2017 (5) TMI 1161 - HC - Income Tax

Indexation benefit on the borrowing cost - LTCG computation - leasehold right was cancelled on 29th March 1998 and the same was restored back on 6th August 2004 - Held that - As explained by this Court in Commissioner of Income Tax v. Mithlesh Kumari (1973 (2) TMI 11 - DELHI High Court) the interest amount constituted part of the actual cost of the land. In fact the AO has in the assessment order calculated the LTCG by including the interest cost. It has been noted by the CIT (A) that the construction activities were carried out continuously and uninterruptedly even during the period when the lease was cancelled and later restored. Consequently, the Court finds no error having been committed by the ITAT in restoring the indexed interest cost as directed by the AO. No substantial question of law - Decided against revenue

Summary

Issues:
1. Indexation benefit on borrowing cost when leasehold right was cancelled and restored.

Analysis:
The appeal by the Revenue was against the order passed by the Income Tax Appellate Tribunal (ITAT) regarding the Assessment Year 2008-09. The main issue revolved around whether the ITAT erred in allowing indexation benefit on the borrowing cost when the leasehold right was cancelled and later restored. The facts revealed that the Assessee acquired leasehold industrial land in 1973 and carried out various improvements over the years. The Assessee applied for conversion to freehold land in 2003, which was executed in 2007. Subsequently, the land was sold in 2007, and long term capital gains were calculated.

The Assessing Officer (AO) determined the long term capital gains differently from the Assessee's calculation, leading to an addition to the Assessee's total income. The Commissioner of Income Tax (Appeals) upheld this addition, but the ITAT allowed the appeal, considering the land sale as a long term capital asset and permitting indexation benefits on the borrowing cost. The Revenue contended that indexation on interest cost should not have been allowed during the period when the Assessee did not have control of the land due to the lease cancellation and restoration.

The ITAT highlighted that the borrowing costs were capitalized year after year for property development, even during the period of lease cancellation and restoration. Referring to a previous court case, it was established that the interest amount formed part of the actual cost of the land. The continuous construction activities during the lease events supported the inclusion of interest cost in the LTCG calculation. Ultimately, the Court found no error in the ITAT's decision to restore the indexed interest cost as directed by the AO, leading to the dismissal of the appeal as no substantial question of law arose on this issue.