It is almost a settled law, being
upheld by the several High Courts and co-ordinate Benches of the ITAT that
interest forms part of the cost of capital assets. In the following cases, it
is very much clear that if the property is purchased from borrowed funds then
consideration for the purchased amount, the interest on borrowed fund also has
to be paid. The amount of interest paid by the assessee constitutes the actual
cost to the assessee for that property. To exclude the interest amount from the
actual cost of the assets/property would lead anomalous result. The interest
amount should be definitely added to the actual cost of the property.
Interest paid on the borrowing made for acquiring
Capital Asset (House Property) is part of the cost of acquisition and
therefore eligible for indexation and deduction from the Sale
Consideration for computation of capital gains.
Assessee
took loans of Rs. 2,80,000/- on 01.07.1995 and paid the balance amount
from her own source. The assessee incurred interest expense of Rs. 3,93,898/-
during the loan tenure since 01.07.1995 to 31.03.2009 and this interest was
capitalized. No deduction under section 24 (b) was claimed in the ITRs filed
for the various years. It was held that there is a consistent view among
various Hon’ble High Courts and which has been consistently followed by the
various Benches of the Tribunal that the assessee is entitled to include
interest as part of the cost of the assets while computing the capital gains under
section 48 of the Act. In the absence of any contrary authority brought to our
notice, the Assessing Officer is directed to allow the interest expenses of
Rs.3,93,898/- paid to LIC Housing Finance Ltd. Subject to appropriate
indexation while computing capital gains under section 48 of the Act.
(Related Assessment Year : 2010-11) – [Parwati Devi Totlani v. ITO - Date
of Judgement : 28.02.2020 (ITAT Jaipur)]
Housing loan interest can be included in cost in capital gain
computation - Assessee is entitled to include interest in the capital cost
while computing capital gains under section 48 of the Act
Ld.
Assessing Officer was of the opinion that interest of Rs. 63,98,540/- on the
housing loan paid by the assessee, for the period starting from the date of
purchase and ending on the date of sale of property could not be allowed as
cost of acquisition/improvement. As per ld. Assessing Officer interest
expenditure incurred during the period of construction alone could be
considered as part of cost. According to him, thereafter it took the character
of revenue expenditure. Though, the assessee relied on the decision of
Co-ordinate Bench in the case of CIT v. C. Ramabrahamm (2013) 57 SOT
0130, ld. Assessing Officer did not accept the claim of the assessee. He
reworked the capital gain excluding the interest on housing loan from the cost
of acquisition/cost of improvement. It was held that the Co-ordinate
Bench has clearly held that an assessee is entitled to include interest in the
capital cost while computing capital gains under section 48 of the Act.
Judicial discipline requires us to follow the order of a coordinate Bench
unless it could be demonstrated that the view taken was contrary to a provision
of law. The ld. Commissioner of Income Tax (Appeals) in the case before us had
followed the decision of Coordinate Bench. We cannot therefore interfere with
the order of the ld. Commissioner of Income Tax (Appeals). In the result, the
appeal of the Revenue stands dismissed. (Related Assessment Year : 2011-12)
– [ITO v. Smt. R. Aishwarya - Date of Judgement : 06.01.2020 (ITAT Chennai)]
Amount of interest paid by the
assessee constitutes the actual cost to the assessee for that property and the
interest amount should be added to the actual cost of the property
It
was held that if the property is purchased from borrowed funds then
consideration for the purchased amount, the interest on borrowed fund also has
to be paid. The amount of interest paid by the assessee constitutes the actual
cost to the assessee for that property. To exclude the interest amount from the
actual cost of the assets/property would lead anomalous result. The interest
amount should be definitely added to the actual cost of the property. (Related
Assessment Year : 2013-14) – [Gayatri Maheshwari v. ITO (2017)
187 TTJ 33 (ITAT Jodhpur)]
Assessee is entitled to claim
deduction under section 24(b) and under section 48 as both provisions are altogether
different
The assessee borrowed funds for
purchasing a house. The interest paid on the said loan was claimed as a
deduction under section 24(b). When the house was sold, the interest paid on
the said loan was treated as “cost of acquisition” and claimed as a deduction under section 48 in computing the capital gains.
