No Lender Certificate Required for Interest Deduction on Let-Out Property: Bombay HC

1. In Shantilal Gulabchand Muttha v. ACIT (2026), the Bombay High Court addressed an important issue regarding the deduction of interest on borrowed capital under Section 24(b) of the Income-tax Act, 1961.

The core question before the Court was whether a deduction for interest on a let-out property could be denied, or an assessment reopened, merely on the ground that the assessee had not furnished a lender’s certificate as contemplated under the proviso to Section 24(b).

The ruling provides significant clarity on the scope of Sections 23 and 24(b), particularly in the context of let-out properties and the reopening of assessments.

2. Fact of the Case: The assessee filed the return of income, declaring rental income under the head “Income from House Property” and claiming a deduction of interest under Section 24(b). The Assessing Officer accepted the returned income and completed the assessment under Section 143(3).

Subsequently, the Assessing Officer issued a notice to reopen the assessment on the grounds that the deduction under Section 24(b) had been allowed without the assessee furnishing a certificate from the lender.

The assessee replied that no such certificate was statutorily required, and none had been called for during the original assessment.

However, the Assessing Officer issued a notice under Section 148 for reopening the assessment.

3. Relevant Statutory Provisions

(a) Section 24(b) of the Income-tax Act, 1961 allows a deduction for interest paid on capital borrowed for the purchase, construction, repair, renewal, or reconstruction of house property. The deduction is restricted to Rs. 2,00,000 in the case of a self-occupied property (subject to conditions), whereas in the case of a let-out property, the interest on borrowed capital is allowed without any monetary ceiling.

Under the New Tax Regime, a deduction for interest on a housing loan for self-occupied property is not available.

However, the computation provisions for let-out property continue to apply even under the new regime. In the case of a let-out property, interest on borrowed capital is deductible without any monetary ceiling, irrespective of whether the taxpayer opts for the old or the new tax regime.

(b) Second Proviso to Section 24(b): The deduction for interest will be allowed only if the assessee obtains and furnishes a certificate from the lender specifying the amount of interest payable.

(c ) Section 23(1)(b) provides that where the property is let and the actual rent received or receivable is higher than the municipal value or the reasonable expected rent, the higher actual amount is taken as the annual value.

4. Before analyzing the Court’s observations, let us first briefly understand the scope and interaction of Section 23(1)(b) and the second proviso to Section 24(b) with the help of a simple illustration.

Illustration: Mr Ajay owns a residential property that is let out. The actual rent received is Rs. 4,20,000 per annum, and the municipal tax paid is Rs. 40,000. The municipal value of the said property is Rs. 3,60,000 per annum, and the reasonable expected rent is Rs. 3,80,000 per annum. The interest on the housing loan is Rs. 5,00,000.

Since the actual rent received (Rs. 4,20,000) is higher than the reasonable expected rent of Rs. 3,80,000, the higher actual amount is taken as the annual value under Section 23(1)(b).

4.1 Computation of Income from House Property

4.2 Since the annual value is determined on the basis of actual rent under Section 23(1)(b), Mr. Ajay would not be required to furnish a lender’s certificate, in light of the judicial interpretation discussed below.

5. Scope of the Lender’s Certificate Requirement under Section 24(b) : The Hon’ble Bombay High Court has clarified the extent to which the requirement of furnishing a lender’s certificate applies:-

(a) When a property is let out for the entire year, and the annual value is determined based on the actual rent received (under Section 23(1)(b)), the requirement to submit a lender’s interest certificate does not apply.

(b) Normally, the second proviso to Section 24(b) provides that interest deduction can be claimed only if the assessee furnishes a certificate from the lender specifying the interest payable. However, the Court clarified that this requirement is not applicable to let-out properties, where income is computed on the actual rent.

6. Judicial Pronouncement: In this case, the Bombay High Court examined the interplay between Sections 23 and 24(b) and clarified when a lender’s certificate is actually required.

The requirement of furnishing a lender’s certificate under the proviso to Section 24(b) applies only to properties covered under Section 23(2), i.e., self-occupied properties where the annual value is taken as Nil.

The restriction on the quantum of interest deduction and the certificate requirement are linked to cases where the Legislature has capped the deduction.

In case of a let-out property, where income is computed under Section 23(1)(b) based on actual rent, the annual value is not Nil and therefore the proviso does not apply.

Consequently, the non-furnishing of a lender’s certificate in the case of a let-out property cannot constitute a valid “reason to believe” that income has escaped assessment.

7. Conclusion: This judgment reinforces the principle that statutory conditions must be applied strictly within their intended legislative framework. Where income is computed under Section 23(1)(b) on the basis of actual rent, the certificate requirement under the proviso to Section 24(b) does not arise. The ruling curbs the mechanical reopening of assessments and provides valuable clarity for taxpayers and professionals alike.

The decision serves as a reminder that the reopening of assessments must be based on legally sustainable grounds, not on a misapplication of statutory provisions.

Disclaimer: The article is for educational purposes only.

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