Budget 2023 proposal – insulting for tax payers by use of phrase ‘ anti-tax avoidance’ measure in relation to deduction of interest allowed as a beneficial provisions under S.24 and Chapter VIA.

[DEV KUMAR KOTHARI]

Interest on housing loans – no deduction from capital gains, if allowed earlier against income from house property or under Chapter VI A. Real time review and amendments are desirable to clarify legislative intention and to remove lacunae if any to avoid use of terms like ‘tax avoidance’ even for claims made as per law as interpreted by Courts and Tribunals.

Budget proposed amendment:

One of proposed amendment is as a measure to avoid second time interest while computing capital gains, if interest has been  allowed while computing income from house property or by way of deduction under Chapter VIA.

The relevant proposal ,notes explanation and speech  etc. are as follows:

Amendment of section 48.

Clause of The Finance Bill”

22. In section 48 of the Income-tax Act, in clause (ii), the following proviso shall be inserted with effect from the 1st day of April, 2024, namely:––

       “Provided that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA;”.

From budget speech:

D. WIDENING & DEEPENING OF TAX BASE AND ANTI AVOIDANCE

D.13 While interest paid on borrowed capital for acquiring or improving a property can, subject to certain conditions, be claimed as deduction from income, it can also be included in the cost of acquisition or improvement on transfer, thereby reducing capital gains. It is proposed to provide that the cost of acquisition or improvement shall not include the amount of interest claimed earlier as deduction.

4. In order to prevent this double deduction, it is proposed to insert a proviso after clause (ii) of the section 48 so as to provide that the cost of acquisition or the cost of improvement shall not include the amount of interest claimed under section 24 or Chapter VIA.

5. This amendment is proposed to take effect from the 1st day of April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.

From notes:

Clause 22 of the Bill seeks to amend section 48 of the Income-tax Act relating to mode of computation. The said section, inter alia, provides that the income chargeable under the head “Capital gains” shall be computed by deducting the cost of acquisition of the asset and the cost of any improvement thereto from the full value of the consideration received or accruing as a result of the transfer of such capital asset. It is proposed to insert a proviso in clause (ii) of the said section so as to provide that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA of the Act. This amendment will take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.

Effective date of  amendment  disputes may arise.:

On reading of  the proposed  provision,  notes and explanation and speech , it is clear that provision will apply from assessment year 2024-25 means from previous year ending 31.03.24 while computing capital gains from Assessment year beginning on 01.04.2024 and subsequent years. However, it is likely that Tax Officers will take a view that this provision is to clear lacunae in provisions so it should be applied retrospectively. More particularly so because honorable FM has placed this issue under the heading

WIDENING & DEEPENING OF TAX BASE AND ANTI AVOIDANCE.

It is true that  while computing cost of acquisition and cost of improvement, all costs incurred up to the date of transfer can be considered so while computing capital gains for AY 2024-25 onwards this rule should be applied for costs incurred  in earlier years also.

Costs of interest which was incurred in earlier years which remained un allowed due to any reason like  limits under  provisions of S.24, or S. 80C  or due to  not claimed  by assessee for any reason like due to below taxable income, loss and lack of  income, assessee not being taxable entity etc. will continue to form part of cost of acquisition and / or cost of improvement.

It is not clear whether interest paid and allowed in earlier years up to AY 2023-24 will also not be allowed. Because though computation of capital gain is to be made for AY 2024-25 on wards but interest was paid and allowed prior to that.   Therefore, a possible view or dispute to arise is that any interest paid and allowed up to AY 2023-24 should not be considered. More so, because this is very difficult to apply new provision in cases when there was no scrutiny or even in scrutiny it was allowed.

Difficulty is for assesses and for tax officers both. Because it is likely that only in cases where disputes arose the assessee as well tax officers have information or a hint about such cases and not in many other cases.

To strictly implement this provision to disallow all interest which were allowed U.S.24 or under Chapter VIA, information will have to be gathered for all years since year of acquisition of house property  ( that may be date of allotment as well).

The amounts allowed will not be very large ( except in some large cases of HNI and corporate entities).

Amendment must have been made earlier:

In view of grouping the provision under WIDENING & DEEPENING OF TAX BASE AND ANTI AVOIDANCE author feels that it is not proper to call it as anti avoidance measure. This is because claims were made and allowed as per general understanding of assesses of a complex subject and such claims have been allowed by High Courts.

For failure of budget teams , tax payers should not be called to have adopted tax avoidance measure in claiming so called  double deduction.

Earlier article and some  judgments discussed therein:

Dispute as to allow ability of interest as part of cost of acquisition or cost of improvement of house property is not new. It is very old issue and Courts and Tribunals have allowed interest paid while computing capital gains  transfers of such property.

Old article by author:

Capital gains: INTEREST ON BORROWED CAPITAL ALLOWED AS COST OF ACQUISITION OF ASSET - recent decision in favor of assessee. However, with respect the author feels otherwise about post acquisition interest.

In the above article , author had discussed some judgments of 2008 passed by High Courts allowing interest while computing capital gains. With respect, author had expressed view that interest for period post acquisition of property should not be allowed.

This means that claims were made before authorities and in many cases claim was allowed ( as per return or even by AO) . Disputes arose in some cases, where amount was higher or   disputes arose.

High Courts allowed interest while computing capital gains. That means interest was allowed by Tribunal, because Income tax  appeal cases were  filed by revenue.

The  title of the old article itself   include this dissent expressed in title by use of  the following sentence

“ However, with respect the author feels otherwise about post acquisition interest.”

Author had discussed provisions and judgments. On this issue views expressed by author are reproduced with highlights added:

“ Interest after acquisition:

In view of author, the element of interest after the acquisition of the capital asset (or completion of the assets in a ready to use form) is completed cannot be regarded either as 'actual cost' or as 'cost of acquisition'. In case of business asset interest during construction period or during process of putting to use the asset can be considered as 'actual cost'. However, 'cost of acquisition' is a restricted term in comparison to 'actual cost'. 

Interest after acquiring capital asset can be considered as interest for holding and carrying capital asset because it is acquired with borrowed funds. In case the capital asset is used in business or earning other income, interest may be allowed as an allowable expenditure as per relevant provisions. 

However, interest paid for the period falling after the date of acquisition, in view of author cannot be considered as 'cost of acquisition' of a capital asset.”

Un quote:

One may recall  and also search judgments  in which interest was allowed as business expenditure, and was  allowed , though it was   capitalized  in cost of assets on which depreciation was also claimed and allowed. Thereafter, amendment was made to deny second time deduction by way of depreciation. One may recall popularly called “Deferred Payment Schemes” in which interest element for period post acquisition / put to use was also capitalized because it was incurred on entering into the scheme .

Amendment was made in the  meaning  of ‘actual cost’   in  section  43(1)  by insertion of Explanation (8) through the Finance Act, 1986 w.r.e.f. 01.04.1974 . The amendment was also specified to be for removal of doubts and it was made to apply w.r.e.f. 01.04.1974

 This explanation reads as follows:

¹³[Explanation 8.-For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset.]

13. Inserted by the Finance Act, 1986, w.r.e.f. 1-4-1974

Deduction while computing capital gains also involves similar principal of accounting and method of computing actual cost or cost of acquisition. Therefore, having made amendment in provisions relating to business income that too with retrospective effect and not making such amendment in relation to capital gains  is indicative of legislative intent of allowing interest as part of cost of acquisition or say total cost of asset transferred.