By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
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Section 24(b) – Prepayment charges paid for closure of loan are covered under the definition of interest and hence deductible u/s. 24(b).
Facts: The assessee had claimed deduction of Rs. 11.05 crores u/s. 24(b) of the Act. Out of the same, the AO did not allow deduction of Rs. 1.56 crore paid as prepayment charges for the closure of the loan which was taken for acquisition of the property. The CIT(A) upheld the claim of the AO. The assessee went into further appeal.
Held: The Honourable Tribunal held that the prepayment charges paid on account of closure of loan account are deductible u/s. 24(b). Section 24(b) provides deduction of interest payable on borrowed capital in computation of income under the head “Income from House Property”. 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 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 utilised. The definition of interest has basically two components viz. first the amount paid by whatever name called in respect of the money borrowed or debt incurred and secondly, any charge paid by whatever name called in relation to such debt incurred both qualify for deduction.
The assessee had made early repayment against its bank loan. 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. The 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). Both the direct interest and prepayment charges are species of the term ‘interest’. Hence the prepayment charges paid by the assessee for closure of loan qualify for deduction us/s. 24(b).
