Case Law Details
Babu Chandy, Baby Marine Exports Vs ACIT (ITAT Cochin)
It is not discernable whether the interest paid for the acquisition of the impugned property has been claimed by the assessee under Chapter IVC of the Income Tax Act, 1961, namely ‘income from house property’. If the assessee had already claimed interest under the head income from house property, the same interest cannot be capitalized and added to the cost of acquisition of the property.
FULL TEXT OF THE ITAT JUDGMENT
This appeal at the instance of the assessee is directed against the order of the Commissioner (Appeals), Trivandrum, dated 8-9-2017. The relevant assessment year is 2008-09.
2. The grounds raised read as follows :–
(1) The order of the Commissioner (Appeals), Trivandrum, is against law, facts and circumstances of the case.
(2) The CIT has erred in not allowing the stamp duty and registration charges of Rs. 384449 as part of the cost of the acquisition of the flat and also the interest payment of Rs. 7,00,700 to ICICI Bank for the Loan availed for acquiring the Flat while computing the short term capital gains on sale of the Flat.
(3) He has erred in stating that even in the section 55(2) of the Act, cost of acquisition means the amount of the purchase price paid to the previous owner or the seller of the property only. As per the provisions of section 55(2)(b), the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1-4-1981 shall be the cost of the acquisition of the asset for the purpose of computation of capital gains on transfer of asset.
(4) The CIT has erred in not following the decision of the Supreme Court in the case of Chellapally Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC)or of the Madras High Court and the Karnataka High Courts decisions in CIT v. K. Raja Gopala Rao (2001) 252 ITR 459 (Mad.) and CIT & Anr. v. Shri Hari Ram Hotels (P) Ltd. The Supreme Court has held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence. It also held that the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed assets. So the claim of the appellant was perfectly in order.
(5) The appellant craves leave to adduce additional grounds at the time of hearing.
3. The brief facts of the case are as follows :–
The assessee, an individual, had filed his return of income for the assessment year 2008-09 on 26-3-2009. The assessee had disclosed short-term capital gains (STCG) on sale of flat. The assessment under section 143(3) was completed vide order dated 30-12-2010. In the assessment order, the assessing officer enhanced the short-term capital gains. The assessing officer held that interest of Rs. 7,00,700 paid to ICICI Bank for loan taken for the purpose of purchase of the impugned flat and the statutory charges such as registration and stamp duty paid should not form part of the cost of acquisition and the same are to be reduced.
4. Aggrieved by the assessment order, the assessee preferred an appeal to the first appellate authority. The Commissioner (Appeals) confirmed the computation made by the assessing officer as regards short-term capital gains. The relevant finding of the Commissioner (Appeals) reads as follows :–
4. “Section 48 of the Act provides for computation of capital gains in the manner indicated therein. Capital gains thus, is computed by deducting from the consideration received on transfer of a capital asset, the cost of acquisition, the cost of improvement and the expenditure incurred in connection with the transfer. In the instant case of the appellant, what is to be allowed as deduction both for the statutory charges paid of Rs. 3,84,449 towards purchase of the land and interest of Rs. 7,00,700 paid on Loan which was allegedly availed to purchase the captioned property as part of the cost. The assessing officer has not allowed both the above as they are not only allowable under the extant provisions of the Act but also cannot be treated as part of the cost. I agree with the assessing officer since provisions of section 48 doesn’t provide for the same. Even under section 55(2) of the Act, cost of acquisition means the amount of the purchase price paid to the previous owner or seller of the property only. What was paid to the seller of the land in the instant case of the appellant is a sum of Rs. 8,12,365 only which the assessing officer has rightly allowed. What was paid as statutory charges is nothing to do with the cost of the land purchased since the said amount was not paid to the seller of the land. Not entertaining this claim is very well within the permissible limit of the Act and doesn’t require further interference. Similarly, the interest allegedly paid towards the loan availed for the property purchased also cannot be entertained since section 48 doesn’t provide for the same. This apart, claim for deduction of this sort cannot be made when the income under the head short-term capital gain is offered for tax more particularly when under no provisions of the Act the alleged payment of interest can be reduced from the sale consideration received. In the circumstances, the decisions relied on by the appellant is totally misplaced and are not applicable to the case of them. The Hon’ble Supreme Court decision is not applicable to the appellant since the same is on interest paid before the commencement of production on amounts borrowed for the acquisition and installation of plant and machinery. The Hon’ble Madras High Court decision is also not applicable to the case of the appellant since the decision is on an asset which was purchased and immediately then mortgaged to avail loan which in turn to be paid for the asset which was purchased. Taking into account all the above, I am of the considered opinion that the appellant has no case to claim for deduction since the Act doesn’t provide for the same.”
