Most taxpayers are aware of the fact that interest paid on a housing loan, or any other loan taken for the acquisition of a residence, is deductible while computing income under the head 'income from house property'. While there is a limit of ₹2 lakh for deduction of such interest if the house is a self-occupied property (whose annual value is therefore taken at nil), there is no such limit if either the house has been let out, or the notional annual value of the house has been offered to tax.
What most taxpayers are not aware of is the fact that there is a view that even if such interest has been allowed as a deduction, such interest can also be claimed as a part of the cost of acquisition of the house in computing the capital gains when the house is sold. This view is, however, controversial, and there have been conflicting views of the Income Tax Appellate Tribunal in this regard.
There have been a few decisions of high courts where the courts have taken the view that when a loan has been taken for acquisition of land, the interest paid on the loan even after the acquisition of the land has been completed, would form a part of the cost of acquisition of the land for the purposes of computation of capital gains. To illustrate, take a situation where land was acquired in the year 2000 for ₹10 lakh, with a loan of ₹9 lakh taken for acquisition in that year. Interest of ₹4.50 lakh has been paid on the loan from 2000 to 2012, when the loan was fully repaid.
Under this situation, the courts have held that the cost of the land is not ₹10 lakh, but ₹14.50 lakh, even though the interest was paid subsequent to the acquisition of the land, since interest on a loan taken for acquisition of the land is an expenditure in acquiring the land.
Following this logic, the Chennai bench of the tribunal took a view that even in the case of a residential house, the interest paid on a loan taken to acquire the house, even after the period that the house has been occupied, would be an expenditure in acquiring the house and would therefore form part of the cost of acquisition of the house for computing capital gains when the house was sold. Interestingly, the tribunal considered the fact that the interest had been allowed as a deduction in computing the income from house property each year. According to the tribunal, the deduction for interest in computing income from house property was a deduction expressly provided by law. Further, in computing capital gains, the cost of acquisition is deductible, and such interest was a part of the cost of acquisition.
According to the Chennai tribunal, computation of income from house property and computation of capital gains were two different provisions, and neither of the provisions excluded the allowability of the interest if the interest was allowed under the other provision. Therefore, according to the tribunal, the interest was deductible under both the provisions.
Recently, the Bangalore bench of the tribunal took a contrary view, holding that such interest on housing loan is not deductible in computing the capital gains, in a situation where the interest has been claimed as a deduction while computing income from house property.
The Bangalore tribunal relied upon a decision of the Karnataka High Court in the context of interest on a loan taken for the acquisition of shares, at a point of time when the dividends were taxable, and interest on loans taken for acquisition of shares was allowable as a deduction against such dividends. The Karnataka High Court had held that if the interest had been allowed as a deduction against the dividends, it would not form part of the cost of acquisition of the shares.
There are, therefore, conflicting judicial views on the subject. There is a decision of the Supreme Court, which has held that normally a double deduction cannot be presumed, but must be expressly provided for. Does this amount to a double deduction not permissible as per the Supreme Court decision? A view is possible that the deduction of interest against income from house property is a deduction, since it is a revenue expenditure. However, in computing capital gains, the interest is treated as a capital expenditure, and is therefore not really in the nature of a deduction. Therefore, the principle laid down by the Supreme Court may not apply.
Today, the position is that claiming an expenditure both under the head 'income from house property' as well as in computing the capital gains for such interest on housing loan would certainly invite litigation, as the matter would be disputed by the tax authorities, possibly all the way up to the Supreme Court. One would, therefore, have to weigh the benefit in possible tax saving, against the costs of litigation. The case in favour of the taxpayer is stronger when the taxpayer has paid interest in excess of the limit of ₹2 lakh. Since the excess interest would not have been allowed as a deduction, the claim of such expenditure as a part of the cost of acquisition of the house would not amount to a double deduction.
Gautam Nayak is a chartered accountant.
In arrangement with HT Syndication | MINT
This article was originally published on July 22, 2016.
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