“INTEREST ON BORROWED CAPITAL IS RESTRICTED TO RS. 30,000/- IF HOUSE CONSTRUCTION IS NOT COMPLETED WITHIN A PERIOD OF 3 YEARS”

TAX TALK-24.09.2012-THE HITAVADA
TAX TALK

BY CA. NARESH JAKHOTIA (Chartered Accountant)

“INTEREST ON BORROWED CAPITAL IS RESTRICTED TO RS. 30,000/- IF HOUSE CONSTRUCTION IS NOT COMPLETED WITHIN A PERIOD OF 3 YEARS”

Query 1]
I have booked a house in Bhilai, under the scheme of Chattisgarh state Housing Board in the year December 2008. The house was financed partly from my company in the year 2009 in March and subsequently part from the Bank started in May-2010. Now even after elapsing of 3 years, the Housing Board is unable to provide me the booked house. It is still under construction and installments are timely paid as per agreement/progress. The issue seems to be between contractor and the housing board. Now the CG Housing board has once again assured that they will deliver the completed houses to all allottees by 2013-July. Although there might be possibility of time overrun due to conditions beyond our control. Now my queries are

1.      Whether there is any restriction in the time period in the construction of house from the date of disbursement of loan to completion date of House for availing I-Tax exemption on the interest paid towards the borrowed capital?

2.      If yes, what is that period and how to become entitled for such exemption in case of time overrun due to Government Agency? [tappup@ymail.com &  hemneel.kankane@rediffmail.com]

Opinion:

1. Interest in respect of pre-construction is deductible in five equal annual installments commencing from the previous year in which the house is constructed/acquired. For this purpose “pre-construction period” means the period commencing on the date of borrowing & ending on the March 31^st immediately prior to the date of completion of construction /acquisition. If the house is completed in any particular year then one should note that the pre-construction interest doesn’t include the interest for the period from 1^st April of that year to the date of completion in that year.
2. The important question here is about the availability of the amount of deduction. Deduction towards Interest on borrowed capital for purchase/ construction of the house property is available u/s 24(b).
3.  The maximum of deduction admissible u/s 24(b) is Rs. 1.50 Lacs if the following three conditions are satisfied:
   a] Loan is taken on or after 01.04.1999 for purchase or construction of the house property.
   b] The acquisition or construction should be completed within a period of 3 years from the end of the financial year in which the capital was borrowed.
   c] The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principal amount outstanding under an earlier loan for such acquisition or construction.
4. If the three conditions mentioned above are not satisfied for any reason whatsoever, the amount of deduction would be restricted to a maximum of Rs. 30,000/-. In other words, the readers may note that deduction would be restricted to Rs. 30,000/- only in the following situations:
   a] Loan is taken before 01.04.1999 for purchase, construction, for renewal, reconstruction or repairs of the house property.
   b] Loan is taken on or after 01.04.1999 for renewal, reconstruction or repairs of the house property.
   c] In respect of the loan taken on or after 01.04.1999, the acquisition or construction is not completed within a period of 3 years from the end of the financial year in which the capital was borrowed.
5. There is no exception or provision in the law to offer deduction up to Rs. 1.50 Lacs if delay in completion of the house property is on account of Government Agency or for any other whatsoever.

Query 2]

We have query about capital gain tax:

1.      We had purchased the agricultural land in year 1999 for Rs. 109,000/- in National Highway Road in 2009-10. We had received notice from National Highway authority & deputy collector for acquisition our land to extend highway width. We got in August-2012 compensation of Rs. 3,85,,000/-. How can we calculate the tax amount? From 4 years, we were doing farming on the land which was under acquisition. The compensation amount is deposited in our term loan account instead of our saving account (capital account).  Sale deed (Land name) & Term loan A/c are in personal name (same).

2.      How the money received in the form of compensation of agricultural land acquisition by the National Highway & deputy collector for building road, can be transferred to loan account instead of saving account (capital account)? Does that transfer attracts any tax?  Because of this small amount, we can't purchase any land/plot. If not, what should we do now to avoid any tax liability?

3.      How we show this entry in our books? (i.e., transfer amount in term loan a/c instead saving a/c)?  Please advice. [lokeshshiva1@gmail.com]

Opinion:

1.      Capital gain arising to an Individual/HUF out of the compulsory acquisition of the urban agricultural land under any law is exempt from income tax u/s 10 (37) of the Income Tax Act-1961 provided:
a] It is received after 31.03.2004 &
b] The said agricultural land was used by the assessee or his parents for agricultural purpose during the preceding 2 years prior to its transfer.
[As far as rural agricultural land is concerned, it may be noted that it is not a capital assets and the surplus its transfer is also tax free in the hands of assessee.]

2.      It appears that the lender (bank/financial institutions from whom the term loan is availed) has created a charge on the land at the time of lending the amount. As a result of this, the compensation is deposited by the concerned authorities in the loan a/c instead of issuing the payment directly to the land holders. The deposit of amount directly in the loan account doesn’t in any adversely affect the taxability of the transaction & is tax neutral. The book entry can be passed by crediting the sale proceeds in the land a/c and debiting the amount to the Term Loan A/c.