Taxation in delayed housing projects

The deduction u/s 80C for capital repayment and the interest u/s 24 are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value is known. If your house is not complete, you cannot claim the deduction. Like one of our clients succinctly put it, can claim the benefit only after the keys of the flat are given to you.

Before going ahead with the discussion, let us first have a handshake acquaintance with the basics of housing loan interest.

The total interest for the years prior to the year in which the property was completed, is deductible in equal installments for the year during which it is completed and each of the four immediately succeeding years. The limit is applicable on the total of the normal interest payable for the year and 1/4th of the interest paid during the period prior to it was ready for occupation.

One important point. The right to claim this deduction is available for the entire year during which the house is ready for occupation, irrespective of the date when it can be occupied.

One more important point. When the bank sanctions the loan, you have earned the right to take a loan from the bank. In case you do not exercise this right, you cannot be said to have taken a loan. Therefore, one can claim the benefit only from the date when the clock starts ticking after the date when the first installment (which may consist of the entire amount of the loan) gets credited to your bank account or directly paid by the bank to the builder.

Now comes the most important aspect — What if the occupation certificate gets delayed beyond three years? As per the letter of the law, it appears that you cannot claim any benefit, either u/s 80C for capital repayment portion of your EMI or u/s Sec. 24 for interest paid.

If that be the case, it is injustice of the highest order since you are penalised for no fault of yours. It is the builder who is responsible for the delay.

Recognising this factual position, the following case laws have observed that —

Kishore H Galaiya v ITO [2012] 24 taxmann11 (Mum Trib: As long as the assessee has invested the requisite amount in construction of new residential house within three years from the date of transfer, but the taking of the possession was delayed because of default of the builder and other factors not under the control of the assessee the exemption cannot be denied.

Shashi Verma v CIT 152 CTR 227(NB) 1999: In modern days it is not easy to construct a house within this stipulated period and under government schemes construction takes many years. Therefore, if substantial investment is made in the construction, then it should be deemed that sufficient steps have been taken to satisfy the requirements of Sec. 54.

VA Tharabai v DCIT [2012] 19 taxmann 276 (Che – Trib): Assessee could not construct proposed residential house within 3 years because owners of the land filed a petition for injunction on which civil court ordered status quo. It was held that the amount spent by assessee in purchasing land be allowed for deduction.

Unfortunately note that these are related with the exemption on capital gains reinvested in housing property offered by Secs. 54 and 54F. Can these decisions be extrapolated to the deduction of interest u/s 24? One cannot lose sight the possibility of the ITO denying the deduction to you on the ground that there is no case law related with Sec. 24 unless he likes your face.

In the current scenario, this requirement of construction being completed within 3 years has become too tight. Recognising this fact, FA16 has amended Sec. 24 and has raised the requirement of the construction being completed within 3 years to 5 years, only for the exemption on interest payable on housing finance. Corresponding amendments have not been inserted for Sec. 54 and Sec. 54F. Hopefully, the corrective action will be taken by the next Budget.

Over a period of time, we have been consistently bringing to the readers such anomalies in the law – essentially these are points that require careful consideration and rumination. Also, sometimes, knowing these pitfalls helps plan ones financial and taxation affairs in a manner that circumvents possible litigation.

If readers have on their own come across any such oddities, peculiarities or incongruities in the law, you are more than welcome to write in at the below mentioned email address. Aspects of general interest would be taken up for publishing in future articles.

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