1. Facts of the Case
- The assessee purchased a flat in July 2013 and took a housing loan for the purchase.
- The assessee started paying EMIs (including interest) from July 2013 onwards, i.e., from the date of receipt of the loan.
- However, the possession of the house property is received in August 2014.
- The question is whether the interest paid during FY 2013–14 (relevant to Assessment Year 2014–15) is eligible for deduction under the Income Tax Act, 1961.
2. Issues in the Case
- Can the assessee claim interest deduction under Section 24(b) of the Income Tax Act for FY 2013–14 (AY 2014–15), even though possession is received only in August 2014?
- Is there a distinction in the treatment of interest paid before possession and interest paid after possession of a house property?
- If the deduction is not allowed in AY 2014–15, can it be claimed in any future year?
3. Legal Principles Covered to Support Case Proceedings and Judgements
A. Section 24(b) – Deduction of Interest on Housing Loan
- Section 24(b) allows deduction of interest on borrowed capital for acquisition or construction of a house.
- The maximum deduction limit is:
- Rs. 2,00,000 for self-occupied property (as per post-1999 amendment)
- No limit for let-out property (interest is fully deductible)
Condition: Deduction is allowed only from the year in which construction is completed or possession is taken.
B. Pre-Construction Interest – Proviso to Section 24(b):
- Interest paid prior to the year of completion/possession is known as “pre-construction interest”.
- Such interest is not deductible in the same year it is paid.
- Instead, it can be claimed in 5 equal annual installments, starting from the year in which possession is obtained or construction is completed.
C. Judicial Interpretations:
- Courts have consistently held that possession or completion of construction is a precondition for claiming interest deduction under Section 24(b).
- In the case of CIT v. Premlata [2003], it was held that interest prior to completion of construction can only be claimed in installments post-possession, and not before.
4. Possible Judgement
Ruling:
- In this case, the assessee has:
- Taken a loan and started paying EMIs (including interest) in July 2013
- Received possession of the flat in August 2014
- Since the possession was not obtained during the financial year 2013–14 (i.e., before March 31, 2014), the interest deduction cannot be claimed in Assessment Year 2014–15.
- The interest paid from July 2013 to March 2014 qualifies as “pre-construction interest” and can be claimed in 5 equal installments starting from AY 2015–16 (i.e., the year in which possession is received).
