The Hindu Business Line : Taking stock of interest

STOCK BROKERS gathered outside the Bombay Stock Exchange. The capital gain from sale of stocks is a long-term capital gain and is exempt, the question of claiming a deduction in respect of such interest on the loan taken does not arise. — Shashi Ashiwal

T.Banusekar

I have taken a loan and invested the amount in stocks. Will the interest payment on the loan be allowed as a deduction in computing the capital gains when I sell the shares? I have taken a personal loan and given it as a loan to my wife and brother. Can I reduce the interest payable on the loan from the interest received on the loan given to my wife and brother? Will it be possible for them to claim the interest paid to me as a deduction from their business income or capital gains?

G. Mehta

If the capital gain from sale of stocks by you is a long-term capital gain and is exempt, the question of claiming a deduction in respect of such interest on the loan taken does not arise. If it is taxable or if the gain is short term, it would still not be possible to claim the interest as a deduction. This will be so since in computing capital gains only expenditure incurred wholly and exclusively in connection with the transfer can be claimed as a deduction. The interest on the loan will not be treated as such expenditure. It may, however, be possible for you to add the interest to the cost of acquisition in computing the capital gain. This view will be supported by the following decisions:

CIT v Maithreyi Pai 152 ITR 247 (Kar)

CIT v Mithilesh Kumari 92 ITR 9 (Delhi)

ACIT v K.S.Gupta 119 ITR 372 (AP)

Naozar Chenoy v CIT 234 ITR 95 (AP)

It is understood that you are not in the business of money lending and therefore the interest received by you from your wife and brother will be assessable under the head income from other sources. Section 57 allows a deduction in respect of an expenditure, which is incurred wholly and exclusively for the purpose of making or earning such income. If the loan has been taken by you for the purpose of lending it further it will have to follow that the interest expenditure is incurred wholly and exclusively for the purpose of earning the interest income and therefore can be claimed as a deduction by you.

Insofar as your wife and brother are concerned, if they have invested the loan taken from you in a business, the interest paid by them to you, should be allowable as a deduction in computing their business income. Insofar as capital gain is concerned, the view expressed in relation to your own situation will apply to them as well.

I took a housing loan to acquire a flat in January. The flat will be completed and I will gain possession of it in July. Will I be able to claim tax benefits in respect of the EMI for the period from Januaryto July? A. Awasthi

The interest payable for the period from January to March can be claimed in five equal annual instalments beginning from the previous year 2006-07. The interest for the period beginning from April can be claimed in full in the same year. The principal repayment will qualify for deduction under Section 80C in the years in which they are actually paid.

My wife and I have acquired a property as co-owners. For acquiring this property we have borrowed a loan of Rs 15,25,000. Out of this loan, Rs 10,00,000 bears a fixed rate of interest while the balance of Rs 5,25,000 bears a floating rate of interest. The entire loan is taken in our joint names with my wife mentioned as a co-applicant. The EMIs on the loan are paid from out of our salaries by way of deduction by the employer, which is remitted to the bank. My employer deducts the EMI on the loan of Rs 10,00,000 which bears the fixed rate of interest while my wife's employer deducted the EMI on the loan of Rs 5,25,000 which bears the floating rate of interest. Given that we co-own the property, will it be possible for both of us to get the tax benefits in respect of the EMI? P. S. Chakravarthy

Both of you will be entitled to the tax benefits. The deduction under Section 80C and under Section 24 in respect of the principal repayment and the interest payment can be claimed by you and your wife in the proportion in which you own the property.

If the property is self-occupied the limit of Rs 1.50 lakh which is the maximum amount that can be claimed in respect of interest under Section 24 will be reckoned independently with regard to each of the co-owners, that is, you and your spouse.

I have taken a loan from a bank for purchasing a land on which I propose to construct a house. Will the EMI paid to the bank qualify for tax benefits? R. Prasad

Section 24 allows a deduction in computing income from house property in respect of any interest payable on capital if the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. Construction of a house property would necessarily mean that a land needs to be acquired.

Therefore it is felt that the deduction in respect of interest should be available in respect of the loan taken for purchase of the land as well. Reference in this connection may be made to Circular No. 667 dated October 18, 1993, in the context of Section 54/54F where the Board had clarified that for computing the exemption under the sections, the amount paid towards purchase of a plot and also towards construction of residential house thereon will qualify for the exemption.

Section 54/54F provide for computing an exemption under the head capital gains on investment being made in a residential house.

The deduction under Section 80C in respect of the principal should also be available on the same basis in respect of the repayment of the loan.

Section 192 casts a responsibility on the employer to deduct tax at source on salary paid to an employee.

If the employer fails to so deduct, who will be liable to pay the tax? Richa

Though Section 192 casts a responsibility on the employer to deduct tax at source on the salary of an employee, it may be noted that Section 191 makes a specific provision that if tax is not deducted in accordance with the provisions, income-tax will be payable by the payee direct. This, of course, will not absolve the employer of his responsibility to deduct tax at source and it would be open to the revenue to recover the tax not so deducted from the payer as well. This would be in accordance with Section 201(1) read with the explanation to Section 191.

Tax recovery may not be enforced on the payer if the payee has included the sum received from the payer/credited by the payer as his income and has also paid tax on the same [CBDT Circular in F.No.275/201/95- IT(B) dt 29.1.97].

It may also be noted that a person not deducting tax at source will be liable to pay interest under Section 201(1A) and also may be liable for penalty under Section 271C and these consequences can be irrespective of the payee having paid the tax on such income.

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