Capitalised interest on land purchase borrowings forms part of actual cost for capital gains computation.

Interest paid on borrowed funds used to acquire land was treated as part of the actual cost of the asset for capital gains computation. Applying commercial and accountancy principles, the article states that where such interest is capitalised and not claimed or allowed as revenue expenditure year after year, it forms part of the acquisition cost. The operative effect is that the full capital outlay incurred to bring the asset into the assessee's hands is included in actual cost when computing capital gains.

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Issues: Whether interest paid on borrowed funds used to acquire land forms part of the actual cost of the asset for computing capital gains.

Analysis: The relevant inquiry was the actual cost of acquisition to the assessee. Interest paid on borrowings for acquiring the plots had not been claimed or allowed as revenue expenditure year after year. Applying commercial and accountancy principles, expenditure capitalised in connection with acquiring the asset was required to be included in the cost of acquisition. The principle was consistent with the view that, for capital gains purposes, actual cost must reflect the full capital outlay incurred to bring the asset into existence or into the assessee's hands.

Conclusion: The interest amount formed part of the actual cost of the plots and had to be included in computing capital gains, in favour of the assessee.

Ratio Decidendi: Interest capitalised on borrowed funds used for acquiring an asset constitutes part of its actual cost for capital gains computation when it is not treated as revenue expenditure.

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