The Assessing Officer held that as the interest had been allowed as a deduction
under section 24(b), it could not allowed
again in computing capital gains. The CIT(A) allowed the claim. On appeal by
the department to the Tribunal, HELD dismissing the appeal:
Deduction under section 24(b) and
computation of capital gains under section 48 are altogether covered by
different heads of income i.e., income from ‘house property’ and ‘capital
gains’. Neither of them excludes the other. A deduction under section 24(b) is
claimed when the assessee computes income from ‘house property’, whereas, the
cost of the same asset is taken into consideration when it is sold and capital
gains are computed under section 48. There is no doubt that the interest in
question is an expenditure in acquiring the asset. Since both provisions are
altogether different, the assessee is entitled to include the interest at the
time of computing capital gains under section 48.
(Related Assessment year : 2007-08)
– [ACIT v. C.Ramabrahmam - Date
of pronouncement : 31.10.2012 (ITAT Chennai)]
In the
case of CIT v. Sri Hariram Hotels (P) Ltd. (2010) 229 CTR 455 : 188 Taxman
170 (Kar), the Hon’ble Karnataka High Court has held as under:‑
“7 We are
unable to agree with the arguments advanced by the learned counsel
for the revenue for the simple reason on facts that even the Commissioner
of Income-tax (Appeals) has held that interest had accrued as on
31.03.2003 and therefore, the Tribunal is justified in
granting the relief to the assessee Since the property has been
purchased out of the loan borrowed from the Directors and any interest
paid thereon is to be included while calculating the cost of acquisition
of the asset. Therefore, question No. 1 has to be answered against the
revenue.”
The Madras High Court in the case of CIT v. K. Raja Gopala Rao observed
as under:
“4. Here, there can be no doubt that the cost
of acquisition to the assessee was not merely the amount that he had paid to
the vendors but also the cost of the borrowing made by him for the purpose of
paying the vendor and obtaining the sale deed... Without the money borrowed,
the assessee would not have been in a position to buy the property... Payment
of consideration for the sale indisputably having been made with the borrowed
funds, the borrowing directly related to the acquisition and, interest paid
thereon would form part of the cost of acquisition. – [CIT v. K. Raja Gopala Rao
(2001) 252 ITR 459 (Mad)]
The Karnataka High Court in the case of CIT v Maithreyi Pai
observed as under:
"Mr. Bhat, however, submitted
that section 48 should be examined independently without reference to section
57. Section 48 provides for deducting from the full value of consideration
received the cost of acquisition of the capital asset and the cost of
improvements, if any. The interest paid on borrowings for the acquisition of a
capital asset must fall for deduction under section 48. – [CIT v Maithreyi Pai
(1985) 152 ITR 247 (Kar)]
In CIT v. Mithilesh Kumari, the
Hon'ble High Court has held as under:-
"(13) We are in respectful
agreement with the observations of the Calcutta and the Bombay High Court in
the decisions referred to above. In the present case, we find that the assessed
in order to purchase the land had not only to borrow the amount of Rs. 95,000
which was the consideration for the purchase of the land but also had to pay
interest of Rs. 16,878 on the amount borrowed by her. The amount of Rs. 95,000
plus the interest paid by the assessed constitutes the actual cost to the
assessed of the land. The fact that the amount of Rs. 95,000 was paid by the
assessed to the vendor and the amount of interest of Rs. 16,878 was paid to a
different person, namely, her mother-in-law, does not make any difference so
far as the assessed is concerned in respect of the actual cost of the land to
her. It will not also make any difference whether the interest was paid on the
date of the purchase or whether it is paid subsequently. To exclude the
interest amount from the actual cost of the assets would lead to anomalous
results. Supposing she had purchased the land for Rs. 1,00,000 by raising a
loan of that amount and had paid interest of Rs. 20,000 on the said loan and
had sold the land for Rs. 1,20,000 It would be unreasonable to hold under such
circumstances by excluding the interest amount from the actual cost of the land
that she had made a capital gain of Rs. 20,000 when, as a matter of fact, she
had not made any profit at all by the transaction. Applying the said
observations of the Calcutta and the Bombay High Courts to the present case, we
hold that the Tribunal was right in additing the interest amount of Rs. 16,878
towards the actual cost of the land." – [CIT v. Mithlesh Kumari (1973) 92 ITR 9 (Del)]
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