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Facts
The assessee, an individual engaged in manufacturing and exporting ready-made garments, sold two immovable properties. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the capitalization of interest on borrowed loans as cost of acquisition/improvement and also disallowed payments made to farmers. The assessee appealed against these decisions.
Held
The Tribunal held that interest expenditure incurred on borrowed capital for the acquisition of properties, till the date of sale, forms an integral part of the cost of acquisition/improvement and allowed the claim of Rs.7,67,07,745/-. Regarding the payments made to farmers, the issue was restored to the Assessing Officer for verification of genuineness, necessity, and nexus with the acquisition of properties.
Key Issues
1. Whether interest capitalized on borrowed loans for property acquisition can be considered as cost of acquisition/improvement. 2. Whether payments made to farmers for obtaining clear title to the properties are allowable as part of the cost of acquisition.
Sections Cited
Sec. 48 of the Income Tax Act, 1961, Sec. 143(3) of the Income Tax Act, 1961, Sec. 144B of the Income Tax Act, 1961, Sec. 40(a)(ia) of the Income Tax Act, 1961, Sec. 37 of the Income Tax Act, 1961
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI ABY T VARKEY & SHRI S. R. RAGHUNATHA
आदेश / O R D E R PER S. R. RAGHUNATHA, AM:
This appeal by the assessee is arising out of the order dated 23.09.2025, passed by the Learned Commissioner of Income Tax (Appeal), NFAC, Delhi (in short “ld.CIT(A)”) for the assessment year (A.Y) 2023-24 against the order u/s.143(3) r.w.s 144B of the Income Tax Act, 1961 (hereinafter the ‘Act’) passed by the Assessing Officer (AO) dated 24.03.2025.
The assessee has raised the following grounds of appeal:
:-2-: ITA. No:2821/Chny/2025 “2. The authorities below erred in not allowing the interest capitalized of Rs.7,67,07,745 claimed as cost of acquisition/improvement while computing the capital gains.
3. The appellant submits that the impugned land sold during the year was acquired out of the loans availed and the interest paid on such loans were capitalized with the cost of the asset every year and the accumulated interest included in the cost of the asset was claimed as cost of improvement while computing the capital gains when the said land was sold.
The appellant submits that the authorities below are not disputing the above fact that the interest expenditure was not claimed as revenue expenditure but only capitalized over the past years but are holding that the interest on loans borrowed for acquiring the land cannot be considered as cost of acquisition.
The learned NFAC relying on the decision of the Apex Court in the case of CIT Vs. Tata Iron & Steel Co. Ltd. (231 ITR 285) has held that the price originally paid for purchase of the property alone constitute "cost" and not subsequent payment of interest. The appellant submits that the subsequent payment of interest capitalized on the loans availed for acquiring the asset has to be allowed if not as cost of acquisition but as cost of improvement as they were made subsequently after acquisition of the asset in the light of the various decision relied on by the appellant before the NFAC and also as per Accounting Standard 16.
The appellant therefore prays that the indexed cost of interest capitalized of Rs. 7,67,07,745/- may be allowed as cost of acquisition/improvement against the computation of capital gains and render justice.
7. The NFAC erred in confirming the addition of Rs. 1,16,13,639 to the long term capital gains representing payments made to farmers on the ground that these payments were not recorded in the sale deed.”
Brief facts of the case are that the assessee is an individual, engaged in the business of manufacturing and exporting ready-made garments and has filed his return of income on 30.10.2023 for A.Y.2023-24, declaring total income of Rs.3,24,04,810/-. The case was selected for scrutiny under CASS and the AO issued statutory notices to the assessee and called for details. In response, the assessee submitted its reply along with details of supporting documents for verification. On perusal of the information available with the department and the reply/documents submitted by the assessee, the AO observed that the assessee has sold immovable property of Rs.32,75,00,000/- and declared long term capital gain of Rs.7,19,97,100/- after deducting the index cost of acquisition of Rs.25,55,02,900/-. Further, the AO observed that the assessee has deducted indexed cost of acquisition of Rs.1,16,13,639/- on account of excess payment to farmers and an amount of Rs.7,67,07,745/- on account of indexed cost of interest
:-3-: ITA. No:2821/Chny/2025 capitalized. Furthermore, on perusal of sale and purchase details as well as P&L account and other documents submitted by the assessee, the AO found that the assessee has paid rent of Rs.1,47,14,356/- and deducted TDS on payment of Rs.1,42,82,956/- on account of rent. Subsequently, on perusal of P&L account & audit report of the assessee, the AO found that the assessee has debited expenses of Rs.69,21,472/- on account of GST-interest & late fee. The AO made an addition of Rs.8,83,21,384/- as long term capital gain income and amount of Rs.1,29,420/- as disallowance u/s.40(a)(ia) and amount of Rs.69,21,472/- as disallowance u/s.37 of the Act by arriving a total income of Rs,12,77,78,086/- and concluded the assessment proceedings by passing an order u/s.143(3) r.w.s 144B of the Act dated 24.03.2025.
4. Aggrieved by the Order, the assessee prefers an appeal before the Ld.CIT(A), for deleting the additions made by the Assessing Officer.
5. The ld.CIT(A) has confirmed the addition of Interest capitalized claimed as cost out of long term capital gains to the tune of Rs.7,67,07,745/- along with amounts paid to farmers for of Rs.1,16,13,669/- in para No.6.1 and 6.2 of the order dated 23.09.2025. Aggrieved by the order of the ld.CIT(A), the assessee preferred an appeal before us.
