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Income Tax Appellate Tribunal – Hyderabad
Shanmugam Narayanaswamy vs The Income-Tax Officer on 17 June, 2005
Equivalent citations: 2005 279 ITR 15 Hyd, (2005) 98 TTJ Hyd 174
Bench: D Manmohan


ORDER

D. Manmohan, Judicial Member

1. This appeal filed by the assesses pertains to the assessment year 2001-02. Though the assesses raised several grounds, in the grounds of appeal annexed to Form No. 36, the only issue is with regard to the deduction claimed Under Section 24(1)(vi) of the Act.

2. The assesses is an employee of Defence Electronics Laboratory, He has availed HBA from his employer in the year 1988. As per the terms of the contract the, principal sum is recoverable at the rate of Rs. 1250/- per month in. 128 monthly instalments commencing from the month falling after completion of the house. The recovery towards interest will start immediately after the liquidation of the principal and the interest is payable in 60 monthly instalments. The assesses repaid the entire principal amount by January 1999. Subsequently, interest of Rs. 4000/- per month was paid. During the previous year relevant of the assessment year 2001-02 the total amount paid towards, interest was Rs. 48,000/- which was set off against the. income from house property and the resultant loss of Rs. 3.1,544/- was declared under the head property income.

3. The AO observed that the interest payable. on principal accrues year after year on the reduced balance of principal, though under HBA Rules the principal amount is recovered first and the interest is recovered later. He further observed that Section 24 of the Act speak of “interest payable on amounts borrowed and thus it refers to the interest accrued relevant to the previous year. As per the agreement, the interest paid by the assesses, calculated from year to year, is paid on deferred payment basis but it cannot be treated as interest payable in the previous year in which it was actually paid. In order to highlight that the interest really relate to the period covering more than 12 months, the AO observed that the interest relating to 15 years is being paid in 5 years or less than that period or in one lumpsum to be recovered from the retiring benefits. In the absence of specific provision to allow claim of deduction on actual payment basis, in the light of the language of section i.e., “interest payable” the claim of deduction was not allowed by the AO. In this regard, he has relied upon Circular No. 363 issued by the CBDT wherein it was stated that where the interest amount is recovered after the payment of principal amount, the interest allowable for deduction under Section 24(1)(vii) would be on the basis of accrual of interest which would start running from the date of drawal of the advance, He accordingly disallowed the claim of deduction.

4. Aggrieved, assesses contended before the learned CIT(A) that Section 24 speaks of interest “payable” and unless there is a liability to pay interest it cannot be said that interest is payable in such years. In the instant case, there was no enforceable demand and thus the interest accrued is not payable immediately. Therefore, it was submitted that accrual basis has no relevance in the instant case and the CBDT Circular which gives concession to the Government employees is not binding on the assessees. Learned CTF(A) observed that the principal amount was actually recovered from asst year 1998 to 1999 and, as per the contract, the interest amount was recovered from Feb. 1999 onwards though the interest accrued on year to year basis from the date of taking the loan. He further observed that the principal amount having been recovered in the earlier years, interest on HBA did not accrue during the previous year relevant to the assessment year under consideration and hence no interest was payable during the year.

5. In other words, when there is no outstanding advance, there cannot be any liability to pay interest. Learned counsel relied upon the decision of ITAT, C-Bench Mumbai in the case reported in 13 ITD 581 (Bom) (Addl. CIT v. M.N. Nambiar) which was distinguished by the learned CIT(A) on the ground that the decision was rendered in the context of the facts obtained in that case and has no application to the instant case.

6. Further aggrieved, assesses is in appeal before the Tribunal. Learned counsel appearing on behalf of the assesses adverted any attention to The terms of contract and the letter dated 21st June, 2001 to submit that during the period of recovery of principal amount; there is no obligation on the part of the assesses to pay interest and the interest is calculated annually with a clear understanding that it is payable after the payment of principal sum. The certificate issued by the employer also indicates that the assessee has not availed exemption/reduction with regard to the interest accrued on HBA. Learned counsel strongly relied upon the decision of TTAT, Bombay Bench in the case of ‘M.N. Nambiar (supra) in support of his contention that an amount which is not payable in an earlier year would be allowed as deduction if the liability to pay arose during the accounting year. The term ‘payable’ cannot be equated to the term “accrued’ inasmuch as the expression payable’ has to be understood in the sense that interest is recoverable in that year whereas in the ‘instant case interest is recoverable by the employees only upon the recovery of the entire principal amount and ‘not prior to that date.

