2018 (2) TMI 1634 - AT - Income Tax

Tribunal allows appeal, includes interest in acquisition cost & habitability expenses in improvement cost.

The tribunal allowed the appeal, reversing disallowances by the AO and CIT(A). It held that interest paid for acquiring the capital asset should be ... Disallowance of interest - AR submitted that the entire interest paid by assessee on loan taken for acquiring capital asset deserves to be allowed - AO was of opinion that since interest in question on housing loan, had already been claimed as deduction u/s 24(b), the same could not be taken into consideration for computation u/s 48 and interest amount was added to income of assessee - Held that:- From these judicial pronouncements, it is very much clear that if the property is purchased from borrowed funds then interest on borrowed fund has to be paid. The amount of interest paid by assessee constitutes actual cost to the assessee for that property. To exclude interest amount from the actual cost of the assets/property would lead to anomalous result. The interest amount should be definitely added to the actual cost of the property. We reverse the findings of CIT(A) and hold that the entire interest paid to bank for acquiring capital asset would be eligible as part of cost of acquisition. Disallowance of expenses incurred towards cost of improvement being woodwork, electrical and plumbing etc of the new flat - Held that:- In our considered opinion assessee is eligible to get the benefit as AO has not disputed the nature of expenses incurred. Assessee incurred the expenditure to make the house habitable and therefore the claim of assessee deserves to be allowed. Issues Involved:1. Disallowance of interest capitalized and added to the cost of property sold.2. Disallowance of construction cost (cost of improvement) for claiming exemption under Section 54 from Long Term Capital Gain.Comprehensive, Issue-Wise Detailed Analysis:1. Disallowance of Interest Capitalized and Added to the Cost of Property Sold:The assessee filed a return of income declaring a total income of Rs. 1,80,90,075/-. During the assessment, the Assessing Officer (AO) disallowed the claim of Rs. 16,27,671/- as interest capitalized and added to the cost of property sold before indexing. The AO observed that the interest included in the cost of acquisition was already claimed as a deduction under the head “income from house property” and thus disallowed it. The assessee revised the calculation, reducing the interest to Rs. 5,64,569/- without indexation. The AO disallowed the interest paid for financial years 2005-06 and 2006-07 amounting to Rs. 6,66,766/-.The appellate tribunal examined the submissions and judicial pronouncements. It referenced the case of CIT Vs. Mithilesh Kumari, where it was held that interest on borrowed funds for acquiring a capital asset forms part of the cost of the asset. The tribunal also cited the case of ACIT Vs. C. Ramabrahmam, where it was held that deduction under Section 24(b) and computation of capital gains under Section 48 are covered by different heads of income and do not exclude each other. It concluded that the entire interest paid for acquiring the capital asset should be included in the cost of acquisition. Thus, the tribunal reversed the findings of the CIT(A) and allowed the ground raised by the assessee.2. Disallowance of Construction Cost (Cost of Improvement) for Claiming Exemption Under Section 54:The AO disallowed Rs. 13,79,256/- claimed by the assessee as construction costs necessary to make the new flat livable. The assessee argued that these expenses were incurred on woodwork, electrical, and plumbing work to make the flat habitable. The expenses were supported by bills and vouchers, which were not disputed by the AO. The tribunal noted that the nature of expenses was not questioned and that these were necessary to make the house habitable. Consequently, the tribunal allowed the claim of the assessee, reversing the disallowance confirmed by the CIT(A).Conclusion:The tribunal allowed the appeal filed by the assessee, reversing the disallowances made by the AO and confirmed by the CIT(A). The tribunal held that the entire interest paid for acquiring the capital asset should be included in the cost of acquisition and that the expenses incurred to make the new flat habitable should be allowed as part of the cost of improvement. The order was pronounced in the open court on 19.02.2018.