MUMBAI, MAY 17, 2013: THE issues before the Bench are - Whether it can be said that the foreclosure charges paid for early repayment of a housing loan are directly linked to bank loan availed for acquisition of the property and Whether such foreclosure charges are covered under the definition of Interest u/s 24(b) of the Act. YES is the Tribunal's answer.

Facts of the case

Assessee is a company. During assessment, AO had disallowed prepayment charges amounting to Rs. 1,56,68,640 paid to HDFC Limited for closure of loan taken from HDFC Limited for the purpose of acquisition of the premises. In the computation of income under the head “Income from house property”, assessee had claimed deduction of Rs. 11.05 crore towards interest u/s 24(b). AO had noticed that it comprised of the interest of Rs. 9.48 crore and prepayment charges of Rs. 1.56 crore. On being called upon to explain as to why the deduction should not be denied in respect of prepayment charges, the assessee tendered its reply which had been reproduced in the assessment order. Not convinced with the assessee’s contention, the AO held that the prepayment charges of Rs. 1.56 crore would not fall u/s 24(b). Thus, the deduction was denied for such amount. On appeal, no relief was allowed.

Having heard the matter, Tribunal held that,

++ there is no dispute on the fact that the assessee availed loan for acquisition of certain premises, the income from which was shown and accepted under the head “Income from house property”. The assessee claimed deduction of Rs. 11.05 crore u/s 24(b). The AO did not allow deduction of Rs. 1.56 crore paid as prepayment charges for the closure of the loan account which was taken for acquisition of property fetching the extant house property income. Under these circumstances the question arises as to whether such amount of Rs. prepayment charges’ paid to HDFC for closure of loan account is deductible u/s 24(b). 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) makes it manifest 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 Rs. 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;

++ it is noticed 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 which was taken for acquisition of property. The bank accepted the early repayment of loan 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. It is beyond our 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. In our considered opinion the payment of such Rs. 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 Rs. interest’. We, therefore, set aside the impugned order on this issue and order for the grant of deduction.

(See 2013-TIOL-368-ITAT-MUM)