Such a property which was demolished and had only 4 walls would be outside the perview of the chapter "income from house property" . But when you construct it then its exigible to income from house property.
Interest shall be admissible since there is construction . This is not a renovation this is total demolition of existing building and construction of a new building.
Since the above house property has been let out, full deduction of interest shall be given
S22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".
Tell me , after demolishing the rooms and retaining only walls, where is the building?
Even a vacant plot has boundary wall, but we can't say its a building. Its a plot
24. Income chargeable under the head "Income from house property" shall be computed after making the following deductions, namely:—
(a) a sum equal to thirty per cent of the annual value;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Note that restriction os Rupees 200 ,000 is provided for property u/s 23(2) Which is basically self pccupied or deemed to be self occupied
Hence for let out property there is no restriction.
S.23(2)
Where the property consists of a house or part of a house which—
(a) is in the occupation of the owner for the purposes of his own residence; or
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,
the annual value of such house or part of the house shall be taken to be nil.