Cost of acquisition and expense substantiation: interest on acquisition borrowing qualified for indexation, but unsupported car expenses were disallowed.

Interest paid on borrowed funds used for acquisition of property was treated as part of the assessee's cost of acquisition for long-term capital gains purposes under section 48, because the booking, bank finance, and direct payments to the vendor were integrally connected with the acquisition; indexation on the assessee's share of that interest was therefore allowed. For car running expenses, the assessee failed to produce a log book or comparable supporting material, so a reasonable ad hoc disallowance for possible personal or non-business use was upheld. The appeal thus succeeded on the capital gains issue and failed on the expense claim, resulting in partial relief.

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Issues: (i) whether the assessee was entitled to indexation benefit on interest paid on borrowed funds while computing long-term capital gains under section 48; (ii) whether the ad hoc disallowance of car running expenses, sustained partly by the first appellate authority, called for interference.

Issue (i): whether the assessee was entitled to indexation benefit on interest paid on borrowed funds while computing long-term capital gains under section 48.

Analysis: The property was booked and substantial payments were made through bank finance under a tripartite arrangement, with amounts directly paid to the vendor. The cost of acquisition was not confined to the later registration date merely because the formal conveyance was executed subsequently. On the facts, the interest paid on the borrowed funds formed part of the assessee's share in the cost of acquisition for capital gains purposes.

Conclusion: The issue was decided in favour of the assessee, and indexation benefit from financial year 1999-2000 was allowed in respect of the assessee's share of interest paid to the banks.

Issue (ii): whether the ad hoc disallowance of car running expenses, sustained partly by the first appellate authority, called for interference.

Analysis: The assessee could not produce a log book or comparable supporting material to substantiate the entire claim. In such circumstances, estimation of a reasonable portion of the expenditure for personal or non-business use was justified.

Conclusion: The issue was decided against the assessee and the disallowance as restricted by the first appellate authority was sustained.

Final Conclusion: The appeal succeeded only on the capital gains issue and failed on the disallowance of car running expenses, resulting in partial relief to the assessee.

Ratio Decidendi: For computation of capital gains, interest paid on borrowed funds used for acquisition of property may form part of the cost of acquisition where the borrowing and payment are integrally connected with the acquisition, and unsupported expense claims may be reasonably estimated and disallowed when not properly substantiated.

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