Thursday, July 28, 2016

Prepayment charges on home loans are deductible as 'interest' under Sec. 24(b): Mumbai ITAT

Facts:
a) The assessee had been claiming deduction on account of payment of interest to six bankers from whom the assessee had taken loan for construction of property.
b) The assessee took fresh loan from Axis Bank which was utilized for exclusive purpose of repayment of loans to the aforesaid six parties. In the process of change over of lender, it paid prepayment charges and processing charges to these six bankers.
c) It claimed deduction of such prepayment charges and processing charges under Section 24(b). The AO disallowed assessee's claim. The CIT(Appeals) upheld order of AO. The aggrievedassessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
1) The only issue that needed to be decided was whether 'pre -payment charges' and 'processing fee' shall form part of 'interest' under section 24(b). The term 'interest' has been defined in section 2(28A) as under:

“Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”


2) From bare reading of such definition it is clear that the term 'interest' shall include any services fee or other charges in respect of moneys borrowed and it goes to the extent of saying that any charges in respect of any credit facilities which has not been utilized.
3) The 'processing fee' charged by Axis Bank was nothing but service fee charged by the bank and, therefore, it would be clearly allowable as per plain provisions of the Act. 
4) As far as the prepayment charges were concerned, these have been paid for the loans which have been refunded and, thus, no more utilised by the assessee. It has been clearly provided that any charges incurred even for any credit facility which has not been utilised shall also form part of the term 'interest'.
5) The assessee appeared to have done the restructuring of its loans and changed its lenders for the purpose of reducing its interest burden by availing loan from the lenders at lower rate of interest. The prepayment charges and processing fee borne by the assessee at this stage were compensated subsequently by payment of lower amount of interest. Thus, prepayment charges and processing fee would be allowed as deduction under Section 24(b). - Peepul Tree Properties (P.) Ltd. v. Astt. CIT [2016] 71 taxmann.com 332 (Mumbai - Trib.)
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