Prepayment charges paid for early closure of loan, whether to be
allowed as deduction under the Income tax Act, 1961 or not? This
question has arisen many times, however the Mumbai Bench of Income-
tax Appellate Tribunal has finally given an affirmative answer on
this issue in the case of Windermere Properties Pvt. Ltd.
Brief Facts of the case
In the present case, a loan was taken by the taxpayer for
acquisition of property from the HDFC Bank. In the assessment year
2006-07, the taxpayer repaid the entire loan amount. While
calculating the 'Income from House Property', the
prepayment charges were claimed as deduction. However, during the
assessment, deduction claimed by the taxpayer with respect to the
prepayment charges was disallowed as deduction, according to the
assessing officer, such charges do not qualify as a deduction and
only the interest paid on the loan should be allowed for
Whether the prepayment charges for foreclosure of loan is
deductible under the head Income from House Property?
Observations of the Tribunal:
The Tribunal deliberated in detail the definition of interest
as contained in Section 2(28A) of the Income Tax Act of 1961, which
is stated as follows:
"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 the moneys borrowed
or debt incurred or in respect of any credit facility which has not
According to the above definition of 'interest', it can be
interpreted that not only the any sum of money paid as interest is
eligible for deduction under the said section, but also any other
amount/sum of money paid in relation to such debt will also qualify
for deduction under this section.
The Tribunal observed that there was a direct link between
prepayment of charges and loan availed for acquisition of property.
The loan was availed by the taxpayer for acquiring a property and
gradually such loan was repaid. Due to the receipt of prepayment
charges, bank accepted early payment of loan. With such early
payment of loan, taxpayer managed to remove the interest liability
in respect of loan, which would have otherwise continued until the
final payment of loan. Therefore there was direct correlation
between the prepayment charges and the loan availed for acquisition
of property and hence according to the tribunal, prepayment charges
were to be allowed as a deduction under the head Income from House
The above decision of the Tribunal is a welcome step and has
been highly appreciated. Taking loan for acquiring a property is as
it is a burden on general working class, by giving the term
'interest' such a wide interpretation, Tribunal has given
some amount of relief to taxpayers. Taxpayers are usually required
to pay substantial prepayment charges at the time of earlier
payment of loan. By allowing to claim such prepayment charges as
deduction while calculating Income from House Property would help
in saving some amount of taxes.
1. ITA No. 7192/MUM/2010, AY-2006-07, dated 22 march
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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