2013 (5) TMI 400 - AT - Income Tax

Prepayment charges paid to HDFC Limited for closure of loan taken for the purpose of acquisition of the premises - whether allowable u/s 24 - Held 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 as accepted by bank 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, thus it is beyond of 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. Both the direct interest and prepayment charges are species of the term interest . Therefore, set aside the impugned order on this issue and order for the grant of deduction. In favour of assessee.

Summary

Issues:
1. Disallowance of prepayment charges for closure of loan under Income from house property.
2. Deduction in respect of property tax.
3. Disallowance of various expenses incurred against house property income.

Issue 1: Disallowance of Prepayment Charges for Closure of Loan under Income from House Property:
The appeal addressed the disallowance of prepayment charges amounting to Rs. 1,56,68,640 paid to HDFC Limited for the closure of a loan taken for property acquisition. The Assessing Officer disallowed the deduction based on the argument that prepayment charges do not fall under Section 24(b) of the Income-tax Act, 1961. The Tribunal examined the definition of "interest" under Section 2(28A) and concluded that prepayment charges are linked to the loan obtained for property acquisition, making them deductible under Section 24(b). The Tribunal set aside the order and allowed the deduction for prepayment charges.

Issue 2: Deduction in Respect of Property Tax:
The second ground of the appeal concerned the deduction for property tax amounting to Rs. 2.03 lakh. However, the learned AR did not press this ground, leading to its dismissal by the Tribunal.

Issue 3: Disallowance of Various Expenses Incurred Against House Property Income:
The third ground of the appeal was against the confirmation of the disallowance of Rs. 3,96,243 incurred as various expenses against house property income. The learned AR did not press this ground as well, resulting in its dismissal by the Tribunal.

In conclusion, the Tribunal partially allowed the appeal, primarily focusing on the deduction of prepayment charges for loan closure under Income from house property. The Tribunal emphasized the link between prepayment charges and the loan obtained for property acquisition, leading to the decision to grant the deduction. The issues regarding property tax deduction and disallowance of expenses were not pursued by the appellant and were consequently dismissed by the Tribunal.