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Facts
The assessee challenged the CIT(A)'s order concerning four key additions/disallowances, including restricting depreciation on leased cars to 15%, disallowing interest on a loan for plot purchase as part of the cost of acquisition, an addition to income from house property by misclassifying car lease income, and enhancing income by disallowing a loss on the sale of land. The CIT(A) had sustained the Assessing Officer's actions on these matters.
Held
The Tribunal allowed depreciation on leased cars at 30% and held that interest on borrowed capital for acquiring a plot is part of the cost of acquisition for computing capital gains. It directed the deletion of the addition to income from house property, finding the Assessing Officer misclassified car lease income. Furthermore, the Tribunal allowed the capital loss on the sale of land, reversing the CIT(A)'s enhancement of income.
Key Issues
1. Eligibility for depreciation rate on leased cars used for hiring. 2. Inclusion of interest on borrowed capital for plot purchase as part of cost of acquisition. 3. Correct classification of car lease income versus rental income from house property. 4. Allowability of capital loss on the sale of land.
Sections Cited
Section 57, Section 24(b), Section 48, Section 139(1)
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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI G.S. PANNU, VICE- & SHRI CHALLA NAGENDRA PRASAD
PER CHALLA NAGENDRA PRASAD: JUDICIAL MEMBER:
This appeal is filed by the assessee against the order of the learned Commissioner of Income-Tax (Appeals), Ghaziabad dated 31.10.2019 for the assessment year 2013-14.
The assessee raised the following grounds of appeal:
1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income-Tax(Appeals) [CIT(A)] is bad both in the eye of law and on facts. 2.(i) On the facts and circumstances of the case, ld. CIT(A) has erred both on facts and in law in confirming the action of the A.O. in making addition of Rs.4,83,907/- by restricting the claim of depreciation to 15% on leased cars.
(ii) That the addition has been confirmed without appreciating the fact that the cars were being used for hiring.
3.(i) On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the A.O. in making the addition of Rs.19,22,524/-, being interest paid on the amount of loan borrowed to purchase the plot.
(ii) That the said addition has been made despite the fact that the interest on loan taken to purchase the plot is a part of cost of acquisition.
4. (i) On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the A.O. in making the addition of Rs.2,75,520/- under the head ‘income from house property’. (ii) That the addition has been confirmed without considering the facts of the case that the rental income from house property and on cars were shown separately.
5.(i) On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in enhancing the income of the assessee to the extent of Rs.39,75,568/- on account of loss incurred on sale of land.
Ground no.1 of grounds of appeal is general nature, hence, called for no adjudication.
3. Ground no.2 is with respect to disallowance restricting the depreciation to 15% as against 40% claimed by the assessee on cars.
The assessee gave two cars on hire and earned income of Rs.5,73,600/- and this was offered to income under the head “income from other sources”. The assessee claimed expense i.e. car insurance, interest on car loan from the said income. The assessee also claimed depreciation on cars @ 40%. The Assessing Officer, while completing the assessment, restricted the depreciation to 15% which was sustained by the learned CIT (Appeals). The learned counsel submits that the cars were given on hire and lease rent received from the vehicles was offered as income and, therefore, the depreciation on leased vehicles has to be allowed at 30% and not at 15%.
Learned Departmental Representative placed reliance on the order of the Assessing Officer.
We have heard the rival contentions and perused the material placed on record. On perusal of page no.18 of the paper book which is the letter furnished to the Assessing Officer in the course of assessment proceedings we noticed that the assessee contended before the Assessing Officer that he owns three cars out of which two cars were given on lease rent and one car was used for personal purposes.
It was submitted that the income earned on leasing of these cars was offered to tax under the head “income from other sources” and claimed expenses under Section 57 of the Act, namely, car insurance, interest on car loans and depreciation. The assessee also provided copies of agreements, entered into for lease of the vehicles, however, we noticed that the Assessing Officer restricted the depreciation to 15% only. The appendix where the rate of depreciation to be allowed on vehicles given on hire suggests that motor lorries and motor taxies used in a business of running them on hire are eligible for depreciation @ 30%. In this case, since in this case, the assessee has given his vehicles on lease basis on hire, the Assessing Officer should have allowed depreciation @30% instead of 15%. Thus, we direct the Assessing Officer to allow depreciation @ 30% against 40% claimed by the assessee and allowed by the Assessing Officer at 15%.
