Prepayment charges on foreclosure is akin to interest – Mum ITAT


M/s WINDERMERE PROPERTIES PVT LTD v DCIT ITA No.7192/Mum/2010 (Mum ITAT)

Background:

The assessee claimed deduction of Rs. 11.05 crore towards interest u/s 24(b) of the Income-tax Act, 1961 in the computation of income under the head “Income from house property”. On perusal of its details, the Assessing Officer noticed that it comprised of the interest of Rs. 9.48 crore and prepayment charges of Rs. 1.56 crore. The Assessing Officer held that the prepayment charges of Rs. 1.56 crore would not fall u/s 24(b) of the Act. Resultantly, the deduction was denied for such amount. No relief was allowed in the first appeal.

HELD:

  • The term “interest” has been defined in section 2(28A) to mean : “interest payable in any manner in respect of any moneys borrowed or debt incurred …. and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”.
  • The definition of interest u/s 2(28A) manifests that it has basically two components, viz., firstly, the amount with nomenclature of interest for moneys borrowed and secondly, the amount paid by whatever name called in respect of the money borrowed or debt incurred.
  • The second category may also encompass any charge paid for not utilizing the credit facility. When we incorporate the definition of interest’ in section 24(b), the position which emerges is that not only the amount paid designated as interest but also any other amount paid by whatever name called in relation to such debt incurred also qualifies for deduction.
  • 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.
  • Payment of such ‘prepayment charges’ cannot be considered as de hors the loan obtained for acquisition or construction or repair etc. of the property on which interest is deductible u/s 24(b) of the Act. Both the direct interest and prepayment charges are species of the term ‘interest’.

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