Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

INTERESTING ISSUE ON COST OF ACQUISITION

Cost Inflation Index for FY 2011-12 notified at 785 reflects a rise of 10.4% over last year’s 711

             Readers are aware that for purposes of computation of long term capital gains, a taxpayer is entitled to compute Indexed Cost of Acquisition, which is determined with reference to the Cost Inflation Index (CII) notified by the Government for the relevant financial year.

             Vide its Notification No.35 of 2011 dated 23-06-2011, the Central Government has notified the Cost Inflation Index (CII) for FY 2011-12 at ‘785.’ The CII for FY 2010-11 was ‘711.’ The increase of 74 points during the past one year reflects a rise of 10.4% in the Cost Inflation Index, also confirming the fact that the common man has continued to suffer under the double digit inflation impact!

INTEREST PAID FOR ACQUIRING ASSET CAN BE TREATED AS PART OF COST!

             In many situations, a taxpayer may acquire a capital asset by taking a loan or borrowing funds, being required to pay interest on the same. An interesting question that would arise for consideration in such cases is whether the interest paid by the taxpayer on such loan or borrowing can be added to the cost of acquisition while computing his taxable capital gains when he later sells the asset? 

             This issue came 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 Assessing Officer 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 vendor 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.

DOUBLE DEDUCTION FOR SAME INTEREST NOT ALLOWED!

             However, in the above context, it also needs to be borne in mind that if the taxpayer has been allowed a deduction in respect of the interest paid for the acquisition of the asset under any provision of the Income-tax Act, such as interest deductible on housing loan interest deductible on housing loan under Section 24  or against income from other sources under Section 57, double deduction for the very same interest cannot be claimed by the taxpayer as part of the cost of acquisition of the capital asset, while computing the taxable capital gains in case of transfer of such asset. This principle has been laid down by the Karnataka High Court in its judgement in the case of ‘CIT vs. Maithreyi Pai’ 152 ITR 247.

Leave a Reply

You must be logged in to post a comment.

Powered by Epaperz.com | Hosted at HostADomainNow.com