Section 48 bars Double Deduction of Interest on Borrowed Capital for House Property

Prevention of Double Deduction of Interest on Borrowed Capital for House Property: Section 48 of the Income-tax Act and Landmark Judgments

Summary: The Finance Act, 2023 inserted a proviso to Section 48(ii), effective from Assessment Year 2024-25, providing that the cost of acquisition or improvement of an asset shall not include deductions claimed for interest under Section 24(b) or Chapter VIA. The amendment addresses the possibility of claiming the same interest both as a deduction from income from house property or under Chapter VIA and as part of the cost for computing capital gains. The restriction applies only to interest actually claimed as a deduction; interest paid beyond the applicable deduction limits, including amounts exceeding the Rs. 2 lakh limit for self-occupied property, may still be included in the cost where it was not claimed as a deduction. For years up to AY 2023-24, the supplied material states that the position depends on the facts and applicable judicial views. The material cites divergent decisions, including CIT v. Maithreyi Pai, which disallowed double deduction, and ACIT v. C. Ramabrahmam, which permitted inclusion under Section 48 despite an earlier Section 24(b) claim. Captain B.L. Lingaraju v. ACIT followed Maithreyi Pai. Other authorities recognised interest as cost of acquisition where it had not already been allowed elsewhere.

Interest paid on borrowed capital for acquiring, constructing, renewing, or reconstructing a house property has long been a significant tax benefit for homeowners in India. Under the Income-tax Act, 1961, such interest is deductible while computing income from house property under Section 24(b) (subject to limits, e.g., ₹2 lakh for self-occupied property) and, in certain cases, under provisions of Chapter VIA (such as Sections 80EE or 80EEA for additional interest relief for first-time or affordable housing buyers). Separately, when the property is transferred, the same interest has often been claimed as forming part of the cost of acquisition or cost of improvement under Section 48 while computing capital gains.

This dual claim created the possibility of a double deduction on the same expenditure, leading to revenue leakage. The Finance Act, 2023, addressed this by inserting a specific proviso to Section 48.

The Pre-Amendment Position and the Risk of Double Benefit

Section 24(b) expressly allows deduction of interest payable on borrowed capital used for the property. Chapter VIA provides further targeted deductions in eligible cases. Independently, judicial decisions had recognised that interest incurred on borrowings for acquiring a capital asset could form part of the “cost of acquisition” or “cost of improvement” under Section 48, reducing taxable capital gains on sale.

In the absence of an express statutory bar linking the two provisions, some assessees claimed the interest first under the head “Income from house property” (or Chapter VIA) during the holding period and again as part of cost under Section 48 on transfer. Revenue authorities frequently resisted the second claim on the ground that the same amount could not be allowed twice.

The Legislative Amendment (Finance Act, 2023)

To prevent this, the Finance Act, 2023, inserted the following proviso to clause (ii) of Section 48 (effective from Assessment Year 2024-25 onwards):

“Provided that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA.”

The Memorandum explaining the provisions of the Finance Bill, 2023, stated the rationale clearly: interest was being claimed first as a deduction from income under Section 24 (or Chapter VIA) and again as part of cost of acquisition/improvement under Section 48. The amendment seeks to prevent revenue leakage by way of double deduction.

Importantly, the restriction applies only to the amount of interest claimed as deduction under Section 24(b) or Chapter VIA. Where the actual interest paid exceeds the maximum allowable deduction (for example, interest exceeding the ₹2 lakh limit for a self-occupied property), the excess amount that was never claimed as a deduction can still be included in the cost of acquisition or improvement. In such cases there is no double deduction.

The amendment is prospective and applies from AY 2024-25. For earlier assessment years, the pre-amendment legal position (including judicial views) continues to govern.

Landmark Judicial Pronouncements

Courts and Tribunals had expressed divergent views before the statutory clarification.

1. CIT v. Maithreyi Pai [(1985) 152 ITR 247 (Karnataka High Court)]

This is one of the foundational High Court decisions. The Court held that interest paid on borrowings for acquisition of a capital asset falls for deduction as cost of acquisition under Section 48. However, if the same sum has already been allowed as a deduction under any other head of income, it cannot be allowed again while computing capital gains. The principle is that no assessee can be permitted deduction of the same amount twice over under the scheme of the Act. This decision has been frequently relied upon by the Revenue and by Tribunals taking a restrictive view.

2. ACIT v. C. Ramabrahmam [(2012) 27 taxmann.com 104 / 57 SOT 130 (Chennai ITAT)]

The Chennai Bench took a liberal view. It held that deduction under Section 24(b) and computation of capital gains under Section 48 operate under different heads of income (“Income from house property” and “Capital gains”). Neither provision excludes the operation of the other. Interest is an expenditure incurred in acquiring the asset and can therefore be included in the cost of acquisition under Section 48 even if it had earlier been claimed under Section 24(b). This decision was followed by several other Benches (including Delhi ITAT in Ashok Kumar Shahi).

3. Captain B.L. Lingaraju v. ACIT (Bangalore ITAT, ITA No. 906/Bang/2014)

The Bangalore Bench followed the Karnataka High Court in Maithreyi Pai and disallowed the inclusion of interest in the cost of acquisition where the same interest had already been allowed under Section 24(b). It emphasised the prohibition on double deduction.

4. Other supporting authorities on interest as cost of acquisition

High Courts (including Karnataka in CIT v. Sri Hariram Hotels P. Ltd., Madras in CIT v. K. Raja Gopala Rao, Delhi, and Andhra Pradesh) have held that interest on borrowings utilised for acquiring immovable property forms part of the cost of acquisition, provided it has not already been allowed under another provision. These decisions support the inclusion of unclaimed interest (or excess interest beyond the Section 24(b)/Chapter VIA limits) even after the 2023 amendment.

Post-amendment decisions for pre-AY 2024-25 years have generally continued to apply the earlier judicial principles, with some Tribunals still permitting the dual claim for years prior to the statutory bar, while others continue to follow the Maithreyi Pai principle against double benefit.

Practical Implications

For Assessment Years up to 2023-24

The position depends on the facts and the binding judicial view in the relevant jurisdiction. Where interest has already been fully claimed under Section 24(b) or Chapter VIA, inclusion under Section 48 remains contentious and may invite litigation.

From AY 2024-25 onwards

Only interest that has not been claimed as a deduction under Section 24(b) or Chapter VIA can form part of the cost of acquisition or improvement. Taxpayers should maintain clear records of the quantum claimed under each provision.

Excess interest

Interest paid beyond the statutory ceiling under Section 24(b) (or the additional Chapter VIA limits) remains eligible for inclusion in cost, as there is no double deduction.

Under-construction properties

Interest during the construction period (which is capitalised and claimed in five equal instalments after completion under Section 24) follows the same principles once claimed.

Documentation

Certificates from the lender, interest certificates, and computation of the exact amount claimed year-wise under Section 24(b)/Chapter VIA are essential to support any residual claim under Section 48.

Conclusion

The 2023 amendment to Section 48 provides much-needed statutory clarity and plugs a long-standing gap that had led to conflicting judicial outcomes. It upholds the fundamental principle against double deduction while preserving the legitimate inclusion of unclaimed interest in the cost base for capital gains. Taxpayers and professionals must carefully segregate the interest claimed under the house-property and Chapter VIA provisions from any residual amount sought to be added to the cost of acquisition. Proper year-wise tracking and documentation will be critical to withstand scrutiny, especially in the post-amendment regime.