Pre-construction interest and house rent allowance exemption accepted where construction cost and actual rent payment were proved.

Pre-construction interest on borrowed capital was held allowable as deduction under section 24(b) where it related to construction cost and the assessee's entitlement was shown on the record, so the disallowance was deleted. Exemption under section 10(13A) for house rent allowance was also allowed because the assessee proved occupation of the residential premises and actual rent payment through rent receipts and bank transfer evidence, satisfying the statutory conditions. Both additions were therefore set aside and full relief was granted to the assessee.

---

---

Issues: (i) Whether pre-construction interest on borrowed capital, disallowed while computing capital gains from sale of house property, was allowable as deduction under section 24(b) of the Income-tax Act, 1961. (ii) Whether exemption under section 10(13A) of the Income-tax Act, 1961 in respect of house rent allowance was admissible on the facts of the case.

Issue (i): Whether pre-construction interest on borrowed capital, disallowed while computing capital gains from sale of house property, was allowable as deduction under section 24(b) of the Income-tax Act, 1961.

Analysis: The amount represented interest on borrowed capital relatable to the pre-construction period. The claim had been made as part of the cost of construction, and the record showed that the assessee was entitled to the benefit of such interest under section 24(b). The disallowance had been confirmed without adequate reasoning.

Conclusion: The disallowance was not sustainable and the addition was deleted in favour of the assessee.

Issue (ii): Whether exemption under section 10(13A) of the Income-tax Act, 1961 in respect of house rent allowance was admissible on the facts of the case.

Analysis: Exemption under section 10(13A) requires special allowance granted to meet expenditure actually incurred on payment of rent for residential accommodation occupied by the assessee, and the benefit is unavailable where the accommodation is owned by the assessee or rent is not actually paid. On the facts found, the assessee occupied the premises and had produced rent receipts and bank transfer evidence, satisfying the statutory requirements. The authorities' contrary view was therefore not accepted.

Conclusion: The assessee was entitled to exemption under section 10(13A), and the disallowance was deleted.

Final Conclusion: The appeal was allowed and both disputed additions were set aside, resulting in full relief to the assessee on the issues decided.

Ratio Decidendi: Where interest on borrowed capital pertains to the pre-construction period, it is allowable under section 24(b), and exemption under section 10(13A) cannot be denied when actual rent payment and occupation of residential accommodation are established on the evidence.

---