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Facts
The Revenue appealed an order allowing the assessee to deduct indexed cost of interest paid on borrowed funds for property acquisition when calculating Long-Term Capital Gains (LTCG). The assessee had claimed this deduction, which they had also claimed as deduction under section 24(b) in earlier years.
Held
The Tribunal held that the interest paid on borrowed funds for the acquisition of a capital asset, prior to the amendment by Finance Act, 2023, is deductible for computing capital gains, even if a deduction was claimed under Section 24(b) in earlier years, as there was no specific prohibition against double deduction.
Key Issues
Whether interest paid on borrowed funds for property acquisition can be included in the cost of acquisition for calculating capital gains, even if it was also claimed as a deduction under Section 24(b) in earlier years.
Sections Cited
Section 24(b), Section 48, Section 55
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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI GIRISH AGRAWAL
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Revenue against the order dated 13.07.2023, impugned herein, passed by the National Faceless Appeal Center (NFAC)/ Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2013-14.
Brief facts relevant for adjudication of this appeal are that the Assessee had sold the property valued at Rs.27,00,00,000/- which was purchased from borrowed funds and for claiming the long term capital gain on the same, has deducted the amount of Rs.9,90,67,611/- as indexed cost of acquisition and Rs.3,95,42,739/- as indexed cost of interest paid to bank (shown under “indexed cost of improvement”) and offered the amount of Rs.13,13,89,649/- to tax on account of Long Term Capital Gains (LTCG).
The Assessee had claimed the respective applicable amount as deduction u/s 24(b) of the Act and rest of the amount as indexed cost of improvement/acquisition.
Considering the case of the Assessee, the Assessing Officer (AO) framed two questions which are as under:
i) Whether the interest paid is a cost of acquisition/improvement? ii) Whether the benefit of indexation is to be allowed to the interest cost?
The AO perused the provisions of section 55 of the Act and also reproduced in para 4.2 of the assessment order and after analyzing the provisions observed that the section 55 of the Act clearly says that the case of improvement means “all the expenditure of a capital nature incurred in making any additions or alternations to the capital asset by the Assessee after it became his property”. The interest payment on housing loan cannot be said to be the expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the Assessee after it became his property.
5.1 The AO further observed that it is clearly evident from reading of section 55 of the Act that in no situation does the definition of cost of the acquisition involve bringing in any cost incurred after the date of acquisition, unless the cost of improvement and in the instant case, there is no improvement done in the property.
5.2 The AO further relied on the judgments passed by the Hon’ble Tribunal at Mumbai in the case of V. Mahesh, Income Tax Officer vs. Vikram Sadanand Hoskote (2007) 18 SOT 130 (Mum) wherein it was held “that it cannot be said that expenditure incurred after the asset brought into existence i.e. after the acquisition of the asset would form part of the actual cost and that therefore interest paid on the loan received on the mortgage of the property would not form part of the cost of acquisition”.
5.3 The AO also relied on the judgment of the Tribunal in the case of Harish Krishnakant Bhatt vs. ITO (2004) 91 ITD 311 (Ahmedabad) wherein the Hon’ble Tribunal was pleased to hold “that interest paid for acquiring share is not liable as a deduction from capital gains after the date of acquisition of the shares”.
5.4 On the aforesaid analyzations, the AO ultimately disallowed the amount of Rs.3,95,42,739/- and added the same to the income of the Assessee by observing and holding “that interest expenditure on borrowed funds cannot be the part of cost of the acquisition after the date of acquisition unless it is the cost of the improvement and in the instant case no improvement was done and that too with the borrowed funds. Thus such interest paid of Rs.3,95,42,739/- (after taking indexation) after the date of acquisition is not a cost of acquisition/improvement and it cannot be allowed as a deduction and therefore the same is being disallowed and added back to the income of the Assessee as LTCG”.
The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner, who by considering the conclusion drawn by the AO and the contentions raised by the Assessee along with various judgments as reproduced in para No.10 of the impugned order and analyzing the provisions of law as well as contrary judgments concerning the issue, ultimately allowed the claim of the Assessee by observing and concluding as under:
“13.0 I have carefully considered the grounds of appeal raised by the assessee and written submissions made in support of the appeal, the information downloaded from departmental portals and examined the issue under dispute in the light of the facts and circumstances of the case and relevant provisions of the statute and judicial precedent quoted by the appellant.