6. The ld.AR of the assessee stated that the ld.CIT(A), NFAC erred in confirming the additions of Rs.8,83,21,384/- to the long term capital gains returned by the assessee and not allowing the interest capitalized of Rs.7,67,07,745/- claimed as cost of acquisition/improvement while computing the capital gains. Further, the ld.AR stated that the ld.CIT(A) erred in confirming the addition of Rs.1,16,13,639/- to the long-term capital gains representing payments made to farmers on the ground that these payments were not recorded in the sale deed. The ld.AR submitted that the assessee had borrowed loans to the tune of Rs.11.16 crores to purchase the two properties, which have been sold for Rs.24.00 Crores (Rs.12.00 Crores each). Accordingly, the assessee had paid total interest of Rs.6.51 crores from financial year 2016-17 to 2019-20, which was claimed as cost
:-4-: ITA. No:2821/Chny/2025 of the properties sold with a indexation value of Rs.7.51 crores. The two properties were bought for Rs.6.00 Crores on 17.08.2016 and for Rs.6.26 crores on 24.06.2019.
Further, the ld.AR submitted that the assessee also paid Rs.1.42 crores to the farmers (indexed cost of Rs.1.73 crores) to get the right title to the properties purchased. These payments were made to farmers and other agreement holders to obtain the proper title to the property. The ld.AR drew our attention to the details of payments made to farmers in the written submission made. Therefore, the ld.AR prayed that the deduction of Rs.8,83,21,384/- may be allowed while computing the capital gains and the disallowances made by the Assessing Officer may be deleted and justice rendered.
Per contra, the Ld.DR stated that the assessee has provided insufficient submissions of the explanation/documents during the assessment and the appeal proceedings and hence the impugned order of the Ld.CIT(A) be confirmed by dismissing the appeal of the assessee.
We have carefully considered the rival submissions, perused the material available on record and examined the orders of the authorities along with the paper book filed. The dispute before us, insofar as Ground Nos. 2 and 7 are concerned, relates to (i) allowability of interest capitalized on borrowed funds as part of cost of acquisition/improvement while computing long-term capital gains, and (ii) allowability of payments made to farmers claimed as part of cost of acquisition.
It is an admitted fact that the assessee had purchased two immovable properties during the financial years 2016-17 and 2019-20 for a total consideration of Rs.12.26 crores, funded partly through borrowed capital amounting to Rs.11.16 crores. It is also undisputed that the assessee incurred interest expenditure of Rs.6.51 crores on such borrowings till the date of sale of the properties and claimed the same as part of cost of acquisition/improvement, duly indexed to Rs.7,67,07,745/-.
:-5-: ITA. No:2821/Chny/2025
We note that the Assessing Officer as well as the ld. CIT(A) disallowed the claim primarily on the ground that interest expenditure is not allowable as cost while computing capital gains. However, such a view is not sustainable in law. Section 48 of the Act clearly provides that expenditure incurred wholly and exclusively in connection with the acquisition of a capital asset is allowable while computing capital gains. Interest paid on borrowed funds utilized for acquiring a capital asset, till the date of sale, forms an integral part of the cost of acquisition/improvement.
The assessee has furnished details of loan availed, interest paid thereon and nexus between the borrowed funds and acquisition of the impugned properties. The lower authorities have not disputed the utilization of loans for acquisition of the properties, nor have they pointed out any defect in the computation of interest or indexation claimed by the assessee.
In view of the settled legal position and considering the facts of the present case, we hold that the interest expenditure incurred on borrowed capital for acquisition of the properties is allowable as part of cost of acquisition/improvement. Accordingly, the disallowance of indexed interest of Rs.7,67,07,745/- is hereby deleted and the same is directed to be allowed while computing long-term capital gains by allowing the corresponding ground of appeal raised by the assessee.
With regard to the claim of payments made to farmers amounting to Rs.1,16,13,639/- (indexed value Rs.1.73 crores), the assessee has contended that such payments were made to farmers and agreement holders to obtain clear and marketable title over the properties. The assessee has also submitted that these payments were necessary for completing the acquisition and perfecting the title.
We observe that the Assessing Officer and the ld. CIT(A) have rejected the claim mainly on the ground that such payments do not find mention in the registered sale deeds and that sufficient documentary evidence was not furnished during assessment proceedings.
:-6-: ITA. No:2821/Chny/2025
Considering the totality of facts and in the interest of justice, we are of the view that this issue requires verification at the level of the Assessing Officer. If the payments were indeed incurred wholly and exclusively for acquiring clear title to the properties and are supported by credible evidence such as agreements, confirmations, payment proofs and identity of recipients, the same would qualify as cost of acquisition u/s.48 of the Act.
Accordingly, we restore the issue relating to payments made to farmers to the file of the Jurisdictional Assessing Officer with a direction to verify the genuineness, necessity and nexus of such payments with the acquisition of the properties. The Jurisdictional Assessing Officer shall allow the claim in accordance with law after providing reasonable opportunity of being heard to the assessee.
In the result, the appeal of the assessee is partly allowed for statistical purposes, in the manner indicated above.
Order pronounced in the open court on 02nd February, 2026 at Chennai.