S. 48 — Capital gains on sale of land — Land purchased out of borrowed funds — Whether registration charges and interest paid on borrowings eligible for deduction and indexation — Held, Yes.

8. 
   

   Ishtiaque Ahmad v. ACIT

ITAT Bench ‘C’, New Delhi

Before D. R. Singh (JM) and

K. G. Bansal (AM)

ITA No. 863/D/2009

A.Y. : 2002-03. Decided on : 28-8-2009

Counsel for assessee/revenue : J. J. Mehrotra/

D. N. Kar

S. 48 — Capital gains on sale of land — Land purchased out
of borrowed funds — Whether registration charges and interest paid on
borrowings eligible for deduction and indexation — Held, Yes.

Per K. G. Bansal :

Facts :

The assessee had purchased a piece of land in October 2006
out of borrowed funds. The land was sold in the year under appeal. While
returning income as long term capital gains — it claimed registration charges
of Rs.4.63 lacs and the interest paid by him during the years 1997-98 to
2001-02 aggregating to Rs.72 29 lacs, as the cost of improvement. The claim
was disallowed by the AO. On appeal the CIT(A) allowed the claim qua the
registration charges, however, the claim for indexation was denied. In respect
of interest paid, the CIT(A) agreed with the AO and held that the interest
payable on loan taken for acquisition of the land was not part of the cost of
acquisition/improvement.

Held :

The Tribunal noted that the registration charges paid was
treated as cost of improvement of the land and as such allowed as deduction by
the CIT(A). Referring to the provisions of second proviso to S. 48, it agreed
with the submission of the assessee that the provisions contained in clause
(ii) shall have the effect as if for the words ‘cost of acquisition’ and ‘cost
of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost
of any improvement’ had respectively been substituted. Therefore, it was held
that the assessee was entitled to indexation with reference to the
registration charges paid.

In respect of interest paid — the Tribunal agreed with the
assessee that as held by the Delhi High Court in case of CIT v. Mithlesh
Kumari, the actual cost of the asset need not be only those costs incurred
on the date of acquisition. Accordingly, relying on the decision of the Delhi
High Court (supra), it held that interest paid on borrowed funds for
purchase of land after its actual purchase constituted cost of the land. It
further held that in terms of second proviso to S. 48, the cost has to be
indexed for working out the capital gains.

Case referred to :

CIT v. Mithlesh Kumari, (1973) 92 ITR 9 (Del.)