2023 (11) TMI 701 - AT - Income Tax

Interest on borrowed capital for property acquisition allowed only under section 24, not as cost of acquisition for capital gains under section 48(ii)

The ITAT PUNE dismissed the assessee's appeal regarding disallowance of indexed cost of interest paid for property acquisition as deduction under section ... Scope of Limited scrutiny under CASS - Capital gain computation - deduction u/s 48(ii) from the Long Term Capital Gains in respect of the indexed cost of interest paid for acquisition of the house property sold by the assessee - whether disallowance of deduction u/s 48(ii) from LTCG in respect of the indexed cost of interest paid for the acquisition of the house property sold by the assessee, made by AO by travelling beyond the issue for which this case was selected for limited scrutiny under CASS is without jurisdiction - HELD THAT:- The assessment order is silent as to the allowability or otherwise as to why this indexed cost of interest expenditure on loans borrowed cannot be allowed as deduction. However, the appellant had claimed deduction towards interest expenditure while computing the capital gains on sale of said two flats. The NFAC placing reliance on the decision of Tata Iron & Steel Co. [1997 (12) TMI 5 - SUPREME COURT] had confirmed the disallowance. The undisputed fact is that the two flats purchased by the appellant company were held as capital assets. Therefore, the income from these two flats is assessable under the head “income from house property” as per the provisions of section 22 of the Act. The provisions of section 24 specifically provide that where the property had been acquired with borrowed capital, the interest expenditure incurred on such borrowed capital is allowable as deduction. The expenditure which is allowable u/s 24 cannot be capitalized, claimed as cost of acquisition. It is settled position of law that when the Statute provides for deduction in particular manner i.e. the AO is bound to compute the income in the manner prescribed under the Statute not in any other manner. Therefore, the approach adopted by the Assessing Officer is totally in accordance with provisions of the Income Tax Act and requires no interference. Case was selected under CASS for following reasons like Sale consideration of the property in ITR is less than sale consideration of property reported in ITR and Sale of property reported in form 26QB. The cost of acquisition of property also forms integral part of the sale of property. Therefore, it cannot be said that the Assessing Officer had travelled beyond the items for which the case was selected for scrutiny assessment. Accordingly, the grounds of appeal/additional grounds of appeal filed by the assessee stand dismissed. Issues Involved:The appeal challenges the disallowance of deduction u/s 48(ii) of the Income Tax Act from Long Term Capital Gains, and the disallowance of interest paid for acquisition of a house property. The appellant also contests the charging of interest u/s 234B of the Income Tax Act. The key issues are the jurisdiction of the Assessing Officer in disallowing deductions, the treatment of interest paid for property acquisition, and the correctness of the assessment order.Disallowed Deduction u/s 48(ii):The appellant contested the disallowance of deduction u/s 48(ii) of the Income Tax Act from Long Term Capital Gains, specifically in relation to the indexed cost of interest paid for the acquisition of a house property. The appellant argued that the Assessing Officer exceeded the scope of limited scrutiny assessment under CASS. The appellant sought to allow the indexed cost of interest expenditure as a deduction in computing capital gains. The NFAC rejected the appellant's submissions, citing the decision in CIT vs. Tata Iron & Steel Co., holding that the disallowance was justified.Interest Expenditure Disallowance:The appellant raised additional grounds challenging the disallowance of interest paid for the acquisition of two flats. The Assessing Officer disallowed interest paid for acquisition of the flats, treating it as the indexed cost of improvement. The appellant argued that the interest paid for property acquisition should be allowed as a deduction, relying on various decisions. However, the NFAC upheld the disallowance, citing the decision in CIT vs. Tata Iron & Steel Co. The Tribunal found that the Assessing Officer's approach was in accordance with the provisions of the Income Tax Act and dismissed the appeal.Jurisdiction of Assessing Officer:The appellant contended that the Assessing Officer's addition of interest expenditure exceeded the limited scrutiny assessment's scope. However, the Tribunal found that the Assessing Officer's actions were within the selected items for scrutiny assessment under CASS. The Tribunal dismissed the grounds of appeal and additional grounds raised by the appellant. Ultimately, the appeal filed by the appellant was dismissed, and the order was pronounced on November 15, 2023.