5. The learned A.R. reiterated the submissions made before the Income Tax authorities. The learned D.R. on the other hand supported the orders of the assessing officer and the Commissioner (Appeals).
6. I have heard the rival submissions and perused the material on record. The assessee had sold a flat and had declared short-term capital gains of Rs. 8,97,986. The cost of acquisition of the flat as claimed by the assessee are as follows :–
| Cost of undivided share in land | Rs. 8,12,365 |
| Cost of Flat Building including car park | Rs. 47,04,490 |
| Interest on Loan availed from ICICI Bank for the above Purchase | Rs. 7,00,700 |
| Statutory Charges for registration of Flat in the Appellant’s name | Rs. 3,84,449 |
| TOTAL COST | Rs. 66,02,004 |
6.1 The impugned flat was sold for Rs. 75 lakhs and the short term capital gains on sale of the impugned flat disclosed by the assessee was Rs. 8,97,996 (75,00,000–66,02,004). The assessing officer however, concluded the assessment wherein he did not allow interest paid of Rs. 7,00,700 on for the loan taken by the assessee for the purchase of the impugned flat and also the statutory charges of Rs. 3,84,449 as part of the cost of acquisition.
6.2 On further appeal, the Commissioner (Appeals) confirmed the computation made by the assessing officer. For dismissing the appeal of the assessee, the Commissioner (Appeals) relied on the section 48 of the Income Tax Act which provides for the mode of computation of capital gains by deducting from the sale consideration, the cost of acquisition, the cost of improvement and the expenditure incurred in connection with the transfer of the impugned property. The Commissioner (Appeals) further relied on section 55(2) of the Income Tax Act and stated that cost of acquisition means the amount of purchase price paid to the previous owner or seller of the property only.
6.3 Section 55(2) has 4 clauses, clause (a), clause (aa), clause (ab) and clause (b). The first 3 clauses deals with good will, tenancy rights, stage carriage permit, share or any other security within the meaning of the securities contract Act and equity shares or shares allotted to a share holder. Only in clause (a) and clause (aa) there is reference to ‘purchase price paid’. In clauses (ab) and clause (b), the cost of acquisition is mentioned and it has to be deducted from the sale consideration for computing the capital gains. The applicable clause of section 55(2) to the assessee’s case is clause (b) and the relevant sub clause is sub clause (i), which provides that where the capital asset become the property of the assessee before 1-4-1981 means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1-4-1981. The statutory charges such as registration and stamp duty are paid for getting the property registered in the name of the assessee, without such payment the assessee would not become the owner of the impugned flat. The cost of acquisition of property would definitely include statutory charges such as registration and stamp duty duly paid. Therefore, I hold that the amount of Rs. 3,84,449 should be included as cost of acquisition of the impugned flat.
6.4 As regards interest paid of Rs. 7,00,700 to ICICI Bank, it is undisputed fact that the loan has been taken for the purpose of purchase of the impugned flat which has given rise to short term capital gains. The Hon’ble Andhra Pradesh High Court in the case of Addl. CIT v. K.S. Gupta (1979) 119 ITR 372 (AP) had categorically held that interest paid for acquisition of an asset will be part of the cost of acquisition and same needs to be reduced while determining the capital gains on the sale of the property. The Hon’ble High Court of Andhra Pradesh had followed the dictum laid down by the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC). The Hon’ble Supreme Court in the case of Challapalli Sugars held that as the expression ‘actual cost’ has not been defined. It was held by the Hon’ble Supreme Court that it would be necessary to ascertain the connotation of the expression, in accordance with the normal rules of accountancy prevailing in commerce and industry. The Hon’ble Supreme Court opined that the accepted accountancy rule for determining cost of fixed asset is to include all expenditure necessary to bring such asset in to existence and put them in working condition. It was held by the Hon’ble Apex Court that in case money is borrowed by a newly started company which is in the process of constructing and erecting the plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed asset.
6.5 In the instant case, it is not discernable whether the interest paid for the acquisition of the impugned property has been claimed by the assessee under Chapter IVC of the Income Tax Act, 1961, namely ‘income from house property’. If the assessee had already claimed interest under the head income from house property, the same interest cannot be capitalized and added to the cost of acquisition of the property. Since these facts are not available on record, I am of the view as regards interest paid amounting to Rs. 7,00,700 for the loan availed from ICICI Bank for the purpose of acquisition of the impugned property whether to be allowed as deduction in computing the STCG is to be considered afresh by the assessing officer. The assessing officer shall take decision in accordance with law after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly.
7. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
even payment for which deduction has been claimed can be added to the cost.