14.0 Briefly stated the facts of the case are that the assessee, Sri Neville Tuli, being an Individual, filed his return of income for the impugned AY 2013-14 electronically on 31.03.2015, declaring a total income of Rs. 13,48,94,830/-. Subsequently, the case was picked up for Scrutiny under CASS. Accordingly, the AO issued the statutory notices u/s. 143(2) and 142(1) of the Act to the assessee, calling for various details and documentary evidence. In response thereto, the assessee submitted the certain details and documentary evidences before the AO. After having considered the submissions made by the assessee, the AO framed the impugned assessment order u/s. 143(3) of the Act dated 30.03.2016, determining the total income of the assessee at Rs. 17,44,37,570/-. While doing so, the AO made a disallowance of Rs. 3,95,42,739/- against the claim of indexed cost of interest as deduction while computing the capital gains. Aggrieved with the decision of AO, the assessee filed the present appeal.
15.0 During the appeal proceedings, it is noticed that the assessee 15.0 had claimed the deduction of Rs. 1,50,000/- each under the income from house property under section 24(b) of the Act i.e., interest on borrowed capital in the ITRs of AY 2011-12 and 2012-13. The fact is not recorded in the assessment order. From this, it can be stated that the assessee claimed deduction of the same interest expenditure under the head Income from House Property in the earlier years and as cost of acquisition/improvement during the current AY 2013-14. On the said facts of the case, the impugned issue is adjudicated in the subsequent paragraphs of the order.
16.0 I have perused the provisions of the sections 48,49 and 55 of the Act. These sections speak about the cost of acquisition of capital asset in computing the capital gains. However, these sections are not clearly speaking about the allowability of interest paid on housing loan as part of cost of acquisition in computing the capital gains. I have come across conflicting decisions of the tribunals and high courts on allowability of deduction of interest expenditure on housing loan u/s 48 as cost of acquisition. The following case laws have been referred to me by the appellant in support of his claim. The gist of the decision in each case is as under-
"(1) CIT v. K. Raja Gopala Rao[2001] 252 ITR 459/ [2002] 125 Taxman 148 (Mad.): The case related to sale of a hotel property and the court decided that the interest on capital borrowed for the purpose of acquisition of the property shall be considered as cost of acquisition. The reason stated is payment of consideration for the acquisition of property indisputably having been made with the loan funds, the borrowing directly pertaining to the acquisition of property. Hence, the interest paid thereon would form part of the cost of acquisition.
(II) CIT v. Sri Hariram Hotels (P.) Ltd. [2010] 325 ITR 136/188 Taxman 170 (Kar.): Assessee took the loans from the directors to acquire the property te and any interest paid thereon would also be accounted for towards the cost of acquisition of the asset.
(III) Asstt. CIT v. C. Ramabrahman [2012] 27 taxmann.com 104 (Chennai): In this case, the assessee had transferred a house property for certain consideration. While computing the capital gains, assessee claimed a deduction of certain amount of interest paid on a housing loan for acquisition of the said property. A deduction was allowed by the department u/s 24(b) of the Income- tax Act in earlier AYs. Due to this, the AO disallowed the claim for deduction of the said interest while computing the capital gains of the current AY in the assessment order. Not satisfied with the AO's order, assessee contested the said order before CIT(A). The CIT(A) allowed the claim of the assessee stating that, the assessee is eligible to claim the deduction of interest u/s 48 of the Act, despite the fact that the same had been claimed and allowed u/s on 24(b). The Revenue pleaded before the ITAT that, once the assessee had availed of a deduction under section 24(6) for interest, he is not entitled to claim again a deduction of the same amount for the purposes of computation of Capital Gains u/s 48. The Hon'ble ITAT observed that there was no dispute about the fact that the interest in question was claimed and allowed as a deduction in the past in computing the income from house ante property under the statutory provisions of section 24(b). It further noted that the assessee had chosen to claim the said interest again as a deduction in computing the Capital Gains. The Tribunal, on consideration of the facts and the law, held as under: -
‘8. We are of the opinion that deduction u/s. 24(b) and computation of capital gains u/s. 48 of the "Act" are altogether covered by different heads of income, i.e., "income from house property" and "capital gains". Further, a perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. In other words, a deduction u/s. 24(b) is claimed when concerned assessee declares income from 'house property', whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed u/s 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains u/s 48 of the "Act". Therefore, the CIT(A) has rightly accepted the assessee's contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(Appeal).'
