2017 (5) TMI 356 - AT - Income Tax

Disallowance on account of cost of improvement while computing the capital gain - Held that - Deduction u/s. 24(b) and computation of capital gains u/s 48 were altogether covered by different heads of income i.e., income from house property and capital gains . None of them excludes operative of the other. The interest in question was indeed expenditure in acquiring asset. Since both provisions were altogether different, assessee was entitled to include interest paid on housing loan for computation of capital gains u/s 48 despite the fact that same had been claimed u/s 24(b) while computing income from house property. If the property is purchased from borrowed funds then consideration for the purchased amount, the interest on borrowed fund also has to be paid. The amount of interest paid by the assessee constitutes the actual cost to the assessee for that property. To exclude the interest amount from the actual cost of the assets/property would lead anomalous result. The interest amount should be definitely added to the actual cost of the property. Respectfully following the above we reverse the findings of the ld. CIT(A) and hold that the interest paid to bank for acquiring capital asset would be eligible as part of cost of acquisition. - Decided in favour of assessee

Issues Involved:
1. Validity of the order passed by the Assessing Officer (AO).
2. Disallowance of ?5,42,877/- on account of cost of improvement while computing the capital gain.
3. Computation of capital gains of ?5,47,465/- by the AO and whether interest paid to the bank for acquired capital assets should be considered as part of the cost of acquisition.
4. Consideration of judicial decisions cited by the assessee.

Detailed Analysis:

1. Validity of the Order Passed by the AO:
The assessee contended that the AO's order was erroneous. However, the primary grievance was regarding the disallowance related to the cost of improvement in the computation of capital gains.

2. Disallowance of ?5,42,877/- on Cost of Improvement:
The assessee claimed that the interest paid on borrowed funds for purchasing the property should be capitalized and indexed under Section 48 of the Income Tax Act, 1961. The AO disallowed this claim, reasoning that the interest paid is not an improvement cost since no construction was made on the plot. The AO also noted that the interest paid on the loan taken for purchasing the property is allowable under the head "income from house property," not under "capital gains."

3. Computation of Capital Gains of ?5,47,465/-:
The AO computed the capital gains by deducting the indexed cost of acquisition from the sale consideration. The AO did not consider the interest paid on the borrowed funds as part of the cost of acquisition or improvement. The CIT(A) upheld the AO's decision, stating that the interest paid did not have a direct nexus with the purchase and sale of the land and was not an allowable deduction under Section 48.

4. Consideration of Judicial Decisions:
The assessee cited several judicial decisions to support the claim that the interest paid should be included in the cost of acquisition. These included decisions from the Hon'ble Delhi High Court, Karnataka High Court, and ITAT Chennai Bench, which held that interest on borrowed funds for purchasing property should be included in the cost of acquisition for computing capital gains. The CIT(A) and AO, however, found these case laws not applicable to the present case.

Tribunal's Decision:
The Tribunal analyzed the facts and judicial precedents, including the case of CIT Vs. Mithlesh Kumari (1973) 92 ITR 9 (Delhi), which held that interest paid on borrowed funds for purchasing property constitutes the actual cost of the property. The Tribunal also referred to other cases, including CIT Vs. Sri Hariram Hotels (Purchase) Ltd. and ACIT Vs C. Ramabrahmam, which supported the inclusion of interest in the cost of acquisition.

The Tribunal concluded that excluding the interest from the actual cost of the property would lead to anomalous results. It held that the interest paid to the bank for acquiring the capital asset should be considered part of the cost of acquisition. Consequently, the Tribunal reversed the findings of the CIT(A) and allowed the appeal filed by the assessee.

Conclusion:
The appeal filed by the assessee was allowed, and the interest paid on borrowed funds for purchasing the property was deemed part of the cost of acquisition for computing capital gains. The grounds related to the validity of the AO's order and the disallowance of the cost of improvement were resolved in favor of the assessee. Grounds No. 5 and 6, being general in nature, required no adjudication.

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