Deduction u/s. 24(b) and computation of capital gains u/s 48 were altogether covered by different heads of income i.e., income from ‘house property’ and ‘capital gains’. None of them excludes operation of the other. The interest in question was indeed expenditure in acquiring asset. Since both provisions were altogether different, assessee was entitled to include interest paid on housing loan for computation of capital gains u/s 48 despite the fact that same had been claimed u/s 24(b) while computing income from house property.
FULL TEXT OF THE ITAT JUDGMENT
The present appeal has been filed by assessee against order dated 20/11/14 passed by Ld.CIT(A) for assessment year 2011-12 on the following grounds of appeal:
“1. That Order of the Learned Income Tax Officer is wrong and bad in law to the extent of addition made to the income of the Assessee, and the Learned Commissioner of Income Tax (Appeal) has also erred while confirming the additions as per the grounds following.
2. That the Learned Assessing Officer has erred both in fact and in law while disallowing claim of assessee of Rs. 16,27,671/- as per original return submitted (stated as Rs. 6,66,7661- in the assessment order) on account of interest capitalized and added to the cost of property sold, before indexing and arriving at the indexed cost of property while computing the Long Term Capital Gain and that indexation should have been applied to interest as well, and the Learned Commissioner of Income Tax (Appeal) has also erred while confirming the additions.
3. The Learned Assessing Officer has erred both in fact and law while disallowing Rs. 13,79,256/- being construction cost (cost of improvement, i.e. wood work, electric and plumbing etc.) of the new flat, necessary to make the flat livable, for claiming exemption U/S 54 from the Long Capital Gain.
4. That each Ground of Appeal is independent of each other.
5. That the Ass essee craves leave to add to or amend any ground of appeal at any time before or during the course of hearing.”
2. Brief facts of the case are as under:
The assessee filed his return of income on 28/07/11 declaring a total income of Rs.1,80,90,075/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued along with notice under section 143(1) and questionnaire. In response to the statutory notices, representative of assessee appeared before Ld. AO and filed all necessary details/information as called for. Ld. AO from the return of income observed that assessee has claimed exemption under section 54 on account of capital gain resulting from sale of residential house. During the course of assessment proceedings assessee was asked to submit the details of capital gain.
2.1. Assessee submitted that during the year under consideration it had sold the property at 803, Laural apartment, 50-60 CPA Ramaswamy Road, Alwarpet, Chennai on 30/09/10. Assessee further submitted that out of the sale consideration assessee purchased a new property at 112A Raheja Atlantis, sector 31-32, Gurgaon, Haryana on 10/12/2010.
2.2. It was further observed that assessee computed indexed cost of acquisition as under:
Indexed cost of acquisition
|Total cost of construction||Rs.1,04,54,355/-|
|Indexed cost of construction||Rs. 1,47,73,472/-|
|Total interest paid||Rs. 16,27,671/-|
2.3. During the course of assessment proceedings assessee was asked to show cause as to why the interest included in the cost of acquisition may not be disallowed, as the same has been claimed as deduction under the head “income from house property”. In response to the show cause notice, assessee replied vide submission dated 31/01/14 that it had erroneously included the interest paid on housing loan which was paid after the date of possession. The assessee having realised the mistake/error revised the calculation of cost of property sold and indexed. Accordingly assessee also paid the due taxes thereon, consequent to the revision of income. The revised calculation of cost with indexation computed by assessee is as under:
Indexed Cost of Acquisition
Amount in Rs. Amount in Rs.
|Total cost of construction||1,04,54,355/-|
|Indexed Cost of construction||1,47,73,472/-|
|Total interest paid*||5,64,569/-|
Indexed Cost of Acquisition 1,53,38,041/-
(Indexed cost of construction + total interest paid)
(* Details of interest paid)
Revised details of long term capital gain on immovable property
|Amount In Rs.|
|Net Sale Price||3,80,56,000/-|
|Less: Indexed cost of acquisition||1,53,38,041/-|
|Less: Exemption u/s 54||2,22,07,631/-|
2.4. Assessing officer thus disallowed interest paid for financial years 2005-06 and 2006-07 amounting to Rs.6,66,766/-, as it was interest paid on the loan taken for purchase of the capital asset, before the same could be put to use.
Assessing officer disallowed the expenses amounting to Rs.24,23,971/- which comprises of Rs.10,44,715/-towards other charges paid for purchase including registration charges, legal charges, documentation charges etc. and Rs.13,79,256/-incurred on cost of improvement like Woodwork, electrical and plumbing work etc before the said property could be made livable.
2.5. Aggrieved by the additions made by Ld. AO assessee preferred appeal before Ld. CIT (A) who confirmed the addition so made.
2.6. Aggrieved by the order of Ld. CIT (A), assessee is in appeal before us now.
3. It has been submitted by Ld.AR that Ground No. 1 is general in nature and therefore does not call for any adjudication.
4. Ground No. 2 has been raised against disallowance confirmed by Ld. CIT (A) towards disallowance of interest for the year 2005-06 and 2006-07. Ld.AR submitted that the entire interest paid by assessee on loan taken for acquiring capital asset deserves to be allowed.
4.1. The Ld.AR submitted that assessee during the assessment proceedings on realising the mistake corrected the computation by filing revised calculation of cost of property sold and indexed. He said that assessee suo moto disallowed interest paid on loan taken, for acquiring of capital asset after the date of possession.