Ground no.2 of the grounds of appeal of the assessee is allowed.
Coming to ground no.3 of grounds of appeal i.e. interest paid on loan borrowed for purchase of plot as part of cost of acquisition, we observe that in the course of assessment proceedings, the Assessing Officer noticed that the assessee took loan from India Bulls Financial Services Ltd. and paid interest for the financial years 2007- 08 to 2014-15 totaling to Rs.38,45,048 and the same has been added to the cost of acquisition of the property sold. The Assessing Officer required the assessee to justify its claim and the assessee has replied that he has intended to construct house property on the plot, however, due to unavoidable circumstances, the same could not be constructed and, therefore, the interest was capitalized and added to the cost of acquisition of the property sold in order to claim as expense out of income from house property. Not convinced with the reply, the Assessing Officer referring to the decision of the Mumbai Bench in the case of the Vikram Sadananad Haskote held that interest paid by the assessee for the period commencing from the date of acquisition of assets till the date of sale would not form part of cost of acquisition.
Accordingly, interest relating to cost acquisition of assets was disallowed from the cost of acquisition claimed by the assessee. As the assessee as holding 50% of the shares in the property. Assessing Officer disallowed Rs.19,22,524 being 50% of interest paid of Rs.38,45,045. This was sustained by the learned CIT (Appeals).
The learned counsel before us submits that the learned CIT (Appeals) sustained the disallowance observing that the details during the appellate proceedings, the date of payment given by the assessee by way of disbursal letter did not tally with the prepayment letter given by the assessee. The learned counsel further submits that the detail of interest paid in earlier years is placed at page 25 of the paper books. It is submitted that prepayment details and disbursal letter from the India Bulls are given at pages 26 to 35 of the paper books and it could be seen therein that there is no difference in amounts stated as the interest paid in earlier years beyond disbursal letter.
The learned counsel further submits that interest paid by the assessee on acquisition of assets in earlier years is to be treated as part of cost of acquisition and placed reliance on the decisions of Hon'ble Delhi High Court in the case of CIT vs. Mithlesh Kumari – (92 ITR 9) and the decision of the Hon'ble Madras High Court in the case of CIT vs. Raja Gopala Rao – (252 ITR 459). Further, reliance was also placed on the decision of Co-ordinate Bench in the case of Sh.
Subhash Bana Vs. ACIT – dated 19.02.2018.
On the other hand, learned Departmental Representative supported the orders of the authorities below.
Heard rival contentions. We observe that more or less an identical issue came up before the Co-ordinate Bench in the case of Sh. Subhash Bana (supra) and the Co-ordinate Bench following the decision of Hon'ble jurisdictional High Court in the case of CIT vs. Mithlesh Kumari (supra) held as under:
“5.2 We have perused the records, analyzed 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),
“(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 assessee in order to purchase the land had not only to borrow the amount of Rs.95,00,000.00 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 assessee constitutes the actual cost to the assessed of the land. The fact that the amount of Rs.95,000.00 was paid by the assessee 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 assessee 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 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/sw.48. The Assessing Officer was 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 C) 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.”
Following the above decisions, we direct the Assessing Officer to allow the interest on borrowed capital as part of cost of acquisition for the purpose of computing capital gains. Ground no.3 of grounds of appeal of the assessee is allowed.
13. Coming to ground no.4 i.e. addition of Rs.2,75,520, we observe that the Assessing Officer in the assessment order stated that the assessee received rent of Rs.5,73,600 but has shown rental income of Rs.1,80,000 only and, therefore, he recalculated the income from house property and made an addition of Rs.2,75,520 which was sustained by the learned CIT (Appeals).
