2024 (8) TMI 419 - AT - Income Tax

Long-Term Capital Gains (LTCG) - interest expenditure allowable to the assessee in the computations - HELD THAT - Assessee was engaged in real estate projects. The assessee acquired vacant land towards projects and availed certain loan from the bank in two concerns. However, the project did not take-off and the assessee defaulted in repayment. Admittedly, the assessee was engaged in the business of real estate projects. Since the project did not take-off and no activities was carried out, the assessee may not be in a position to establish that the land was acquired for business purposes. As further be seen that one-time settlement was arrived at and the land was possessed and sold by the bank. The entire sale proceeds have been retained by the bank and nothing has come to the assessee. In such a case, the decision of case of Sri Hariram Hotels P Ltd. 2009 (12) TMI 369 - KARNATAKA HIGH COURT would apply which has, more or less, similar facts. In this case, the assessee purchased an immoveable property for a project which did not materialize on account of various reasons and ultimately assessee-company sold the said property. While computing amount of capital gains, assessee claimed deduction in respect of interest paid to Directors on loans borrowed from them in order to purchase property in question. The same was denied by lower authorities. Tribunal allowed assessee s claim on the ground that since the property had been purchased out of loans borrowed from Directors, any interest paid thereon was to be included while calculating cost of acquisition of asset. The Hon ble Court upheld the order of Tribunal. Similar is the decision of Mithlesh Kumari 1973 (2) TMI 11 - DELHI HIGH COURT In this case, the assessee purchased perpetual leasehold rights in a plot of land and raised a loan for paying price of land. The assessee paid interest on such borrowings. The assessee sold the land and offered gains after including amount of interest and ground rent in actual cost. The revenue denied the claim. Tribunal allowed assessee's claim holding that all expenses incurred by the assessee in acquiring capital asset were distinct from items of expenditure incurred for retaining and maintaining capital asset. The Hon ble Court confirmed the stand of Tribunal qua claim of interest component. Therefore, we would hold that the impugned interest expenditure would be allowable to the assessee in the computations. AO is directed to re-compute the income of the assessee. The assessee is directed to provide the requisite details.

Summary

Issues:
1. Confirmation of addition of Long-Term Capital Gains (LTCG) by the Assessing Officer.
2. Allowability of interest component in the computation of capital gains.
3. Re-computation of income by the Assessing Officer.

Detailed Analysis:
1. The appeal before the Appellate Tribunal ITAT Chennai for Assessment Year 2006-07 arose from the confirmation of certain additions of LTCG by the Assessing Officer under section 153A read with section 143(3) of the Income Tax Act. The deceased assessee's legal heir represented her, challenging the additions made by the Assessing Officer.

2. The case involved the disposal of properties by the assessee, with the Assessing Officer computing LTCG despite the entire sale proceeds being retained by the bank to settle loan dues. The matter had been previously remanded to the CIT(A) for fresh consideration, where it was observed that the loan taken was for business needs, not for acquiring the property, leading to the denial of the claim for cost of acquisition.

3. The Tribunal analyzed the facts, noting that the assessee was engaged in real estate projects and had acquired land with loans that defaulted in repayment. The Tribunal referred to relevant case laws, including decisions from the High Courts of Karnataka and Delhi, where interest components were allowed in the computation of capital gains when the property was purchased with borrowed funds. Based on these precedents and the circumstances of the case, the Tribunal allowed the appeal, directing the Assessing Officer to re-compute the income considering the interest expenditure as allowable.

In conclusion, the Appellate Tribunal ITAT Chennai allowed the appeal, directing the Assessing Officer to re-compute the income of the assessee by considering the interest expenditure as allowable in the computation of capital gains.