Ld.AR submitted that in fact total interest on loan amounted to Rs.16,27,671/- which is allowable as cost of property, with indexation, and assessee claimed Rs.5,64,569/-without indexation as per the revised computation submitted during the course of assessment proceedings. He placed reliance upon various decisions, wherein it has been held that interest on money borrowed for acquiring capital asset will form part of cost of asset. The decisions cited by Ld.AR are as under:
4.2. On the contrary Ld. DR relied upon the orders of authorities below. He submitted that the entire interest expenses claimed by assessee cannot be included for the purposes of computing cost of acquisition, as assessee had claimed interest expenses while calculating income from house property under section 24 (b) of the Act.
5. We have perused the submissions advanced by both the sides in the light of records placed before us.
Assessee has made investment in the capital asset partly out of the borrowed funds and had incurred interest expenses thereon as under:
|F.Y.||Amount (Rs.)||Amount (Rs.)|
|2006-07 ( up to date of possession)||306569||564549|
|2006-07 (after date of possession)||102217|
5.1. Admittedly assessee has claimed the interest paid on loan taken for acquiring capital asset as expenses under section 24 (b) of the Act.
5.2. We have perused the records, analysed the facts and circumstances of the case and considered the judicial pronouncements, which was placed before us. In the case of CIT Vs. Mithilesh Kumari (supra), Hon’ble High Delhi Court 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. 95,000.00 which was the consideration for the purchase of the land but also had to pay interest of Rs. 16, 878.00 on the amount borrowed by her. The amount of Rs. 95,000.00 plus the interest paid by the assessed constitutes the actual cost to the assessed of the land. The fact that the amount of Rs. 95,000.00 was paid by the assessed to the vendor and the amount of interest of Rs. 16,878.00 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. 1,00,000.00 by raising a loan of that amount and had paid interest of Rs. 20,000.00 on the said loan and had sold the land for Rs. 1,20,000.00. 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. 20,000.00 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 adding the interest amount of Rs. 16,878.00 towards the actual cost of the land.”
5.3. Further in the case of ACIT Vs C.Ramabrahmam, the ITAT Chennai Bench ‘C’ in ITA No. 943/Mds/2012 has held that the assessee had purchased house property, availing loan. The house property was subsequently sold and assessee included interest paid on housing loan while computing capital gains u/s 48. The Assessing Officer was of opinion that since interest in question on housing loan, had already been claimed as deduction u/s 24(b), the same could not be taken into consideration for computation u/s 48 and interest amount was added to income of assessee. The CIT(A) reversed the findings of Ld.AO and held deduction u/s. 24(b) and computation of capital gains u/s 48 were altogether covered by different heads of income i.e., income from ‘house property’ and ‘capital gains’. None of them excludes operation of the other. The interest in question was indeed expenditure in acquiring asset. Since both provisions were altogether different, assessee was entitled to include interest paid on housing loan for computation of capital gains u/s 48 despite the fact that same had been claimed u/s 24(b) while computing income from house property. The revenue’s appeal was dismissed by the ITAT, Chennai Bench and the order of the ld. CIT(A) was upheld.
5.4. From these judicial pronouncements, it is very much clear that if the property is purchased from borrowed funds then interest on borrowed fund has to be paid. The amount of interest paid by assessee constitutes actual cost to the assessee for that property. To exclude interest amount from the actual cost of the assets/ property would lead to anomalous result. The interest amount should be definitely added to the actual cost of the property.
5.5. Respectfully following these legal propositions and on basis of our observations as held herein, we reverse the findings of ld. CIT(A) and hold that the entire interest paid to bank for acquiring capital asset would be eligible as part of cost of acquisition.
5.6. Accordingly we allow ground No. 2 raised by assessee.
6. Ground No. 3 relates to disallowance confirmed by Ld. CIT (A) in respect of expenses incurred towards cost of improvement being woodwork, electrical and plumbing etc of the new flat amounting to Rs.13,79,256/-.
6.1. Ld.AR submitted that the expenses were incurred by assessee to make the flat livable, the details of which are as under.
|Amount as per conveyance deed||Rs. 1,84,89,360/-|
|Stamp paper the above||Rs. 12,94,300/-|
|Other charges paid for purchase, including registration charges, legal charges, documentation
charges, EDC, IDC etc.
|Total payments to Raheja Developers||Rs.2,08,28,375/-|
|Cost of improvement i.e. wood work, electric and plumbing work etc.||Rs.13,79,256/-|
|TOTAL cost of property||Rs.2,22,07,631/-|
6.2. He submitted that the expenses incurred on new flat were explained to Ld.AO in detail supported by bills and vouchers regarding purchase of materials which fact has not been doubted by Ld.AO. He thus submitted that assessee is to get the relief in respect of expenditure incurred in the new house to make it habitable as per assessee’s choice.
On the other hand Ld.DR relied upon authorities below.
6.3. We have perused the submissions advanced by both sides in the light of material placed on record and case laws cited.
In our considered opinion assessee is eligible to get the benefit as Ld. AO has not disputed the nature of expenses incurred. Assessee incurred the expenditure to make the house habitable and therefore the claim of assessee deserves to be allowed.
6.4. Accordingly this ground of appeal by assessee stands allowed.
7. In the result appeal filed by assessee stands allowed.
Order pronounced in the open court on 19.02.2018.