MS.LATA SUBRAMANIAN,BANGALORE vs. ASST. COMMISSIONER OF INCOME TAX, BANGALORE

The assessee has raised as many as 8 grounds but the only effective grievance of the assessee is regarding the rejection of the assessee’s claim that interest of Rs. 14,44,658/- paid on loan borrowed from bank to invest in property should be considered as cost of acquisition for computing the capital gain on sale of that property.

As per the facts noted by the AO in Para 5 of the assessment order, the assessee claimed carry forward of short term capital loss of Rs. 989,622/-. The AO further noted that the assessee has capitalized interest on loan borrowed from bank for the purchase of shobha Suncrest Apartment and such capitalization is of Rs. 585,670/- in FY 2008 – 09 and Rs. 858,989/- in FY 2009 – 10. As per the AO, as per sections 49 r.w.s. 48, cost of acquisition means the cost paid to the previous owner to acquire the property increased by cost of improvement, if any. The AO disallowed this claim of capitalization of interest as cost of acquisition. Being aggrieved, the assessee carried the matter in appeal before CIT (A) but without success and now the assessee has filed this appeal before us.

Learned AR of the assessee placed reliance on a judgment of Hon’ble Karnataka High Court rendered in the case of CIT vs. Sri Hariram Hotels (P) Ltd. as reported in 229 CTR 455. Learned DR of the revenue supported the assessment order.

We have considered the rival submissions. Facts are undisputed as noted above and under these facts, we find no infirmity in the orders of the lower authorities. We also find that as per copy of Computation of Income for AY 2009 – 10 and AY 2010 – 11 available on page 6 and 9 of the paper book, the assessee has reported income from house property in respect of another property but not in respect of this property. Hence, it has to be assumed that this is a self occupied house property for which no rental income is taxable because, in spite of specific query of bench, learned AR of the assessee could not give any reply as to whether this is a let out property or self occupied property. Moreover, whatever be the fact on this aspect, it will not change the result because for let out and self occupied property both, interest on loan borrowed to acquire the property is allowable as deduction u/s 24 and it cannot be considered as a part of cost of acquisition. Now we examine the applicability of the judgment cited by the learned AR of the assessee. As per the facts noted in Para 3 of this judgment, a property was acquired by the assessee to put up a hotel out of borrowed funds and the project could not be materialized and ultimately, the property was sold. Under these facts, it was held by the tribunal that interest should be capitalized and Hon’ble Karnataka High Court upheld this tribunal order. In that case, the main contention of the revenue was this that after selling the property, a resolution is passed by the company to pay the Page 3 of 4 interest to directors and hence, there was no interest liability on the date of sale. In the present case and in that case, facts are materially different. In that case, the property in question was acquired to put up a hotel building and that project did not materialize. Hence, interest in that case was although allowable u/s 36 (1) (iii) but since, the business did not commence, it cannot be claimed or allowed. Under those facts, capitalization of interest was approved. In the present case, interest is allowable u/s 24 and this is not the case of the assessee that u/s 24, interest cannot be claimed or allowed. Therefore, in the present case, it cannot be capitalized. Moreover, in that case, this was not an objection of the revenue that interest cannot be capitalized. The objection was this that since the interest is quantifiable after date of sale, it cannot be capitalized. In our considered opinion, the ratio of this judgment is this that even if the interest is quantified in the light of board resolution of a date after date of sale, it can still be capitalized and there is no decision on this aspect that capitalization per se is proper or not. In the present case, the objection of the revenue is this that capitalization of interest is per se not justified. Hence, this judgment renders no help to the assessee in the present case.

In the result, the appeal filed by the assessee is dismissed.