The Hindu Business Line : Conflict of `interest'

COMPUTATION of income under the head `income from house property' has witnessed relatively few cases of litigation. This is mainly because the provisions are simple and compact. The only major deduction one can get from rental income is interest on capital borrowed for either purchase or construction of property.

Various deductions under Section 24 of the I-T Act have been overhauled and today there are only two major ones:

a) a deduction of 30 per cent from the annual value; and

b) interest payable on capital borrowed.

Recently, the Hyderabad Bench of the Tribunal had to consider an interesting case as to when interest is to be claimed as a deduction in respect of a residential property, in the Shanmugam Narayanaswamy vs Income-Tax Officer (2005 279 ITR (AT) 15) case.

Facts, issues

The assessee, an employee, had taken a house-building advance from his employer in 1988. Under the contract, the principal sum was recoverable at the rate of Rs 1,250 per month and in 128 monthly instalments commencing from the month falling after completion of the house. The recovery towards interest was to start immediately after the liquidation of the principal and the interest was payable in 60 monthly instalments. The assessee repaid the entire principal by January 1999. Subsequently, the assessee paid interest of Rs 4,000 per month. During the previous year relevant to the assessment year 2001-02, the assessee paid a total interest of Rs 48,000 and set off the amount against the income from house property and declared a loss of Rs 31,544 under the head property income.

The assessing officer (AO) disallowed the deduction claim on the ground that there was no specific provision to allow the claim on actual payment basis. The Commissioner (Appeals) held that the principal amount having been recovered in the earlier years, interest on house building advance did not accrue during the previous year relevant to the assessment year and, hence, no interest was payable during the year. The assessee took the issue to the Tribunal.

The question for consideration was: How does one construe and interpret the expression "interest payable" contained in Section 24 of the Act. Is it with reference to principles of accounting or in the context of the terms of agreement?

Board circular

The Central Board of Direct taxes, vide Circular No 363 of June 24, 1963, has dealt with this aspect with reference to building advance taken by Central Government employees.

The Circular stresses the importance of withdrawal of the advance as against the time the liability for interest crystallises.

Admittedly, this Circular was issued in the limited context of Housing Building Advance Rules and may not have relevance to other contractual arrangements.

Tribunal decision

The Tribunal held that the interest payable on the advance can be claimed as a deduction in the year in which it is actually paid as per the terms of the contract.

The Tribunal reasoned that the term `payable' can be understood as the time when the liability has to be discharged either by the statute or by virtue of contract, though the liability to pay has accrued in the preceding years.

Whenever there is a conflict between the provisions of law and the terms of a contract, the former prevails.

In the case discussed, the law on the import of the expression "interest payable" is unclear and, hence, the contractual arrangement gained the upper hand.

Conflicts of such nature are bound to arise more frequently in today's world of dynamic changes and innovative schemes which form part of contracts. Gone are the days when one could apply the provision of law to the facts and decide the matter. It is imperative to go through the clauses in the agreement to decide the allowability of an item as a deduction

(The author is a Chennai-based chartered accountant.)

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