2005 (6) TMI 234 - AT - Income Tax

Summary

Issues:
1. Deduction claimed under section 24(1)(vi) of the Act for interest paid on House Building Advance (HBA).

Analysis:
The appeal filed by the assessee before the Appellate Tribunal ITAT Hyderabad pertained to the assessment year 2001-02, focusing on the deduction claimed under section 24(1)(vi) of the Act. The assessee, an employee of Defence Electronics Laboratory, had availed an HBA from the employer in 1988, repaying the principal sum by January 1999 and subsequently paying interest. The Assessing Officer disallowed the deduction, citing that interest payable on amounts borrowed should accrue year after year on the reduced balance of principal. The officer relied on Circular No. 363 by the CBDT, stating that interest allowable for deduction under section 24(1)(vii) should be based on the accrual of interest. The Assessing Officer disallowed the deduction due to the absence of a provision for claiming it on an actual payment basis.

The assessee contended before the CIT(A) that interest should be considered payable only when there is a liability to pay it, emphasizing that no enforceable demand existed for interest payment. The CIT(A) noted that interest on the HBA did not accrue during the relevant assessment year since the principal amount had been recovered in earlier years. The CIT(A) distinguished a previous case decision and upheld the disallowance of the deduction.

The assessee, further aggrieved, appealed before the Tribunal, arguing that interest was payable only after the entire principal amount was recovered, as per the terms of the contract. The Tribunal considered the term 'payable,' noting that it was not defined under the Act. Referring to Black's Law Dictionary and a High Court decision, the Tribunal highlighted two views on the issue. It concluded that interest payable on an HBA could be claimed as a deduction either in the year the liability accrued or in the year it was actually paid, favoring the assessee's contention. The Tribunal directed the Assessing Officer to allow the deduction under section 24(1)(vi) of the Act, ultimately allowing the appeal filed by the assessee.