The learned counsel for the assessee submits that the Assessing Officer went wrong in considering the lease income from cars as the rent received on property and computed the income from house property which is not correct. The assessee has separately shown income of Rs.1,80,000 under the head “income from house property”. Therefore, the assumption of the Assessing Officer that assessee has received rent of Rs.5,73,600 under the head “income from house property” is not correct.
Heard rival contentions. On perusal of the computation of income filed at pages 1 to 6, we observe that the assessee has declared income from house property at Rs.1,80,000 and also declared lease rent from cars of Rs.5,73,600 under the head “income from other sources”. On perusal of the assessment order, we notice that the Assessing Officer misdirected himself in considering the rental income from property at Rs.5,73,600 and in recomputing the income under the head “income from house property” Thus, we direct the Assessing Officer to delete the addition of Rs.2,75,520 made in the assessment order.
The last and ground no.5 of grounds of appeal of the assessee is in respect of enhancing the income by the learned CIT (Appeals) on account of loss on sale of land. We observe from the learned CIT (Appeals)’s order that he was of the view that assessee has claimed loss on sale of plot and in the absence of any reply, the learned CIT (Appeals) disallowed a sum of Rs.39,75,568 which resulted in enhancement of income.
17. Before us, the learned counsel for the assessee submits that the assessee had declared an amount of Rs.4,32,164/- being loss under the head ‘income from capital gain/loss’. However, on coming to know that there was some computational error in the capital loss shown by the assessee, the computation was suo moto revised by the assessee during the assessment proceedings. On revision capital gain of Rs.9,20,328/- was declared by the assessee and the capital loss of Rs.4,32,164/- which was earlier claimed to be carry forward was not so claimed. The same is also accepted by the Ld. A.O (page 2 of assessment order). The Hon’ble CIT(A) stating that the loss of Rs.39,75,558/- cannot be allowed to the assessee on sale of plot as it was not claimed by the assessee in original return of income. The fact on record remains that on recomputation of capital gains assessee himself is not claiming any net loss. In fact the loss on sale of property as now been shown by the assessee is much lesser than what has been shown earlier in the return and therefore there is no further loss that has been claimed by the assessee. Therefore, the question of allowability of loss through revised computation does not arise. The attention is invited to the fact that the assessee has filed its original return of income under Section 139(1) within the time prescribed under the Section. It is not the case whereby revising the computation the assessee had claimed some extra loss in fact he has reduced the loss earlier claimed. The Ld. A.O. had accepted the revised computation made by the assessee and the learned Commissioner (Appeals) made the disallowance misinterpreting the facts of the case.
Heard rival contentions and perused the orders of the authorities below.
We find force in the submissions of the learned CIT (Appeals). As a matter of fact, on perusal of the assessment order, it is the finding of the Assessing Officer that the assessee in the course of assessment proceedings submitted revised calculation sheet of capital gain computing the Long Term Capital Gain of Rs.9,20,328/- as against loss of Rs.4,21,664/- declared in the return of income. In the revised calculation sheet of capital gain, we observe that the assessee has taken the sale price at Rs.36,88,000/- and the indexed cost of acquisition at Rs.76,63,568/- which resulted in capital loss of Rs.39,75,568/-. The learned CIT (Appeals) was under the view that this capital loss allowed by the Assessing Officer is not correct. We observe that the cost of acquisition arrived at by the assessee at Rs.49,56,133/- includes interest of Rs.19,22,524/- on borrowed loan for purchase of property which was treated as cost of acquisition. We also notice that the purchase cost of the property to the assessee’s share of 50% is Rs.29,91,391/- and after indexation, the cost of acquisition stood at Rs.76,63,568/-. In the circumstances, the apprehension of the learned CIT (Appeals) that the Assessing Officer allowed Long Term Capital Gain loss of Rs.39,75,568 appears to be not correct. Thus, there is no ground for any disallowance of capital loss of Rs.39.75,560 as directed by the learned CIT (Appeals). This ground of appeal of the assessee is allowed.