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Can interest on housing loan allowed as a deduction u/s. 24 be treated as part of cost of acquisition on sale of the house

      The Income-tax Appellate Tribunal (ITAT), Chennai was recently called upon to decide a tricky issue as to whether interest on housing loan, already claimed by the taxpayer as deduction under Section 24(b) in computing his income from house property, could again be deducted by him under Section 48 of the Income-tax Act, treating the same as part of its cost of acquisition while computing the taxable capital gains on sale of the house.

    The Assessing Officer had disallowed the taxpayer’s claim on the ground that he had already claimed deduction of such interest under Section 24(b) and hence the same could not be allowed to be deducted under Section 48 for purposes of computation of capital gains. The Commissioner Appeals allowed the taxpayer’s appeal against which the Revenue preferred second appeal before the ITAT.

    Deciding the appeal in the case of ‘ACIT v/s. C. Ramabrahmam (2012) 27 taxmann.com 104,’ the Tribunal held that the deduction under Section 24(b) is claimed when the concerned taxpayer declares ‘income from house property,’ whereas, the cost of the same asset is taken into consideration when it is sold and ‘income from capital gains’ is computed under Section 48. A perusal of both the provisions makes it unambiguous that none of them excludes operation of the other.

    The ITAT concluded by observing, “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 taxpayer in the instant case is certainly entitled to include the interest amount at the time of computing capital gains under Section 48.  

RADICAL BUT LOGICAL RATIONALE

    Though seemingly a bit radical, the ratio of the above decision appears to be on a sound legal footing. Section 55(1)(b), which defines ‘cost of improvement,’ specifically disallows expenditure which is deductible in computing income under other heads of income. Interestingly however, Section 55(2), which defines ‘cost of acquisition,’ provides for no such express disallowance of deduction of any expenditure forming part of cost of acquisition, which is deductible or has been deducted for computing income under any other head of income. In light of the above, the logical rationale of the ITAT in holding that ‘none of them excludes operation of the other’ cannot be faulted with.

A similar issue had earlier come to be decided by the Delhi High Court in the case of ‘CIT vs. Mithileshkumari’ 92 ITR 9 (Delhi), wherein the High Court had occasion to consider a case where a lady taxpayer had raised a loan from her mother-in-law for acquiring a land. When she sold the land, she included the amount paid towards interest on loan in the actual cost and disclosed the remaining amount as capital gain on sale of land. The AO held that amount paid towards interest could not be added to the cost of the land.

The Delhi High Court held that it would be reasonable, to include in the actual cost of the capital asset all expenses which were incurred by the taxpayer in acquiring the capital asset as distinct from the items of expenditure which were incurred for retaining or maintaining the capital asset. The fact that the amount of loan was paid by the taxpayer to the seller for acquiring the land and that the amount of interest was paid to a different person, namely, her mother-in-law, did not make any difference so far as the taxpayer was concerned in respect of the actual cost of the land to her. It would not also make any difference whether the interest was paid on the date of the purchase or whether it was paid subsequently. Therefore, the taxpayer was justified in adding the interest amount towards the actual cost of the land, for purposes of computation of capital gains.

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