On perusal of the above decisions, it is noticed that the Tribunal has allowed a double deduction in respect of the same expenditure once while computing the house property income and again while determining the taxable capital gain in the subsequent AY considering the absence of specific prohibition in the Law under the provisions of Sec.24(b) and Sec. 48 for the double claim of deduction.
17.0 However, there are certain contradictory decisions in favour of Revenue by the Hon'ble Karnataka High Court and Hon'ble ITAT (Bangalore) on the impugned issue on the ground of avoidance double deduction of interest expenditure under S.48 and Sec.57 of the Act. The decisions in brief are stated below.
"CIT v. Maithreyi Pai [1985] 152 ITR 247/[1984] 18 Taxman 75 (Kar.): Hon'ble Karnataka High Court inferred that the taxpayer shall not claim a double deduction in respect of the same expenditure. Here in the taxpayer had claimed a deduction in respect of interest paid in respect of a loan taken to purchase shares u/s 48 and the interest expenditure is claimed from her dividend income as well u/s 57. The double deduction of expenditure of interest was not permitted to claim by the assessee in this decision.
Captain B.L. Lingaraju v. ACIT [IT Appeal No. 906/Bang/2014]: Here in this case, the claim of the assessee for deduction under section 48 for the interest paid on a loan was disallowed by the AO on the ground that the said interest was allowed as deduction under section 24(b) in computing the income from house property. Later, the said action of the AO was upheld by the CIT in appeal. Not satisfied with the CIT(A) order, assessee approached the Hon'ble tribunal relying on several decisions of ITATs and Hon'ble HC of Madras. The Tribunal considered the facts and circumstances of the case along with the judgments and written submission and noted that the Court in the case of Sri Hariram Hotels (supra) had followed its earlier decision in the case of Maithreyi Pai(supra) to hold in Hariram Hotels case (supra), that an interest paid on borrowings for the acquisition of capital asset must fall for deduction under section 48 only if the same was not allowable as deduction under section 57 of the Act and that no assessee under the scheme of the Act could be allowed a deduction of the same amount twice over. Further, the Tribunal after analyzing the facts of Captain B. L. Lingaraju's case (supra), noted that the assessee had claimed a deduction of interest of Rs. 1,50,000 in computing the income from self-occupied house property as per section 24(b) of the Act under Income from House property. Relying on the decision of the jurisdictional Karnataka High Court in the case of Maithreyi Pai (supra), the Tribunal held that no deduction under section 48 could be allowed for the same interest in computing the Capital Gains, where it was allowed as deduction or was allowable as a deduction. Finally, the appeal of the assessee was dismissed by the Tribunal.”
18.0 The appellant relied on the decision of the jurisdictional ITAT Mumbai) [supra] in the case of Shri Fritz D. Silva. In the said order, the ecisions relied on by the AO are distinguished and a decision is taken in vour of assessee on the impugned issue by allowing the interest incurred for cquisition of capital asset as deduction u/s 48 of the Act. By relying on the ecisions stated in the written submissions and due to the conflicting decisions the various courts and ITATS, the appellant requested to delete the sallowance by taking a decision in favour of the assessee as per the decision the case of CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC). After careful xamination of the facts of the case and arguments of the assessee, I find a rce in his arguments based on the above decisions of the jurisdictional ITAT nd also depending on the latest insertion of a proviso under the clause (ii) of e Sec.48; which is reproduced below for ready reference.
“Mode of computation 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: -
(i) expenditure incurred wholly and exclusively in connection with such transfer,
(ii) the cost of acquisition of the asset and the cost of any improvement thereto;
Following shall be inserted in clause (ii) of section 48 by the Finance Act, 2023, w.e.f. 1-4-2024:
Provided that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA.
….. …..” [Emphasis Supplied]
19.0 The above amendment brought into the Act by Finance Act, 2023 is coming into effect only from AY 2024-25. Further, the said amendment is not clarificatory in nature to apply retrospectively. Therefore, the explicit provisions of Sec.24(b) and Sec.48 as existed and applicable as on 31.03.2013 shall be applied while computing the capital gains by duly following the decisions of the jurisdictional ITAT which are binding on the CIT(A). Accordingly, the ground of appeal raised by the appellant is allowed.
