2011 (5) TMI 1111 - AT - Income Tax

Tribunal affirms interest inclusion in acquisition cost under Income Tax Act

The Tribunal dismissed the Revenue's appeal, affirming the inclusion of interest paid on delayed payments in the cost of acquisition. It upheld the ... - ISSUES PRESENTED AND CONSIDERED 1. Whether interest paid on delayed/late installments in respect of purchase of immovable property forms part of the 'cost of acquisition' within the meaning of section 55 for the purposes of computing indexed cost of acquisition under section 48. 2. Whether indexation under section 48 may be applied to such interest payments (i.e., whether interest included in cost of acquisition is eligible for indexation). 3. Whether any amendment to section 48 altered the substantive meaning of 'cost of acquisition' as defined in section 55 so as to exclude interest on delayed payments from cost of acquisition. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Interest on delayed installments as part of 'cost of acquisition' Legal framework: Section 48 prescribes deduction of 'cost of acquisition' (and indexed cost where applicable) from full value of consideration to compute capital gains. Section 55 defines 'cost of acquisition' and 'cost of any improvement'. Section 24(b) provides for deduction of interest payable on capital raised for acquisition/construction of property when computing income from house property. Precedent Treatment: The assessment officer treated 'cost of acquisition' on the basis of actual principal installments paid year-wise as per allotment letter and excluded interest charged on late payments from the cost of acquisition. No binding judicial precedent is cited in the record to the contrary; the appellate authority and Tribunal address statutory interpretation. Interpretation and reasoning: The Tribunal accepts the view that 'cost of acquisition' means the total cost at which the property was purchased and is not altered by the mode or timing of payment. Where the allotment or contract fixes a total consideration for the property, that total consideration constitutes the cost of acquisition even if paid by installments. Interest charged by the vendor/authority for delay in payment arises out of acquiring the property and is in substance part of the acquisition cost paid to obtain the asset. The Tribunal distinguishes expenditure that is deductible under income heads (per section 24 and section 55 proviso) from payments that form part of the acquisition price; here the interest is payable to the seller/authority as part of the consideration mechanism and not merely a financing cost claimed under a separate income head. Ratio vs. Obiter: Ratio - Interest charged on delayed payment of the purchase price of immovable property and paid as part of the transaction constitutes part of the 'cost of acquisition' within section 55 and is therefore capable of being included in the cost base for capital gains computation under section 48. Obiter - Observations reconciling section 24(b) and treatment of interest in other contexts are explanatory and not determinative of the present ratio. Conclusions: The Tribunal upholds the inclusion of interest on delayed installments in the cost of acquisition. The Assessing Officer's exclusion of such interest from the cost base was rejected. Issue 2 - Indexation of interest payments included in cost of acquisition Legal framework: The second proviso to section 48 substitutes 'indexed cost of acquisition' for 'cost of acquisition' where long-term capital gains arise, thereby permitting indexation of the cost base. Section 55 identifies components of cost of acquisition and improvement; indexation applies to the cost components recognised for capital gains computation. Precedent Treatment: The Assessing Officer computed indexed cost of acquisition based on installments actually paid, excluding interest; the assessee computed indexation by taking the total contractual cost and indexing interest payments year-wise. The appellate authority adopted the assessee's year-wise indexation approach. Interpretation and reasoning: Having concluded that interest on delayed payments forms part of cost of acquisition, the Tribunal reasons that such component is eligible for indexation under section 48's proviso when computing long-term capital gains. The Tribunal endorses year-wise indexing of payments (including interest) according to the years in which those payments were made rather than indexing only the principal installments or limiting indexation to the principal component recorded in a single base year. Ratio vs. Obiter: Ratio - When interest paid forms part of the cost of acquisition, it is entitled to indexation under section 48 in computing long-term capital gains. Obiter - Methodological remarks on tabulating and indexing payments year-wise are practical guidance rather than novel legal principles beyond the case facts. Conclusions: The Tribunal affirms that interest included in the cost of acquisition is indexable; the assessee's computation of indexed cost (including indexed interest payments) was upheld. Issue 3 - Effect of amendments to section 48 on meaning of 'cost of acquisition' Legal framework: Section 48 contains the mode of computation and, after its amendment, prescribes indexed cost treatment for long-term capital assets. Section 55 continues to define cost concepts. Questions arose whether amendments to section 48 implicitly changed the substantive definition in section 55. Precedent Treatment: The assessment officer asserted that amendment altered the meaning and limited the basis of indexation/excludable components; the appellate authority and Tribunal reject that construction. Interpretation and reasoning: The Tribunal holds that the amendment to section 48 affects the manner of computation (i.e., introduction/clarification of indexation) but does not change the fundamental statutory meaning of 'cost of acquisition' as provided in section 55. Cost remains the amount at which the asset was purchased; the mode of payment or timing does not alter that underlying definition. Consequently, amendment of section 48 does not justify excluding interest paid as part of total consideration. Ratio vs. Obiter: Ratio - Amendments to computation provisions do not supplant definitional provisions; section 55 continues to determine what constitutes cost of acquisition. Obiter - Explanatory references to interaction between sections 48, 55 and 24(b) serve to clarify contexts where interest may be deductible under other heads rather than to expand statutory change. Conclusions: The Tribunal concludes that the amendment to section 48 did not change the definition of 'cost of acquisition' in section 55 and therefore cannot be invoked to exclude interest on delayed payments from the cost base. Disposition The Tribunal upheld the appellate authority's conclusion that (i) interest on delayed installments is part of the cost of acquisition, (ii) such interest is eligible for indexation under section 48 when computing long-term capital gains, and (iii) the amendment to section 48 did not alter the definitional scope of 'cost of acquisition' under section 55. The Revenue's ground challenging the inclusion and indexation of interest was dismissed.