2024 (11) TMI 1303 - AT - Income Tax

LTCG - interest paid is a cost of acquisition/improvement or not? - Whether the benefit of indexation is to be allowed to the interest cost? - HELD THAT - Assessee in the earlier years, as claimed in the A.Y. 2013-14 under consideration, has also claimed the similar deduction of the interest expenditure under the head income from house property and as cost of acquisition/improvement, which has been continuously allowed by the revenue Authorities and therefore the rule of consistency is required to be followed. We are in agreement with the explanation offered by Ld. Sr. Advocate that from the aforesaid observations of the AO and the Ld. Commissioner it shows without saying that the Assessee has not claimed any double deduction and even otherwise in the earlier assessment years the same deduction was claimed and has been allowed. Are agreeable that even otherwise before considering/calculating the capital gain, we should consider the provisions of section 48 of the Act, wherein the provision has been inserted in clause II vide Finance Act, 2023 and w.e.f. 01.04.2024, whereby it is provided that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the account of interest under clause (b) of section 24 or under the provisions of chapter VIA. And therefore for the period prior to that provision inserted and made applicable from 01.04.2024, no such restriction can be imposed and/or made applicable. This particular amendment has been taken care of by the Ld. Commissioner, who by determining that the said amendment not being clarificatory in nature and therefore cannot be applied retrospectively. The Ld. Commissioner at last by considering the explicit provisions of section 24(b) of the Act as existed and applicable as on 31.03.2013, applied the same to the instant case and by following the decisions of the jurisdictional Tribunal favoring the Assessee and the dictum laid down in the case of CIT vs. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT wherein it was held that if two reasonable constructions of a taxing provision are possible, then the construction which favors the taxpayers must be adopted ultimately allowed the claim of the Assessee. Admittedly, prior to insertion of provision vide Finance Act, 2023 and made applicable from 01.04.2024, there was no such provision/restriction for excluding the deduction claimed on account of interest paid, under clause (b) of section 24 or under the provisions of chapter VIA of the Act. Hon ble Delhi High Court has also considered the judgment passed in Fort Gloster Industries Ltd. 1969 (6) TMI 16 - CALCUTTA HIGH COURT and ultimately held that the interest amount towards the actual cost of the land, was rightly added by the Tribunal. Interest paid on the borrowed funds for the purchase of property for the period prior to the provision inserted vide Finance Act, 2023 which was made applicable from 01.04.2024, over and above claimed u/s 24(b) of the Act, would be deductable while computing the capital gains. Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the interest paid on borrowed funds for the purchase of property can be considered as a cost of acquisition/improvement for the purpose of calculating Long Term Capital Gains (LTCG).
2. Whether the benefit of indexation is to be allowed to the interest cost.
3. The possibility of a double deduction of interest under different sections of the Income Tax Act.

Detailed Analysis:

Issue 1: Interest as Cost of Acquisition/Improvement

The primary issue was whether the interest paid on borrowed funds used to acquire property can be considered as part of the cost of acquisition or improvement for the purpose of computing LTCG. The Assessing Officer (AO) disallowed the interest amount of Rs. 3,95,42,739/- claimed by the Assessee on the grounds that interest on housing loans does not constitute capital expenditure incurred in making any additions or alterations to the capital asset after it became the Assessee's property, as per Section 55 of the Income Tax Act. The AO relied on previous judgments, such as V. Mahesh and Harish Krishnakant Bhatt, to support this view.

Contrarily, the Ld. Commissioner allowed the Assessee's claim by considering various judgments that supported the inclusion of interest as part of the cost of acquisition. The Commissioner cited cases like CIT v. K. Raja Gopala Rao and CIT v. Sri Hariram Hotels, which recognized interest on borrowed funds for property acquisition as part of the acquisition cost. The Commissioner emphasized the absence of a specific prohibition in the law against such a deduction prior to the amendment by the Finance Act, 2023.

Issue 2: Indexation of Interest Cost

The AO questioned whether the benefit of indexation should be allowed on the interest cost. The Assessee claimed that the interest paid should be indexed as part of the cost of acquisition/improvement. The Ld. Commissioner, however, allowed this claim, noting that the explicit provisions of Section 48, which govern the computation of capital gains, did not exclude such interest from being considered as a cost of acquisition before the amendment effective from April 1, 2024.

Issue 3: Double Deduction of Interest

The Revenue Department argued that the Assessee claimed a double deduction of interest, once under Section 24(b) as a deduction from income from house property, and again as part of the cost of acquisition/improvement while computing capital gains. The Assessee countered this by stating that the deduction under Section 24(b) was limited to Rs. 1,50,000/- and the remaining interest was claimed as a cost of acquisition/improvement. The Ld. Commissioner supported the Assessee's position, citing the rule of consistency, as similar deductions had been allowed in previous years.

The Tribunal upheld the Ld. Commissioner's decision, affirming that before the amendment by the Finance Act, 2023, there was no restriction on claiming interest as part of the acquisition cost for capital gains computation. The Tribunal cited the principle from CIT vs. Vegetable Products Ltd., favoring a taxpayer-friendly interpretation when multiple reasonable interpretations exist.

In conclusion, the Tribunal dismissed the Revenue Department's appeal, affirming that the interest paid on borrowed funds for property acquisition, over and above the amount claimed under Section 24(b), was deductible while computing capital gains for the period before the 2023 amendment. The appeal was dismissed, and the Assessee's claim was upheld.