Mortgage loan interest and mortgage expenses in property purchase: treated as "cost of acquisition" for capital gains computation

For computing capital gains under ss. 48 and 55(2) of the Income-tax Act, the dominant issue was whether mortgage expenses and interest on borrowed funds used to pay the sale consideration form part of "cost of acquisition." The HC held that cost of acquisition includes not only the amount paid to the vendor but also the directly attributable cost of borrowing undertaken to acquire the property, since the purchase was financed by the loan and the mortgage was a necessary incident to secure that borrowing; execution of the mortgage after the sale deed (though on the same day) did not break this nexus. Applying the SC ratio in Challapalli Sugars, the HC answered the reference in favour of the assessee and against the Revenue.

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Issues involved:
The judgment addresses the question of whether mortgage expenses and interest payable on mortgaged amounts utilized as part of the consideration should be considered as part of the cost of acquisition for the purpose of computing capital gains.

Details of the Judgment:

1. Background and Facts:
The assessee, an individual running a hotel business, received capital gains on the sale of a property in Madras. The property was purchased for a specific amount and mortgaged on the same day to secure a loan used for paying the vendor and stamp duty.

2. Claim of the Assessee:
The assessee claimed that the cost of executing the mortgage and the interest paid till the sale of the property should be added to the purchase price for computing the cost of acquisition. This claim was initially disallowed by the Assessing Officer and the first appellate authority.

3. Tribunal's Decision:
The Tribunal allowed the claim by relying on the Supreme Court's decision in Challapalli Sugars Limited v. CIT [1975] 98 ITR 167. The apex court's ruling emphasized including all necessary expenditures to bring assets into existence and put them in working condition, including interest on borrowed money.

4. Justification for Including Mortgage Expenses:
The judgment highlighted that the cost of acquisition for the assessee included not only the purchase amount but also the borrowing made to facilitate the purchase. The mortgage and borrowing were deemed relevant in determining the cost of acquisition, as without the borrowed funds, the purchase would not have been possible.

5. Application of Legal Precedent:
The judgment concluded that the facts of the case aligned with the principles established in Challapalli Sugars Ltd. [1975] 98 ITR 167, where interest paid on borrowed funds was considered part of the cost of acquisition.

6. Final Decision:
The question posed was answered in favor of the assessee and against the Revenue, indicating that mortgage expenses and interest on mortgaged amounts formed part of the cost of acquisition for computing capital gains.

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