7. On the other hand, learned DR. strongly relied upon the Circular issued by the CBDT wherein it was clarified as. under.

“Since the word used is “payable”, deduction under Section 24(1)(vi) would be on the basis of accrual of interest which would start running from the date of the drawal of the advance. The interest that accrues is to be calculated annually in terms of Rule 6 of the House Building Advance Rules on the balances outstanding on the last day of each month”.

8. Joining the issue, learned counsel submitted that the HBA Rules provide for the rebate on interest payment and thus the correct rate of interest would be known only after completion of the payment of principal amount Prior to payment of principal amount, the cot red: rate of interest is also not known to the assessee. Thus it cannot be said with certainity that a specific amount of interest is payable by the assessee. Apart from this, the terms of contract also provide for recovery of interest only after January, 1999 and thus it cannot be said that prior to January, 1999 interest liability accrues to the assessee.

9. I have carefully considered the rival submissions and perused the record. The term ‘payable’ is not defined under the Act According to Black’s Law Dictionary (Seventh Edition) at page 1150 the term ‘payable’ is defined as a sum of money that is to be paid. Another meaning to the term ‘payable’ is given as under.

“An amount may be payable without being due. Debts are commonly payable long before they fall due”.

In other words, in the year in which the interest is calculated it can be said to be payable though the time for payment is deferred by virtue of a contract The meaning ascribed to the word “payable’ as per Black’s taw Dictionary is in consonance with the clarification issued by the CBDT in its Circular No. 363 dated 24-6-1983 wherein it was stated that deduction Under Section 24(1)(vi) would be on the basis of accrual of interest which would start running from the date of drawal of advance. However, white considering the provisions of Section 43B of the Act, the A.P. High Court in the case of S. Subba Rao & Company (173 ITR 708 at pages 718 &. 719) observed as under.

“It is urged that Section 43B can have no application to-cases where the statutory liability which was Incurred in the accounting years also not payable according to the statute in the same accounting year. We find considerable force in the contention of Sri Swamy. In order to apply the provisions of Section 43B, it seems to us that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily ‘payable’ in the accounting year

(emphasis supplied)”

As could be seen from the view expressed by the Jurisdictional High Court, the term ‘payable’ can be understood as the time when the liability has to be discharged either by statute or by virtue of contract, though the liability to pay has accrued in the preceding years, In other words, there are two views on this issue. The contention of the assessee is supported by the observations of the AP High Court, though the observations are made while considering the provisions of Section 43B of the Act, whereas the view taken by the department is actually supported by the Circular issued by the CBDT, The view canvassed by the learned counsel for the assesses is also supported by the decision of ITAT, Bombay Bench in the case of NM Nambiar (supra). Though the facts of the aforementioned case are different, while explaining the meaning of the term ‘payable’ the Bench observed that a mere accrual of liability will not make the amount payable as there is no obligation to discharge such liability during that accounting year. From a careful perusal of case law, the Circular issued by the CBDT and meanings ascribed to the term ‘payable’ in the Black’s Law Dictionary, it emerges that interest payable, on House Building advance by an employee can be claimed as deduction, Under Section 24(1)(vi) of the Act, either in the year when the liability to pay interest accrues (as per the Circular No. 363 issued by the CBDT and binding on the departmental authorities, being beneficial to the assessee) or in the year in which it was actually paid as per the terms of contract since the agreement with the employer imposes a duty on the assesses to pay interest in instalments immediately after payment of principal sum in full Since there are two views possible on this aspect, in the tight of the decision of Apex Court in the case of Vegetable Products (88 ITR 192) the view which is in favour of the assessee has to be adopted. Under these circumstances, I direct the AO to allow the claim of deduction of Rs. 48,000/- under Section 24(1)(vi) of the Act.

7. In the result, appeal filed by the assessee is allowed.


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