Ways for deduction of home loan interest

In this week’s case, the taxpayer took a home loan from a nationalised bank for the purpose of house construction – however, instead of utilising the same for construction, the taxpayer, in turn, transferred the loan amount to different individuals as loan for the sake of earning interest on higher rates. During the assessment year 2013-14, the bank levied interest of Rs 6.95 lakh, which the taxpayer claimed against the interest income of R. 86.29 lakh earned on account of loans to various individuals. Section 57 of the Income Tax Act [‘the Act’] allows taxpayers to claim deduction of expenses incurred wholly and exclusively for the purpose of earning income offered under the head ‘other sources’.

During the course of assessment proceedings, the tax officer objected to this claim stating that under the provisions of the Act, home loan interest can be specifically claimed under the head ‘House property’ only. The taxpayer contended that the home loan was taken and later transferred to different parties via bank accounts only to earn interest at higher rates, thus leaving a clear trail of all transactions. However, the tax officer disallowed the interest expenditure as claimed u/s 57 of the Act.

When the matter was then brought up before the Jodhpur Tax Tribunal, it observed that merely because the taxpayer has not claimed interest expenditure against the income from house property and claimed the same against the interest income earned by him should not disentitle the taxpayer to claim the same against such interest income which has been earned out of advances so made. 

It is a well settled legal proposition that expenditure incurred for earning any interest income is to be allowed against the income. In this case, the taxpayer has claimed that even the amount borrowed from the bank for the sake of construction of the house was utilised for earning interest income, and which has got amply demonstrated out of the substantial interest income earned and offered to tax in the return of income. 

The Tribunal further observed that in order to be eligible for such a deduction u/s 57, a one-to-one link is required to be established in respect of utilisation of the interest-bearing funds so borrowed. Merely because the loan was sanctioned for housing purpose, it cannot be said that the taxpayer cannot use it for advancing loans to others for earning interest. 

It may amount to violation of the terms and conditions of the agreement so entered with the bank while the loan was sanctioned, but it cannot be a contravention under the Act for advancing such funds for earning interest income. 

The Tribunal observed that the tax officer had not conclusively proved that the interest earned out of advances were not out of the interest bearing funds taken from the bank. 

The Tribunal therefore directed the tax officer to make a correct finding in this regard and if the nexus is proved beyond doubt, the interest paid should be allowed as a deduction against the interest income.

The writer is Sebi-registered investment adviser