Whether interest on housing loan can be treated as part of cost of acquisition is a common question by many taxpayers
There are various provision wherein it is held that interest can be the part of the cost of the assets. It has been held that it is irrelevant whether such interest is paid to the seller or not. It is also not dependent whether interest is paid before or after the purchase of the capital asset.
What is relevant is that such expenditure has to be incurred for the purpose of asset acquisition. If it is so, one can reasonably conclude that interest on housing loan is a part of ‘cost of acquisition’ & so will be available as a deduction against sale consideration while computing capital gains under section 48 of the Act.
The language employed in the definition of ‘cost of acquisition’ is with reference to the ‘cost of improvement’. Both these words are covered in the same section, namely, section 55.
The definition of ‘cost of improvement’ interalia provides for certain exclusions & clarifies that any expenditure which is deductible in computing the income under the heads Income from House Property, Profits and Gains from Business or Profession or Income from Other Sources (Interest on Securities) would not be taken as cost of improvement.
In short, any interest expenditure which is claimed as a deduction while computing “Income from House property” under section 24 is outside the ambit of sub-section (1) to section 55. Such interest expenditure can therefore never constitute ‘cost of improvement’.
Against exact contravention to this, similar is missing in the definition of the word “cost of acquisition”.
The difference in language in defining both the terms is clearly visible. It can very well be argued that, in absence of specific exclusions indicate that cost of acquisition always included interest on housing loans.
In light of this, one can very well argue and accept that housing loan interest can be claimed under section 24(b) and thereafter the same can be claimed as deduction again under section 48 on sale of such property. It can offer dual deduction.
Section 14 provides for mode of computation of income by classifying income under any of the 5 heads.
For each such head of income, the law provides for an independent & separate charging section and computation provisions. The computation provision change drastically from one head to other and are mutually exclusive. As a result, income derived from different sources under specific heads has to be computed for the purpose of taxation in the specific manner provided in appropriate section. Computation of income would entail ascertaining the gross income covered in the respective head and the eligible deductions therein.
With above one can reasonably understand that Income computation, receipts as well as expenditure in the relevant heads of “income” would be mutually exclusive with each other. The provision under the respective heads would be an independent code in itself. In other words, allowability of expenditure is to be determined in the light of the provisions dealing under the distinct heads of income.
In case of housing loan interest, interest is eligible for deduction both under the head
- ‘Income from house property’ under section 24(b) and
- ‘Income from Capital gains’ under section 48.
Contention of the Revenue authorities that same expenditure cannot be claimed under two heads of income has been rejected by the Tribunal.
The judgment of the Tribunal is being relied on the simple arguments that both the sections 24 and section 48 are different and they do not exclude the operation of other.
Here is one more judgment on the issue:
Gayatri Maheshwari Vs I.T.O. (ITAT Jodhpur)
[ ITA No. 208/Jodh/2017]
The relevant part of the judgment drawing above conclusions is produced hereunder
- The ld. CIT(A) on consideration of the assessment order, Assessee’s submissions and the case laws relied upon by the assessee, has held as under:-
“The only dispute in the instant case is whether the interest paid by the assessee to the bank on loan availed for purchase of property could be allowed as deduction in computing the capital gains income. The charge of income-tax is created by virtue of the provisions contained in section 4 according to which the income tax is charged for the relevant assessment year in accordance with and subject to the provisions of Act in respect of the total income of the relevant previous year of every person. As per the scheme of the Act, income is broadly classified under five different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to respective heads of income. Section 45 to section 55A falling under Chapter IV- E deal with assessment of income under the head ‘capital gains’ and section 48 in particular prescribes the mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto are deductible from the full value of the consideration received or accruing to the assessee as a result of transfer of the capital assets. In the instant case, the deduction on account of interest paid to bank has been claimed by the appellant as deduction in computing capital gains. The appellant, however, has failed to explain as to how the said interest could be considered as cost of acquisition of the land or the cost of any improvement thereto. She has also failed to explain as to how the interest paid could be treated as expenditure incurred wholly and exclusively in connection with sale of land. On the other hand, the basis on which the interest was paid by the appellant showed that it had no direct nexus with the purchase and sale of land and as rightly contended by the AO, the interest paid was allowable as deduction against income under the head “income from house property”. Having regard to all these facts of the case, I am of the opinion that the interest paid by the appellant could not be treated as expenditure incurred wholly and exclusively in connection with sale or the cost of acquisition/improvement of the land being sold so as to be eligible for deduction in computing capital gains under section 48.”
The ld. CIT(A) opined that the interest amounts paid by the assessee to the bank with the F.Y. 2007- 08 to 2012-13 were not deductible in computing he capital gains as rightly held by the Assessing Officer and the order of the Assessing Officer was upheld.
- Being further aggrieved, the assessee is in appeal before us. The ld AR of the assessee has reiterated the submissions as made before the ld. CIT(A) and also relied on the decision of the Honourable Delhi High Court in the case of CIT Vs. Mithlesh Kumari (1973) 92 ITR 9 (Delhi).
- On the other hand, the ld. D.R. has relied on the orders of the authorities below.
- We have perused the case 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), the Honourable High Court has 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 additing the interest amount of Rs. 16,878.00 towards the actual cost of the land.”
In the case of CIT Vs. Sri Hariram Hotels (Purchase) Ltd. (2010) 188 Taxman 170 (Kar), the Honourable Karnataka High Court has held as under:-
“7. We are unable to agree with the arguments advanced by the learned counsel for the revenue for the simple reason on facts that even the Commissioner of Income Tax (Appeals) has held that interest had accrued as on 31/3/2003 and therefore, the Tribunal is justified in granting the relief to the assessee since the property has been purchased out of the loan borrowed from the Directors and any interest paid thereon is to be included while calculating the cost of acquisition of the asset. Therefore, question No. 1 has to be answered against the revenue.”
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 A 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 operative 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. From these judicial pronouncements, it is very much clear that if the property is purchased from borrowed funds then consideration for the purchased amount, the interest on borrowed fund also has to be paid. The amount of interest paid by the assessee constitutes the actual cost to the assessee for that property. To exclude the interest amount from the actual cost of the assets/ property would lead anomalous result. The interest amount should be definitely added to the actual cost of the property. Respectfully following these legal propositions and on basis of our observations as held herein, we reverse the findings of the ld. CIT(A) and hold that the interest paid to bank for acquiring capital asset would be eligible as part of cost of acquisition. We hold accordingly. The grounds No. 1 to 4 of the assessee’s appeal are allowed.
- Grounds No. 5 and 6 are general in nature, requires no adjudication.
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