20.0 In the result, the appeal filed by the assessee Sri Neville Tuli against the order u/s 143(3) for the AY 2013-14 is allowed.”
The Revenue Department, being aggrieved, is in appeal before us and raised the sole ground of appeal which read as under:
“Whether on the facts and circumstances of the case in law the Ld. CIT(A) is correct in allowing the indexed cost of interest paid in the Bank of Rs.3,95,42,739/- for calculating the Long-Term Capital Gains on sale of the property by not considering the fact that the said interest amount was also claimed under section 24(b) of the I.T. Act, 1961 in the relevant years where in it was paid of.”
We have heard the parties and perused the material available on record and the judgments cited by the parties. From the sole ground, it appears that the Revenue Department has claimed that the Ld. Commissioner erred in allowing the indexed cost of interest paid in the bank to the tune of Rs.3,95,42,739/- for calculating the LTCG on a sale of property, by not considering the fact that the said interest amount was also claimed u/s 24(b) of the Act, in the relevant years, wherein it was paid off.
8.1 The Ld. D.R. emphasized on the ground raised in appeal, whereas Ld. Senior Advocate Shri Porus Kaka, the Ld. A.R. of the Assessee drew our attention to the para No.4 of the assessment order, wherein it is specifically recorded by the AO that a property has been purchased with borrowed funds and the Assessee had claimed deduction u/s 24(b) of the Act and for the balance the Assessee has claimed it as indexed cost of improvement/acquisition, which goes to show that no double deduction has been claimed by the Assessee, as under the provisions of section 24(b) of the Act, the maximum benefit of deduction can be claimed up to the amount of Rs.1,50,000/- only. As it appears from the para 4.1 that the Assessee claimed the deduction u/s 24(b) of the Act to the extent of allowable amount of deduction and rest of the amount was claimed as indexed cost of improvement/acquisition.
8.2 From the rival contentions raised by the parties question emerges “as to whether the interest paid on the bowered funds for purchase of property, is allowable as deduction while computing the capital gains or not.
8.3 The Ld. Senior advocate further drew our attention to para 15 of the impugned order, wherein it clearly recorded that the Assessee had claimed the deduction of Rs.1,50,000/- each under the income from house property u/s 24(b) of the Act i.e. interest paid on borrowed capital in the ITRs of A.Y. 2011-12 and 2012-13, whereas this fact is not recorded in the assessment order. From this, it can be inferred that the Assessee in the earlier years, as claimed in the A.Y. 2013-14 under consideration, has also claimed the similar deduction of the interest expenditure under the head income from house property and as cost of acquisition/improvement, which has been continuously allowed by the revenue Authorities and therefore the rule of consistency is required to be followed.
8.4 We are in agreement with the explanation offered by Ld. Sr. Advocate that from the aforesaid observations of the AO and the Ld. Commissioner it shows without saying that the Assessee has not claimed any double deduction and even otherwise in the earlier assessment years the same deduction was claimed and has been allowed.
8.5 We further are also in agreement with the argument raised by the Ld. Senior Advocate that even otherwise before considering/calculating the capital gain, we should consider the provisions of section 48 of the Act, wherein the provision has been inserted in clause II vide Finance Act, 2023 and w.e.f. 01.04.2024, whereby it is provided that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the account of interest under clause (b) of section 24 or under the provisions of chapter VIA. And therefore for the period prior to that provision inserted and made applicable from 01.04.2024, no such restriction can be imposed and/or made applicable.
8.6 We observe that this particular amendment has been taken care of by the Ld. Commissioner, who by determining that the said amendment not being clarificatory in nature and therefore cannot be applied retrospectively. The Ld. Commissioner at last by considering the explicit provisions of section 24(b) of the Act as existed and applicable as on 31.03.2013, applied the same to the instant case and by following the decisions of the jurisdictional Tribunal favoring the Assessee and the dictum laid down by the Hon’ble Apex Court in the case of CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC) wherein it was held “that if two reasonable constructions of a taxing provision are possible, then the construction which favors the taxpayers must be adopted” ultimately allowed the claim of the Assessee.
8.7 Admittedly, prior to insertion of provision vide Finance Act, 2023 and made applicable from 01.04.2024, there was no such provision/restriction for excluding the deduction claimed on account of interest paid, under clause (b) of section 24 or under the provisions of chapter VIA of the Act.
