House Property - Pre Payment Charges Allowed

[CA DEV KUMAR KOTHARI]

Housing loan prepayment charges allowed under section 24 by the Tribunal.

Relevant links and references:

Section 2 (28A), 24 of the Income –tax Act, 1961

M/s.Windermere Properties Pvt.Ltd.  Vs. Deputy Commissioner of Income-tax - 2013 (5) TMI 400 - ITAT MUMBAI

ACIT Vs, Sunil Kumar Agarwal - 2013 (5) TMI 399 - ITAT LUCKNOW

Nature of prepayment charges:

Payment of prepayment charges are stipulated in most of loan agreements entered into by banks and financial institutions. Particularly in case of long-term loans, such charges are usual. Such charges are considered to be compensatory in nature for loss of interest income of the money lender, for temporary idle fuinds in case the borrower make a repayment of loan prior to the scheduled repayment.

Many loan agreement provides for such charges, in case prepayment is made within specified time of tenure of loan and many provide for such charges, whenever borrower makes prepayment of loan. The charges are in range of 2 to 5% of principal amount of loan which is repaid before due date. This is not equivalent for total loss, but is expected to cover a period of 2- 6 month, by which time the money lender expect to make use of funds for making new loans. Therefore, in hands of money lender prepayment charges are in nature of a receipt in lieu of interest which was to be earned, and therefore, assume character of income of money lending business. Such charges can also be considered as a charge for credit facility which is not used for some time because of prepayment of loan. Therefore, prepayment charges is ‘interest’ as per meaning assigned in section 2 (28A) of the Income –tax Act, 1961.  

Changes in circumstances and ground realities:

We find that in commercial and financial world lot of changes have take place due to opening of economy and increasing competition. About 30-40 years ago it was very difficult to obtain sizable loan for housing therefore, prepayment was very rare. However, now-a-days it is much easier to obtain loan at competitive terms and conditions and it is also easier to obtain new loan, at better terms to repay old loan. Therefore, in the changed circumstances, the legal provisions also need to be tuned with changes. If there is no change in legal provision, then it becomes necessary to consider them in light of changed circumstances.

Strict interpretations will amount to overlooking ground realities:

In the changed circumstances, we need to be alive with changes. The law as formulated long ago can be considered to have visualized some circumstances, whereas in society and commercial world lot of changes takes place. Therefore, some specific provisions, worded in particular manner can at best be regarded as illustrative of situations. For example, world like ‘interest on capital borrowed for acquisition of house property,…’ if strictly interpreted, may not include interest by way of commitment charges, prepayment charges, late payment charges, etc. as also interest on loan obtained to repay original loan obtained for acquisition of house property. However, considering ground realities, the meaning of such expressions have to be expanded to cover changed circumstances.

There will be no justification, if interest on new loan taken to repay old loan is not allowed. In this case, the fact is not clear, however, when we notice that assessee claimed total deduction of Rs.11.05 crore, it may be a case that interest on new loan taken to repay old loan was also claimed and it was allowed by the AO. Whereas in some other cases, disputes are going on as to whether interest on new loan will be allowed or not u/s 24(b). In ACIT Vs, Sunil Kumar Agarwal - 2013 (5) TMI 399 - ITAT LUCKNOW it has been held that interest on new loan taken to repay old housing loan is also to be treated as loan taken for purchase or construction of house and interest paid on new loan is allowable u/s 24. This ruling is applicable in my case also.

Brief fact of the case of M/s.Windermere Properties Pvt.Ltd.  Vs. Deputy Commissioner of Income-tax - 2013 (5) TMI 400 - ITAT MUMBAI :

The assessee acquired house property and for that purpose obtained housing loan from HDFC. The income from house property is being assessed under the head ‘income from house property’.

Assessee made prepayment of loan and for that had to pay prepayment charges to HDFC. Such charges were disallowed by the AO and the CIT(A) by holding the same not being interest on capital for acquiring the property. Hence assessee preferred appeal before the Tribunal. The Tribunal allowed the claim under section 24(b) considering that prepayment charges is in nature of interest on loan and it has direct link with acquisition of property.