Law:

Section:

Where on advance towards price of flat interest is paid only because of delayed delivery of possession, such payment is nothing but penalty/liquidated damage and it will not be deductible as interest on borrowed capital Section 24 of the Income-tax Act, 1961 - Income from house property - Deductions - Assessment years 1985-86 and 1986-87 - Business of assessee was to construct flats and sell them at profit - Assessee was paid in advance, price of flat by its purchaser - No interest was payable on such advance - However, it was stipulated that if flat was not delivered within stipulated period, assessee would be liable to pay interest to purchaser - As flat could not be delivered within stipulated period, assessee had to pay interest to purchaser - Apparently, assessee did not construct flat on borrowed capital - Whether even if payment made by assessee to purchaser was termed as interest, it was in nature of penalty or liquidated damages and, therefore, deduction was not permissible under section 24(1)(vi) - Held, yes FACTS The assessee was engaged in the business of construction of flats and he sold them at a profit. The assessee was paid in advance the price of the flats by its purchaser with a condition that if the flat was not delivered within stipulated period, the assessee would be liable to pay interest to the purchaser. As the flats could not be delivered during the stipulated period, the assessee had to pay interest to the purchaser. The assessee claimed that interest amount should be deducted from the business income and, therefore, claimed deduction under section 24(1)(vi). The claim was rejected by the assessing authority. The Commissioner (Appeals) affirmed the order of the assessing authority. The Tribunal also dismissed the appeal holding that there was no material to record a finding that advance received by the assessee for sale of flats was utilized in the construction of the said flats. On reference : HELD The law permits for computation of income chargeable under the head 'Income from house property', and also deduction of amount of interest payable on capital when property has been constructed on borrowed capital. In the instant case,…

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