8.8 Though Ld. Senior Advocate drew our attention to various judgments as mentioned in the paper book, however, in order to avoid the repetition, we are referring to only one judgment passed by the Hon’ble Delhi High Court in the case of CIT vs. Mithlesh Kumari 92 ITR 9 wherein the following question was framed:
“Whether on the facts and in the circumstances of the case the interest amount of Rs.16,878/- and the ground rent of Rs.3,793/- constituted part of the actual cost of the plot to the Assessee for the purpose of determining the capital gain?
8.9 The Hon’ble High Court considered the judgment rendered by the Jurisdictional High Court in the case of Habib Hussein vs. Commissioner of Income Tax (1963) 48 ITR 859, 875 (Bom.) wherein it was held as under:
“The dictionary meaning of the word “cost” is 'what is laid out or suffered to obtain anything’…. In our opinion, therefore, the meaning of the expression 'actual cost to the Assessee as used in sub-section (5) of section 10 of the Act would be what the Assessee has, in fact, expended or laid out for the purpose of acquiring the depreciable assets.”
8.10 The Hon’ble Delhi High Court has also considered the judgment passed by the Hon’ble Kolkata High Court in the case of Commissioner of Income Tax vs. Fort Gloster Industries Ltd. (1971) 79 ITR 48 (Cal.) and ultimately held that the interest amount of Rs.16,878/- towards the actual cost of the land, was rightly added by the Tribunal. For completeness and ready reference, the observation made and conclusion drawn by the Hon’ble High Court is reproduced herein below:
“The Assessee had placed an order with a British concern for the purchase of machinery worth Rs. 48 lakhs. The British supplier required a guarantee to be given. The Allahabad Bank Ltd. agreed to be the guarantor for the sum of Rs. 48 lakhs for a consideration of Rs. 36,000 to be paid to the bank as guarantee commission. The Calcutta High Court held that this sum of Rs. 36,000 should be treated as part of the actual cost to the assessee of the new machinery acquired by it for the purpose of allowance of development rebate in terms of section 10(2)(vi)(b) of the Act. The reasoning of the High Court was that costs which were essentially necessary for a particular Assessee to incur for acquiring a capital asset should be included in this actual cost. In so holding, the Calcutta High Court followed a decision of the Bombay High Court in Habib Hussein v. Commissioner of Income-tax [1963] 48 ITR 859 875 (Bom.) in which it was held as follows:
"The dictionary meaning of the word 'cost' is 'what is laid out or suffered to obtain anything'.... In our opinion, therefore, the meaning of the expression 'actual cost to the assessee' as used in sub-section (5) of section 10 of the Act would be what the assessee has, in fact, expended or laid out for the purpose of acquiring the depreciable assets."
We are in respectful agreement with the observations of the Calcutta and the Bombay High Courts 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. 95,000 which was the consideration for the purchase of the land, but also had to pay interest of Rs. 16,878 on the amount borrowed by her. The amount of Rs. 95,000 plus the interest paid by the assessee constitutes the actual cost to the assessee of the land. The fact that the amount Rs. 95,000 was paid by the assessee to the vendor and the amount of interest of Rs. 16,878 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 asset would lead to anomalous results. Supposing she had purchased the land for Rs. 1,00,000, by raising a loan of that amount and had paid interest of Rs. 20,000 on the said loan and had sold land for Rs. 1,20,000. 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 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 towards the actual cost of the land.
8.11 The Hon’ble High Court ultimately answered the question framed, as follows: “The interest amount of Rs. 16,878 constituted part of the actual cost of the plot to the assessee for the purpose of determining the capital gain; but the ground rent of Rs. 3,793 did not constitute part of such actual cost”.
8.12 On the aforesaid analyzations and respectfully following the judgments of the Hon’ble Delhi High Court, we are of the considered view that the interest paid on the borrowed funds for the purchase of property for the period prior to the provision inserted vide Finance Act, 2023 which was made applicable from 01.04.2024, over and above claimed u/s 24(b) of the Act, would be deductable while computing the capital gains. Thus, we answered the question posed accordingly.
8.13 Resultantly, we are inclined to affirm the impugned order, as the same does not suffers from any perversity, impropriety and/or illegality and therefore the same is upheld by dismissing the instant appeal.
In the result, the appeal filed by the Revenue Department stands dismissed.
Order pronounced in the open court on 26.11.2024.