2009 (12) TMI 369 - HC - Income Tax

Capital Gain- The assessee borrowed loans from some of its directors and purchase an immovable property to construct the hotel but it was not construct. Now the assessee sold it and claim deduction of interest paid to the directors. Assessing Officer disallow it. Tribunal allow it. Held that- that sine the property had been purchased but of the loans borrowed from the directors any interest paid thereon was to be included while calculating the cost of acquisition of assets.

Summary

Issues:
1. Whether interest payable to directors by the assessee company towards a loan for the purchase of an asset should be added to the cost of acquisition of the asset when computing long-term capital gains.
2. Whether interest accrued but not paid before the sale of the property can be included in the cost of acquisition of the asset.

Analysis:

Issue 1:
The Revenue challenged the order of the Income-tax Appellate Tribunal (ITAT) regarding the inclusion of interest payable to directors in the cost of acquisition of the asset for computing long-term capital gains. The company had borrowed a loan from directors to purchase a property, and upon selling the property, claimed the interest paid to the directors as part of the cost of acquisition. The Assessing Officer disallowed this claim, leading to an appeal by the assessee. The ITAT ruled in favor of the assessee, stating that interest paid on the borrowed loan should be considered in the cost of acquisition. The Revenue contended that a resolution to pay interest to directors was passed after the sale, arguing against the liability of the company to pay interest as of the sale date. However, the court upheld the ITAT decision, emphasizing that interest accrued by the due date was justifiable to be included in the cost of acquisition, supporting the assessee's position.

Issue 2:
Regarding the second issue, the Revenue argued that since the interest was not paid before the property sale, the amount could not be claimed as part of the cost of acquisition. The court referenced a previous judgment, CIT v. Maithreyi Pai [1985] 152 ITR 247, to support the position that interest accrued but not paid before the sale could not be added to the cost of acquisition. Consequently, the court found no substantial question of law in this appeal and dismissed the case, affirming that the interest paid after the sale could not be considered in the cost of acquisition of the property.