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Interest during twilight period
July, 21st 2007

In the Narsimha avatar, Lord Vishnu chose the twilight period to kill the demon king Hiranyan so as to honour the boon granted to him that he will not die during morning, evening or night.

The taxman might as well choose the twilight hour of acquisition of a house for denial of claim of interest as an expense while computing income from house property.

The Explanation to Section 24 says that interest payable or paid for the period prior to the date of acquisition or completion of construction to the extent it relates to the year prior to the beginning of the previous year in which such acquisition or completion is made is deductible in five equal instalments beginning with the first year after such acquisition or completion.

To wit, suppose one had taken the loan on April 1, 2006, and started construction immediately. And let us say the construction is completed on December 31, 2007.

Beginning with the previous year 2008-9, the interest for the period April 2006 to March 2007 can thus be claimed as deduction in five equal instalments. So far so good. But what happens to the interest from April 1, 2007, to March 31, 2008?

Preconstruction period

To be sure, the interest for the period January 1 to March 31, 2008, would qualify straightaway as expenditure for the previous year 2007-8 because it undoubtedly relates to the previous year in question.

But the interest for the period April 2007 to December 31, 2007, falls between the two stools and thus could go abegging if the taxman were to read the law strictly because the Explanation as pointed out earlier gives encouragement to the preconstruction period interest only to the extent it relates to the period preceding the previous year in which the house is completed.

And it does not make the grade for deduction in one shot for the previous year 2007-08 because the house property came into being as contemplated by Section 22 only on January 1, 2008, and therefore any interest for the period preceding this date will have to be treated as interest during the construction period.

Ironically though, it does not make the grade under the Explanation either for deduction over a period five years. Ousted by both the dispensations, an assessee could well find himself between the devil and the deep sea if the taxman were to exploit the twilight zone for the Revenues benefit.

Need for amendment

The Explanation thus needs to be amended retrospectively so as to confer the benefit of deduction over a period five years to the entire interest during the construction period.

To project the anomaly in sharp relief, let us assume in the above example that the loan was taken a year later, that is, on April 1, 2007, and the construction completed on December 31, 2007. In such a scenario, the entire preconstruction interest would fall by the wayside. Surely, this couldnt have been the legislative intent.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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