the benefit of the mercantile system of accounting and the claim for deduction could not be allowed on accrual basis. Another ground given was that the assessee had advanced certain interest-free loans to its sister concerns and thereby used the borrowed indirectly for extra-commercial considerations. On these reasonings, it was held that the claim made by the assessee was inadmissible.
When the assessee in the above case went in appeal to the Appellate Assistant Commissioner of Income-Tax, the said Appellate Assistant Commissioner of Income-Tax upset the order of the Income-tax Officer and he has held that the rental income was assessable under the head “Income from House Property” and the deduction on account of interest payable to the Allahabad Bank was a permissible deduction in view of the provisions contained in section 24(1)(vi) of the Act. The appellate authority also noticed that the principal amount on which liability to pay interest was sought to be deducted was indisputably invested in the construction of the godowns. On these findings, the appeal was allowed.
Later at the view taken by the Appellate Assistant Commissioner of Income Tax was upheld by the Income Tax Appellate Tribunal. Now when the matter came up before the Hon’ble judges of the High Court they opined that Section 24 permits the deduction of any interest on borrowed capital for the acquisition, construction, repair or reconstruction of the property in question. It, inter alia, says that income chargeable under the head “Income from house property” shall be computed after making the deduction, amongst others, where the property has been acquired, constructed, etc., with borrowed capital, the amount of any interest payable on such capital.
The findings of fact which are not disputed in this application, are that the money borrowed was invested in the construction of godowns. In this view of the matter, the amount of interest payable, namely, Rs.73, 424, was clearly an admissible deduction in computing the taxable income of the assessee. Once the nexus between the borrowed capital and the acquisition, construction, etc., of property is established and proved, the claim for deduction of interest on borrowing cannot be resisted.
It may be noticed that section 24 (1) (vi) permits deduction of the interest “payable” on the borrowed capital utilized for the construction, etc., of property. The deduction has not been made dependent on the actual payment of the amount claimed as deduction. If the amount of interest sought to be deducted had fallen due or a liability in that regard had been incurred in the previous years relevant to the assessment year in question, whether factually the amount of interest is paid or not, it is permissible deduction under section 24 (1) (vi) of the Act in computing the income chargeable to tax under the head “Income from house property”.
Finally the Hon’ble judges of the High Court held that deduction in respect of interest o the borrowed capital is permissible on accrual basis as per Section 24 of the Income-tax Act, 1961.
Section 24 of the Income-tax Act, 1961 has been substituted by the Finance Act 2001 with effect from 1.4.2002. The newly substituted above-mentioned Section 24 clearly states 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 a deduction while computing the income chargeable under the head “Income from house property”. Thus, it is very clear that the interest in respect of loan taken for house property will be allowed as a deduction irrespective of the fact whether such interest has been paid or not actually paid. It is, therefore, crystal clear that even when the interest in respect of house loan is payable at a later date even then such interest would be allowed as a deduction on accrual basis. The situation would remain unchanged in case the loan is taken for residential house or for self use or for house property for renting out.
The issue concerning allowability of deduction in respect of accrual of interest as also being considered by the Central Board of Direct Taxes while answering the question of interest on house building advance taken by Central Government servants under House Building Advance Rules. The Circular No. 363 dated 24.6.1983 issued by the Central Board of Direct Taxes makes the intention of the Government very clear. In the said Circular if the Government servants, the advance together with interest thereon is to be paid in full by monthly instalments within a period not exceeding 20 years. The recovery of the principal is made first in not more than 180 monthly instalments and then interest is recovered in not more than 60 instalments.
Finally in the said circular after citing the provisions of Section 24 of the Income-tax Act, 1961 the CBDT opined that where property has been acquired or constructed with borrowed capital, a deduction in respect of amount of interest payable on such capital is allowed in computing the income from house property. Since the word used is ‘payable’, deduction under section 24(1)(vi) would be on the basis of accrual of interest which would start running from the date of the drawal of the advance. The interest that accrues is to be calculated annually in terms of rule 6 of the House Building Advance Rules on the balances outstanding on the last day of each month.
Thus, in view of the above-mentioned decision of the High Court the clarification of the Central Board of Direct Taxes as also the clear cut provisions mentioned in Section 24 of the Income-tax Act, 1961, the interest on housing loan would be allowed as a deduction even when the same has not been paid during the year. However, in respect of the housing loan for self-occupied residential house property care should be taken by the assesses to furnish with the Income-tax return a certificate from the person to whom any interest is payable on the capital borrowed. Finally, while taking house loan care should also be taken the nexus between the loans of the house property.
The Author is Tax & Investment Consultant at New Delhi for over 40 years. Email: firstname.lastname@example.org.